What Is Health Insurance?

What Is Health Insurance?

Let me explain health insurance directly: it's a contract between you and an insurance company where they agree to cover all or part of your healthcare costs, and in return, you pay a monthly premium.

This contract typically lasts one year, and during that time, you're on the hook for certain expenses related to illness, injury, pregnancy, or preventative care before the full coverage kicks in.

Key Takeaways

Health insurance handles most of your medical and surgical expenses plus preventative care, all in exchange for those monthly premiums. Keep in mind, a higher premium usually means lower out-of-pocket costs when you need care. Plans include deductibles and copays, but federal law now caps these out-of-pocket expenses. Also, programs like Medicare, Medicaid, and CHIP provide federal coverage for older adults, disabled individuals, and low-income people.

In US health insurance, you often face out-of-pocket costs before coverage starts, such as a deductible where you pay up to a set amount yourself, or copayments where you cover a fixed share for specific services.

How Health Insurance Works

Navigating health insurance in the US can be complex, with various regional and national providers offering coverage that differs by state or even county in terms of pricing and availability.

Over half of Americans get their health insurance as a job benefit, where the employer covers part of the premium—it's tax-deductible for them and tax-free for you, except in some cases for S corporation employees.

If you're self-employed, like a freelancer or gig worker, you buy insurance directly from providers. The Affordable Care Act, or Obamacare, set up the ACA Healthcare Insurance Marketplace, letting you shop for and buy standard plans from private insurers in your area. If your income is between 100% and 400% of the federal poverty level, you get subsidies to help with costs.

Some states have their own marketplaces with features customized for locals. If you're over 65 or have disabilities, End-Stage Renal Disease, or ALS, you qualify for Medicare's federally subsidized care. Low-income families can access subsidized Medicaid.

Types of Health Insurance

Health insurance can be tough to figure out. In the US, managed care plans mean you stick to a network of designated providers; go outside it, and you pay more—or the insurer might not cover it at all.

Plans like HMOs and POS require you to pick a primary care physician who manages your care, suggests treatments, and refers you to specialists. PPOs don't need referrals but offer better rates for in-network use.

Insurers can deny coverage for services without preauthorization or push generics over name-brand drugs if they're cheaper. Always check the rules before signing up.

What Are Copays, Deductibles, and Coinsurance?

Most plans make you share costs: the deductible is what you pay out of pocket annually before insurance starts covering; it's capped by federal law. Copays are fixed fees for things like doctor visits or prescriptions, even after the deductible. Coinsurance is your percentage of costs after the deductible, up to the yearly out-of-pocket max.

Plans with higher out-of-pocket costs often have lower premiums, so balance that against the risk of big bills from serious health issues. If you're self-employed, you might deduct up to 100% of your premiums.

High-Deductible Health Plans (HDHP)

HDHPs are gaining popularity with their higher deductibles and lower premiums, and they're the only plans that let you open a Health Savings Account with major tax perks.

For 2024, an HDHP has at least $1,600 deductible for individuals or $3,100 for families, with out-of-pocket maxes at $8,050 and $16,100. In 2025, those rise to $1,650/$3,200 min and $8,300/$16,600 max.

With an HDHP, you can contribute pretax to an HSA for medical expenses, getting tax-deductible contributions, tax-deferred growth, and tax-free withdrawals for qualified uses. After 65, you can withdraw for any reason without penalty, but non-medical uses get taxed.

Federal Health Insurance Plans

Not all US health insurance comes from private companies; Medicare, Medicaid, and CHIP are federal plans covering older, disabled, and low-income folks.

The Affordable Care Act (ACA)

In 2010, the ACA expanded Medicaid in participating states for low-income individuals. It bans denying coverage for preexisting conditions and lets kids stay on parents' plans until 26.

The ACA created the federal Health Insurance Marketplace for shopping affordable plans, and states could make their own. Plans must cover 10 essential benefits. There used to be a tax penalty for not having insurance, but that's gone since 2019. A 2012 Supreme Court ruling let states opt out of Medicaid expansion. As of 2024, about 45 million people are covered through the ACA.

Medicare and CHIP

Medicare covers those 65+, disabled, or with End-Stage Renal Disease or ALS; CHIP covers low-income kids under 19. Medicaid helps with long-term care like nursing homes, which Medicare doesn't, so many get supplemental private coverage.

Who Needs Health Insurance and Why?

Everyone needs it to offset costs from minor issues to major surgeries or life-threatening conditions, keeping you financially stable.

How Do You Get Health Insurance?

Options include employer plans where you pay part, marketplaces for self-employed, Medicare for over-65s, or Medicaid for low-income.

How Much Does Health Insurance Cost?

Costs vary by coverage scope, plan type, deductible, and your age. Check marketplace levels: bronze to platinum, priced by coverage and user costs.

The Bottom Line

The US lacks universal government healthcare, relying on private insurers, subsidies, and tax incentives to make it affordable. If employed, use your job's plan; self-employed, buy direct or via marketplace with subsidies if low-income; elderly or disabled, go for Medicare or Medicaid.