Health insurance is a type of insurance coverage that typically pays for medical, surgical, prescription drug and sometimes dental expenses incurred by the insured. Health insurance can reimburse the insured for expenses incurred from illness or injury, or pay the care provider directly.
It is often included in employer benefit packages as a means of enticing quality employees, with premiums partially covered by the employer but often also deducted from employee paychecks. The cost of health insurance premiums is deductible to the payer, and the benefits received are tax-free, with certain exceptions for S Corporation Employees.
How Health Insurance Works
Health insurance can be tricky to navigate. Managed care insurance plans require policyholders to receive care from a network of designated healthcare providers for the highest level of coverage. If patients seek care outside the network, they must pay a higher percentage of the cost. In some cases, the insurance company may even refuse payment outright for services obtained out of network.
Many managed care plans—for example, health maintenance organizations (HMOs) and point-of-service plans (POS)— require patients to choose a primary care physician who oversees the patient’s care, makes recommendations about treatment, and provides referrals for medical specialists. Preferred-provider organizations (PPOs), by contrast, don’t require referrals, but do have lower rates for using in-network practitioners and services.
Insurance companies may also deny coverage for certain services that were obtained without preauthorization. In addition, insurers may refuse payment for name-brand drugs if a generic version or comparable medication is available at a lower cost. All these rules should be stated in the material provided by the insurance company and should be carefully reviewed. It’s worth checking with employers or the company directly before incurring a major expense.
Increasingly, health insurance plans also have co-pays, which are set fees that plan subscribers must pay for services such as doctor visits and prescription drugs; deductibles that must be met before health insurance will cover or pay for a claim; and coinsurance, a percentage of healthcare costs that the insured must pay even after they’ve met their deductible (and before they reach their out-of-pocket maximum for a given period).
Insurance plans with higher out-of-pocket costs generally have smaller monthly premiums than plans with low deductibles. When shopping for plans, individuals must weigh the benefits of lower monthly costs against the potential risk of large out-of-pocket expenses in the case of a major illness or accident.
One increasingly popular type of health insurance is a high-deductible health plan (HDHP), which, in 2020, must have IRS-mandated deductibles of at least $1,400 for an individual or $2,800 for a family, and out-of-pocket maximums of $6,900 for an individual/$13,800 for a family. These plans have lower premiums than an equivalent health insurance plan with a lower deductible. One other advantage: If you have one, you are permitted to open—and contribute pre-tax income to—a health savings account, which can be used to pay for qualified medical expenses.
In addition to health insurance, ill people who qualify can get help from a number of auxiliary products available on the market. These include disability insurance, critical (catastrophic) illness insurance, and long-term care (LTC) insurance.
In 2010, President Barack Obama signed the Patient Protection and Affordable Care Act (ACA) into law. It prohibited insurance companies from denying coverage to patients with pre-existing conditions and allowed children to remain on their parents’ insurance plan until they reached the age of 26. In participating states, the act also expanded Medicaid, a government program that provides medical care for individuals with very low incomes. In addition to these changes, the ACA established the federal healthcare Marketplace.
The Marketplace helps individuals and businesses shop for quality insurance plans at affordable rates. Low-income individuals who sign up for insurance through the Marketplace may qualify for subsidies to help bring down costs. Insurance available through the ACA Marketplace is mandated under the law to cover 10 essential health benefits. Through the HealthCare.gov website, shoppers can find the Marketplace in their state.
Changes in the Affordable Care Act
Under the ACA, Americans were required to carry medical insurance that meets federally designated minimum standards or face a tax penalty, but Congress removed that penalty in Dec. 2017. A Supreme Court ruling in 2012 struck down an ACA provision that required states to expand Medicaid eligibility as a condition for receiving federal Medicaid funding, and a number of states chose to refuse expansion. These changes, among others, have led to a drop in the number of people enrolled through the ACA marketplace from a peak of 17.4 million in 2015, to 13.8 million in 2018.
Medicare and CHIP
Two public health insurance plans, Medicare and the Children’s Health Insurance Program (CHIP), target older individuals and children, respectively. Medicare, which is available to those age 65 or older, also serves people with certain disabilities. The CHIP plan has income limits and covers babies and children up to the age of 18.