How Insurance Works

There are two types of health insurance categories:

1) Government-funded health insurance plans are funded by state and federal taxes.

Examples include:

  • Medicare
  • Medicaid
  • Children’s Health Insurance Program (CHIP)
  • Federal/state employee health plans
  • Veterans Health Administration (VHA)

2) Private health insurance is primarily funded through benefits plans provided by employers or purchased individually.

  • Approximately 56% of the population is insured through employer-sponsored health insurance
  • Approximately 16% of the population is covered by individual health insurance purchased directly through the Health Insurance Marketplace
  • Approximately 18% of large firms offer health care coverage to their workers who are retired

Examples include:

  • Commercial health insurance companies
  • Health Maintenance Organizations (HMOs)
  • Self-funded employer-sponsored benefit plans

You can choose to receive health insurance through your employer if it’s offered. In return, you receive an insurance card that gives you access to the doctors, hospitals and other health care providers that are part of the insurance plan’s network.

When you shop for health insurance on your own through the Marketplace, you choose a coverage category based on your needs and your budget: Bronze, Silver, Gold or Platinum. Depending on the coverage category you chose, your costs will vary, including your monthly premium and whether you pay or how much you pay in copays or coinsurance. Coverage categories have nothing to do with the quality of care.

If you are seeking insurance through your employer, it’s helpful to understand that not all employers are required by law to offer health care coverage to their employees. Small businesses with less than 50 full-time employees don’t have to offer health insurance. However, despite it not being legally required, many small businesses will include it in their employee benefits to best support their employees.

An Example of How Insurance Costs Work

If you are enrolled in an individual plan through the Marketplace or through your employer, you and your health insurance company pay for your health care expenses – this is called cost sharing. Deductibles, coinsurance and copays are all examples of cost sharing. Understanding how they work will help you understand how much you might pay out of pocket for your medical care.

Deductible

A deductible is the amount you pay for health care services before your health insurance begins to pay.

How it works: If your plan’s deductible is $1,500, you’ll pay 100% of your health care expenses until the bills total $1,500. After that, you share the cost with your plan by paying coinsurance.

Coinsurance

Coinsurance is your share of the costs of a health care service. It’s usually figured as a percentage of the amount charged for services. You start paying coinsurance after you’ve paid your plan’s deductible.

How it works: You’ve paid $1,500 in health care expenses and met your deductible. When you go to the doctor, instead of paying all costs, you and your plan share the cost. For example, your plan pays 70%. The 30% you pay is your coinsurance.

Copay

A copay is a fixed amount you pay for a health care service, usually when you receive the service. The amount can vary by the type of service.

How it works: Your plan determines what your copay is for different types of services. You may have a copay before you’ve finished paying toward your deductible. You may also have a copay after you pay your deductible, and when you owe coinsurance. For example, a visit to your doctor’s office for the flu may cost you a $30 copay. A visit to the emergency room at a hospital may have a $100 copay cost out-of-pocket to you. Many routine annual exams have no copay fee, as this is considered preventive care.

Copay amounts are often listed on your health insurance identification card.

    • $5,000 deductible
    • 20% coinsurance
    • $6,000 out-of-pocket maximum

Under this plan, you’ll be responsible for paying for the first $5,000 of covered medical expenses (deductible). After that, your plan covers 80% of the covered expenses and you pay the remaining 20% (coinsurance). When the amount of coinsurance you’ve paid reaches $6,000 (out-of-pocket maximum), the plan covers 100% of your eligible medical costs until your “plan year” renews. A plan is good for one year. At the beginning of the next plan year, the $5,000 deductible and 20% coinsurance will start again.

Other Expenses That Affect Your Total Health Insurance Cost

Your total health insurance cost can also be affected by your out-of-pocket expenses. You may have a copayment, which is usually a small fixed amount you pay per visit to in-network doctors. This is different than coinsurance, which is the percentage of costs you may be responsible for within your plan once you reach your deductible.

For example, let’s say you’ve met your annual deductible, so your plan now pays for benefits. You may wonder what you’ll have to pay if you visit your doctor. The answer depends on the percentage your provider pays for medical services that are covered under the plan.

For example, you bruise your hip in a fall and need an X-ray. Your plan covers 80% of an X-ray. Here’s how the costs might break down:

  • The X-ray costs $200
  • Your plan covers 80%, which is $160
  • Your out-of-pocket cost, or coinsurance, is $40 for the X-ray

You also need to consider your out-of-pocket expense limits. The out-of-pocket expense limit represents the maximum amount you’re responsible for each year. Once the out-of-pocket expense limit is reached, insurance covers 100% of eligible expenses.

When you understand some of the costs of buying and using health insurance, it’s easier to find the plan that fits best for you and your family. Best of all, you’ll be able to get the most out of the plan you choose.

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