How Health Insurance Works and What It Covers

Health insurance pays doctors and hospitals when you need medical care

Health insurance is a contract between you and an insurance company. You pay a monthly fee called a premium. In return, the insurance company pays part or all of your medical bills when you see a doctor, go to the hospital, fill a prescription, or have surgery. Without health insurance, you pay the full cost yourself — which can be thousands of dollars for a single hospital visit.

The insurance company does not pay everything. You typically pay a deductible (a set amount you must pay before the insurance kicks in), a copay (a fixed fee per visit, like $25 to see your doctor), or coinsurance (a percentage of the bill you split with the insurance company). The exact amounts depend on which plan you choose.

Health insurance is different from car insurance in one key way: you can get it through your job, buy it yourself, or get it through a government program. Car insurance is something you buy on your own. But most working adults get health insurance through their employer, who typically pays part of the premium.

Key Takeaways

• Health insurance covers doctor visits, hospital stays, prescriptions, and preventive care, but you pay a monthly premium and share costs through deductibles, copays, and coinsurance.
• Most working adults get health insurance through their employer, which usually covers 50 to 80 percent of the premium cost.
• If you do not have employer coverage, you can buy a plan on the individual market or through government programs like Medicaid or Medicare.
• Each plan has a network of doctors and hospitals; using providers outside the network costs you more money.
• Preventive care like annual checkups and vaccines is usually covered at no cost to you, even before you meet your deductible.

Where health insurance comes from

Most people under age 65 get health insurance through an employer. Your company contracts with an insurance company and offers one or more plans to employees. The employer pays part of your premium (often 50 to 80 percent), and you pay the rest through payroll deduction. This is the cheapest way to get coverage because the employer's contribution is not taxed as income.

If your job does not offer health insurance, or you are self-employed or unemployed, you can buy a plan on your own. You can shop on the individual market year-round, but you get the best prices during the annual open enrollment period, which typically runs from November through January. Outside that window, you can only buy coverage if you have a may have access to life event — like losing your job, getting married, having a baby, or moving to a new state.

If your income is low, you may be able to get Medicaid, a government program that covers medical care at little or no cost. Medicaid is run by each state, so rules and income limits vary. People age 65 and older get Medicare, another government program that covers hospital care, doctor visits, and prescriptions.

What your plan actually covers

Every health insurance plan covers certain services, and the law requires all plans to include preventive care at no cost. This means annual checkups, cancer screenings, vaccines, and blood pressure checks are free — you do not pay a copay or deductible. Plans also cover emergency care, hospital stays, and prescription drugs, though you will pay part of the cost.

What is not covered varies by plan. Cosmetic surgery, fertility treatments, and dental work are often excluded. Some plans do not cover mental health care or physical therapy unless you meet specific conditions. Before you buy a plan, read the summary of coverage, which lists what is and is not included.

Plans also have a formulary — a list of prescription drugs the plan will pay for. If your doctor prescribes a drug not on the formulary, you either pay the full cost yourself or ask your doctor for an alternative. Some plans require you to try a cheaper drug first before they will pay for an expensive one.

Networks and in-network versus out-of-network costs

Every health insurance plan has a network — a list of doctors, hospitals, and clinics that have agreed to work with that insurance company. When you see an in-network provider, you pay the copay or coinsurance amount listed in your plan. When you see an out-of-network provider, you pay much more — sometimes the full bill, sometimes a percentage that is higher than your in-network cost.

Before you choose a plan, check whether your current doctor is in the network. If your doctor is not listed, you can call the insurance company or check their website. Some plans, called HMOs (Health Maintenance Organizations), require you to pick a primary care doctor who coordinates all your care and refers you to specialists. Other plans, called PPOs (Preferred Provider Organizations), let you see any doctor without a referral, but you pay less if you stay in-network.

Emergency care is always covered, even if you go to an out-of-network hospital. But if you have time to choose, use an in-network provider to keep your costs down.

Deductibles, copays, and out-of-pocket maximums

A deductible is the amount you must pay out of your own pocket before your insurance starts paying. If your plan has a $1,500 deductible, you pay the first $1,500 of covered medical costs. After that, the insurance company starts to pay. Deductibles reset every January 1st.

A copay is a fixed fee you pay each time you use a service. You might pay $25 to see your doctor, $50 for an urgent care visit, or $10 for a generic prescription. Copays do not count toward your deductible — you pay them in addition to it. Some services, like preventive care, have no copay.

An out-of-pocket maximum is the most you will pay in a year for covered services. Once you reach this amount, the insurance company pays 100 percent of covered costs for the rest of the year. Out-of-pocket maximums vary by plan but are typically $5,000 to $10,000 for individual coverage.

How to choose a health insurance plan

If you are buying coverage on your own, you will see plans labeled Bronze, Silver, Gold, and Platinum. Bronze plans have the lowest monthly premium but the highest deductibles and copays. Platinum plans have the highest premium but the lowest out-of-pocket costs. Silver and Gold are in the middle. Choose based on how often you expect to use medical care: if you are healthy and rarely see a doctor, a Bronze plan may save you money overall. If you have chronic conditions or take many prescriptions, a Gold or Platinum plan will cost less in the long run.

When comparing plans, look at three numbers: the monthly premium, the deductible, and the out-of-pocket maximum. A plan with a low premium might have a very high deductible, which means you will pay a lot if you need care. Use the plan comparison tool on your state's health insurance marketplace to see the total cost of each plan based on your expected medical needs.

If you may have access to for subsidies or tax credits based on your income, you can reduce your monthly premium. These are only available during open enrollment or after a may have access to life event, so do not miss the important date.

Common mistakes to avoid

One mistake is choosing a plan based only on the monthly premium. A cheap premium often means a high deductible, so you will pay more when you actually need care. Calculate the total cost — premium plus expected deductibles and copays — before you decide.

Another mistake is not checking whether your doctor is in-network. If you switch to a plan where your doctor is out-of-network, you will pay significantly more. Call your doctor's office and ask which insurance plans they accept.

A third mistake is not understanding what your plan covers. Read the summary of coverage before you buy. If you have questions, call the insurance company's customer service line — they can tell you whether a specific service or drug is covered.

Frequently Asked Questions

What happens if I do not have health insurance?

You will pay the full cost of any medical care out of your own pocket. A single hospital stay can cost $10,000 or more. You will also owe a penalty on your federal tax return in some cases, though the penalty amount has been reduced in recent years. Many states offer low-cost or free coverage through Medicaid if your income is below a certain level.

Can I change my health insurance plan during the year?

You can only change plans during the annual open enrollment period, which runs from November through January in most states. If you have a may have access to life event — like losing your job, getting married, having a baby, or moving — you can change plans within 30 to 60 days of the event. Check your state's health insurance marketplace for exact dates and rules.

What is the difference between health insurance and health care?

Health insurance is the contract you have with an insurance company. Health care is the actual medical services you receive — doctor visits, hospital stays, prescriptions. Health insurance pays for health care, but you can receive health care without insurance by paying out of pocket.

Do I have to pay my premium if I do not use my insurance?

Yes. Your premium is the monthly fee you pay to keep your coverage active, whether you use it or not. It is like paying for a membership. If you stop paying your premium, your coverage ends and you are no longer insured.

What does it mean if a drug is not on my plan's formulary?

It means your insurance company will not pay for that drug, or will pay only a small portion. You can either pay the full cost yourself, ask your doctor for an alternative drug that is on the formulary, or request an exception from the insurance company. Some plans will cover a non-formulary drug if your doctor proves you have tried other options first.