Understanding how health insurance works may seem difficult at first, but with a little introduction, you can use your health plan with confidence.
When you get health insurance, also called health coverage, you’re taking a step to protect yourself from unexpected illnesses, injuries and accidents. Without health insurance, you would need to pay for expensive medical bills on your own. Once you’re enrolled, you’ll have access to important health benefits, including preventive care.
In California, residents must have qualifying health coverage. Without it, they may be charged a penalty when they file their state tax return. The only ways to avoid the penalty are to enroll in health insurance or get an exemption.
The quality of your plan is key. A high-quality health insurance plan:
- Safeguards you from unexpected, high medical costs
- Ensures you’ll pay less for covered in-network health care services
- Provides free preventive care, such as health screenings, vaccines and some checkups
How health insurance works
These three main points can help explain how health insurance works:
- When you join a health insurance plan, you become a member.
- You’ll make monthly payments as a member of a group or plan, which shares the cost of medical services needed by members of the plan.
- Members pay “just in case” they need care. As a result, you won’t have to pay the actual cost of care when you need it – it can be very expensive if you have to pay for everything on your own.
However, there are two important caveats to keep in mind.
- If you join a health plan through your job: You and your employer share the cost of your monthly premium payments. Your contribution comes from your paycheck.
- If you are eligible for Medicare: Medicare-eligible individuals have a number of different plan options to choose from, so it’s important to do your homework on how premium payments work for your specific plan. For instance, it is common for Medicare Advantage plans to have $0 premiums.
Defining common insurance terms
As you shop for a new health plan, or research your own current plan policy, you might come across unfamiliar insurance-related words. To understand how health insurance works, it’s important to know what different terms mean.
1. Your premium and deductible
When you enroll in a health insurance plan, you pay a premium (monthly payment) to keep your health insurance active. Your premium can cover some – or all – of your care. You’re responsible for paying your premium, even if you don’t use medical services during the month.
A deductible is the amount you pay for covered health care services before your health insurance starts to pay for those services. For example, if your deductible is $1,000, you pay the first $1,000 of covered services yourself. Premium payments do not count toward your deductible.
Why this matters: When you choose a health insurance plan, you choose your premium and your deductible. In most cases, the higher your deductible is, the lower your premium will be. The opposite is also true: The lower your deductible is, the higher your premium will be.
High premium, low deductible
If you know you will need to use your covered benefits often – if you expect to see your doctor or specialists several times in the coming year, for example – then you may want to consider a plan with a higher premium and lower deductible. Although you’ll pay more each month, you will meet your deductible faster and your insurance carrier will pay for covered services sooner.
Low premium, high deductible
If you know you won’t use your insurance often, a lower premium and higher deductible may work better for you. This means your overall monthly insurance costs will be lower.
2. Your coinsurance
Coinsurance is a portion of the cost of covered health care services after you finish paying your deductible. Coinsurance shows up as a percentage in your summary of benefits and coverage.
What this means: If your coinsurance is listed at 20%, after you’ve paid your deductible, your coinsurance starts. This allows you to pay 20% of the total cost of a health service, while your health insurance carrier pays the remaining 80%.
3. Your copayment
The copayment (or copay) is the set amount you pay for a specific service, such as $25 for each doctor’s visit or $15 to fill your order for a prescription.
What this means: Your copay stays the same, no matter how much your doctor charges for a service. You’ll pay copays until you reach your maximum out-of-pocket amount.
4. Your maximum out-of-pocket amount
A maximum out-of-pocket (MOOP) amount is the most you can pay for covered health care in a 12-month period. Your MOOP includes your deductible, eligible copays and eligible coinsurance payments, but does not include your monthly premium payments.
What this means: Most payments you make when you receive care go toward your MOOP amount. Once you spend this amount on deductibles, copays and coinsurance, your insurance carrier will pay 100% of your covered benefits until the MOOP resets (returns to zero) in the next coverage year. The limit for your MOOP can vary, depending on your plan, but it can’t go over a certain amount each year.
Find a health plan that fits your needs
Ready to start shopping for a health plan? Take a look at this 2021 health plan shopping checklist to find out what qualities to look for in a plan.