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How Does Health Insurance Work?

Health insurance is an agreement between you and an insurance company of your choosing. You purchase the plan that best matches your healthcare needs, and the insurance company agrees to pay all or part of your medical costs when you get sick or hurt.

What are the costs associated with health insurance?

Most health insurance costs can be divided into three categories:

  • Premiums: Most health insurance companies offer several types of plans with varying degrees of coverage. These differences in coverage affect monthly costs, known as premiums. The higher the premium, the less you will pay when you get sick.
  • Deductibles: The dollar amount you pay out-of-pocket before your insurance begins to pay is called your deductible. Insurance plans that have higher monthly premiums tend to have lower deductibles, while plans with lower monthly premiums tend to have higher deductibles.
  • Copays or Coinsurance: When you visit the doctor, you may be asked to pay either a copay which is a standard flat rate, or coinsurance, which is a percentage of the total charge for the visit.

What are the different types of health insurance plans?

There are four types of traditional healthcare plans:

  • Exclusive Provider Organization (EPO): A managed care plan in which services are covered only if you use doctors, specialists or hospitals in the plan’s network (except in an emergency).
  • Health Maintenance Organization (HMO): A type of health insurance plan that usually limits coverage to care from doctors who work for or contract with the HMO. It generally does not cover out-of-network care except in an emergency. An HMO may require you to live or work in its service area to be eligible for coverage, and you must select a primary care physician (PCP) to manage your care.
  • Preferred Provider Organization (PPO): A type of health plan in which you pay less if you use providers in the plan’s network. You can use doctors, hospitals or providers outside of the network without a referral for an additional cost.
  • Point of Service (POS): A type of plan in which you pay less if you use doctors, hospitals or other health care providers that belong to the plan’s network. POS plans require a referral from your PCP in order to see a specialist.

Features of the four traditional healthcare plans

Referral required to see specialist NO NO YES YES
Non-emergency "out-of-network" benefits YES NO YES NO
Emergency coverage YES YES YES YES

High Deductible Health Plan (HDHP): Proactive healthcare with lower monthly costs

Traditional health plans promise comprehensive coverage, but monthly costs are typically expensive and benefits often go unused. At the end of the year, the money spent on premiums is spent and in the insurance company’s pockets. If you are not using your insurance benefits, your monthly premiums are funding other plan members’ healthcare services within your network.

A High-Deductible Health Plan (HDHP) is a plan with a higher deductible than a traditional health insurance plan. It shares many of the same structural features as a traditional healthcare plan, but it has some distinct differences. Your monthly premium is usually considerably lower, which means you get to keep more of your paycheck each month. In exchange, you are agreeing to have a higher deductible, so you will pay a greater amount of qualifying healthcare costs out-of-pocket before your insurance company starts to pay.

By definition, an HDHP is any plan with a deductible of at least $1,350 for an individual or $2,700 for a family. That means you pay at least $1,350 individually, out-of-pocket, before your health insurance begins covering your costs. Total yearly out-of-pocket expenses for in-network services (including deductibles, copayments and coinsurance) cannot exceed $6,650 for an individual or $13,300 for a family.

What are the benefits of HDHP?

An HDHP allows you to take an active role in your healthcare buying decisions. With a lower monthly premium, you have more choice, flexibility and control in how you spend your healthcare dollars.

Some of the specific benefits of HDHPs include:

  • Networks are not necessarily narrowed, as with HMOs
  • Out-of-pocket expenses are the negotiated rate between the healthcare provider and insurance company, not the market rate
  • Many preventive services such as colonoscopies, mammograms and vaccinations are covered at 100 percent
  • There is no need for referrals from primary care physicians to see a specialist

How an HSA differs from an FSA

An HDHP can be combined with a health savings account (HSA), enabling you to pay for certain medical expenses with money saved from your paycheck. HSA contributions are not subject to federal tax. Traditional healthcare plans do not permit HSAs, so the HSA option is a unique benefit to HDHPs. You are eligible to reserve $3,450 annually (pre-tax) for an individual and $6,900 (pre-tax) for a family to pay for qualified medical expenses, including your deductible. Unused HSA funds can roll over into the following year, allowing you to grow your account, tax-free, year after year.

HSAs are often confused with FSAs (Flexible Spending Accounts). FSAs are employer-established plans, so anyone who is not self-employed is eligible. FSAs are limited to $2,650 (pre-tax) per year per employer, and unused funds cannot be rolled over into the following year. FSA contributions can be used to pay for copayments, deductibles, drugs and other healthcare costs, but not for insurance premiums. 

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