Health insurance is a contract between a company and a consumer. The company undertakes to cover all or some of the insured’s health care costs in exchange for a monthly premium.
The contract is usually for one year, during which you are responsible for paying specific expenses related to illness, injury, pregnancy or preventive care.
7 Key Points:
- Health insurance covers most medical and surgical expenses and preventive care costs in exchange for a monthly premium.
- Generally, the higher the monthly premium, the lower the out-of-pocket costs.
- Insurance plans have deductibles and co-pays, but these out-of-pocket expenses are now limited by federal law.
- Medicare, Medicaid, and the Children’s Health Insurance Program (CHIP) are federal health insurance plans that extend coverage to the elderly, disabled, and low-income people.
- Health insurance policies in the United States generally come with coverage exclusions such as:
- A deductible that requires a consumer to pay certain “out-of-pocket” health care costs up to a maximum amount before the company’s coverage begins
- One or more co-pays that require the consumer to pay a specified share of the cost for specific services or procedures
How Health Insurance Works
In the United States, navigating health insurance is challenging. It’s a business with a number of regional and national competitors whose coverage, pricing and availability vary from state to state and even county to county.
About half of the US population has health insurance as an employee benefit, with premiums partially paid by the employer.
- Employer expenses are tax deductible to the payer and employee benefits are tax exempt (with certain exceptions for S Corporation employees).
- Self-employed people (including freelancers and gig workers) can buy their own insurance directly from insurers. The Affordable Care Act of 2010, commonly called Obamacare or ACA, mandated the creation of the ACA Healthcare Insurance Marketplace, which allows individuals to search for and purchase standard plans from private insurers that are available where they live. The cost of ACA-based coverage is subsidized for taxpayers whose incomes are between 100% and 400% of the federal poverty threshold.
Types of Health Insurance
Navigating health insurance can be tricky. In the US, managed care insurance plans require policyholders to receive care from a network of designated health care providers. If patients seek out-of-network care, they must pay a higher percentage of the cost. The insurer may even refuse to pay outright for services obtained out of network.
Most managed care plans—such as health maintenance organizations (HMOs) and point-of-service (POS) plans—require patients to choose a primary care physician who oversees the patient’s care, makes treatment recommendations, and makes referrals to medical specialists.
Preferred Provider Organizations (PPOs), on the other hand, do not require referrals. However, they charge lower rates for using in-network practitioners and services.
Insurance companies may deny coverage for certain services that were obtained without prior authorization. They may refuse to pay for brand-name drugs if a generic version or a comparable drug is available at a lower price. Before you buy insurance, check the insurance company’s rules.
What Are Copayments, Deductibles, and Coinsurance?
Most health insurance plans require their customers to pick up some of the cost of their coverage in a variety of ways:
- The deductible is the amount you pay out of pocket each year before the insurer starts covering the costs. This is now limited by federal law.
- Copays are set fees that subscribers must pay for specific services, such as doctor visits and prescription drugs, even after deductibles have been met.
- The deductible is the percentage of health care costs that the insured must pay even after the deductible has been met (but only until the out-of-pocket maximum for the year is reached).
- Insurance plans with higher out-of-pocket costs generally have lower monthly premiums. When shopping for plans, consider the benefit of lower monthly payments against the potential risk of large out-of-pocket expenses in the event of a serious illness or accident.
If you are self-employed, you can deduct up to 100% of the premiums for health insurance that you pay out of pocket.
High Deductible Health Plans (HDHPs)
One increasingly popular type of health insurance is the high deductible health plan (HDHP). These plans have higher deductibles and lower monthly premiums. Their users are the only ones who can open a Health Savings Account (HSA), which has significant federal tax benefits.
For 2024, a high-deductible health plan is one that has deductibles of at least $1,600 for an individual or $3,100 for a family. The total out-of-pocket maximum is $8,050 for an individual and $16,100 for a family. For 2025, these amounts will increase to minimum deductibles of $1,650 and $3,200 and maximum deductibles of $8,300 and $16,600.
High-deductible health plans offer a unique advantage in that, if you have one, you can open — and contribute pre-tax income to — a health savings account that can be used to pay for qualified medical expenses. These plans offer a triple tax advantage in that:
- Contributions are tax deductible
- Contributions grow on a tax-deferred basis
- Qualified withdrawals for medical expenses are tax-free
- Federal health insurance plans
Not all health insurance in the US is provided by private companies. Medicare, Medicaid, and the Children’s Health Insurance Program (CHIP) are federal health insurance plans that extend coverage to the elderly, disabled, and low-income people.
Affordable Care Act (ACA)
In 2010, President Barack Obama signed the Affordable Care Act (ACA). In participating states, the act expanded Medicaid, a government program that provides medical care to low-income individuals.
The Affordable Care Act 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 age 26.
In addition to these changes, the ACA established a federal health insurance marketplace and allowed states to set up their own exchanges if they wished. The ACA also prohibits insurers from denying coverage to patients with pre-existing conditions.
ACA Marketplace helps individuals and businesses shop for quality insurance plans at affordable prices. Insurance available through the ACA Marketplace is required to cover 10 essential health benefits.
Originally, under the ACA, taxpayers were required to have health insurance that met federally set minimum standards or face a tax penalty. However, the Tax Cuts and Jobs Act eliminated this penalty after December 31, 2018.
A 2012 Supreme Court ruling struck down a provision of the ACA that required states to expand Medicaid programs.
