Health Insurance

Health Insurance Basics: The 101 Guide to Health Insurance

Health insurance is an product that’s designed to cover medical expenses. Like auto insurance covers your car if you get into an accident, health insurance covers you if you get sick or injured. Health insurance also covers preventive care – i.e., doctors visits and tests before you get sick.

Health insurance doesn’t always cover 100% of your costs. In fact, it’s designed to share costs with you up until a certain point, called the out-of-pocket limit. After you hit the out-of-pocket limit, health insurance will pay 100% of your healthcare costs.

There are a few ways that health insurance companies might share costs with you, and they make up major features of your health insurance plan that you need to be aware of: your deductible, your copayment, your coinsurance, and your out-of-pocket limit. We’ll discuss them in more detail in our “Key features” section below.

All health insurance plans need to cover the ten essential benefits. In addition to the ten essential benefits, health insurance plans must meet certain affordability standards, as well as other rules that vary on a state-by-state basis, in order to be included on a government-run health insurance exchange. Off-exchange plans, so called because they are not sold on government-run exchanges, must also cover the ten essential benefits and meet certain federal standards in order to be considered qualifying health coverage. These consumer protections closed loopholes that caused financial problems for policyholders in the past.

As outlined by the Affordable Care Act (the ACA, also known as Obamacare), all American citizens must have qualifying health coverage. If you don’t, you’ll have to pay a fee on your federal tax return. The tax fee is calculated in one of two ways:

  1. 2.5% of your household income or
  2. $695 per adult and $347.50 per child under 18

You’ll pay whichever is higher.

Who should buy health insurance?

Literally everyone should buy health insurance because it’s mandatory (unless you qualify for a hardship exemption). But you might be thinking that it makes more sense to take the tax hit than to buy an expensive health insurance policy you don’t need. First, you should know that health insurance can be less expensive than the tax fee you face if you don’t have health insurance. Secondly, the amount you’d have to pay out-of-pocket for a medical emergency if you don’t have health insurance is much, much higher than the tax fee. Medical bills are a leading cause of consumer debt and related financial problems (e.g., bankruptcy and home foreclosure).

If you’re buying health insurance and you fit into one of the following groups, we’ve listed a few additional considerations for when you’re shopping for health insurance.

If you’re buying for a family

If you have children, it’s likely that they may need to visit the doctor or urgent care more frequently than a relatively healthy adult. Make sure that your deductible, copayments, and coinsurance payments are affordable for you, as you may otherwise be paying out-of-pocket for a simple doctor’s visit.

You should also be aware that your plan may have a family deductible in addition to individual deductibles for each family member. Individual deductibles are lower than the family deductible. Once an individual hits their individual deductible, their health insurance plan kicks in just for them. But once the family deductible is met, health insurance kicks in for every member of the family, regardless of whether or not an individual has reached their deductible.

If you’re a student

You can stay on a parent’s health insurance plan until you’re 26-years-old, so no need to buy health insurance if your parents are willing to let you stay on their plan. You can also check your university for health insurance plans, which may be more affordable. This is an especially good option if you’re going to college out-of-state, as your parent’s plan’s network may not work in your state.

If you’re self-employed

If you just became self-employed after leaving a full-time W2 job, you can use COBRA to continue your previous employer’s coverage until you’re able to find a new plan. If it’s not open enrollment, you should also be able to qualify for a special enrollment period to shop on the marketplace.

Make sure your premiums are affordable, as your monthly income may be variable. Your health insurance premiums are also tax deductible, so don’t forget that come tax time. Additionally, if you travel frequently, you may want to purchase a plan that allows you to see out-of-network providers, like a PPO or POS plan.

If you have a low income

If you’re on a low income or tight budget, you should look into whether or not you qualify for Medicaid. Medicaid is a public health insurance plan available for low income individuals and families. We discuss Medicaid in more detail below.

If your income is between 100% and 400% of the federal poverty line, you likely qualify for a subsidy from the health insurance marketplace. This subsidy can help make health insurance more affordable.

The most important thing to remember is to have some sort of coverage in place. A serious health issue can turn into a financial disaster if you’re not careful. If you qualify, look into catastrophic plans; these low cost plans can protect you from the cost of serious illnesses and accidents.

If you’re a veteran

If you’re a veteran, you may qualify for health care through the U.S. Department of Veterans Affairs (VA). The Affordable Care Act does not change VA health benefits. If you qualify for VA health benefits, you do not need to purchase an additional health insurance plan to meet the Affordable Care Act’s health insurance mandate.

If you have health insurance coverage through a private-sector employer, you can have and use both health insurance plans at the same time.

If you’re pregnant

All health insurance plans that count as qualifying health insurance cover pregnancy and childbirth related services. Maternity care and childbirth are one of the ten essential benefits required on qualifying health plans under the ACA. These services are covered even if you became pregnant before your coverage starts.

For most health insurance plans, you can find the specific way your plan covers childbirth on page 7 of your Summary of Benefits and Coverage document.

Having a child counts as a qualifying event for a special enrollment period in which you can enroll in a new plan or switch plans. In the state of New York, becoming pregnant also qualifies you for a special enrollment period.

Maternity care and childbirth are also covered by Medicaid and CHIP. If you qualify for Medicaid and CHIP and are pregnant, you can apply at any time during the year through your state agency or marketplace.

If you’re a senior citizen

If you’re above the age of 65, you likely qualify for Medicare. We go into more detail into Medicare below, but the gist of it is that it’s a federal program designed to help you cover healthcare costs into your old age.

You can also purchase supplemental insurance, called Medigap, that can help pay for your deductibles, copayments, and coinsurance. Medigap plans may or may not make sense for you – make sure you know what you’re buying before you start to pay for it.

If you’re currently in the military

If you’re an active duty service member, your health care (and your family’s health care) is covered by TRICARE. You do not need to purchase additional health insurance to comply with the ACA.

If you’re married, but don’t have kids

If you’re married but don’t have kids, you don’t need to buy health insurance as a family. You can buy individual plans from separate companies, if that makes sense for you and your spouse. You can also purchase a family plan from the marketplace.

One of you can also be a dependent on the other’s employer-provided health insurance plan, if that’s available.

Which type of health insurance to buy

Generally, there are two types of health insurance: public health insurance (like Medicaid, Medicare, and CHIP) and private health insurance. Most people have some form of private health insurance, whether they purchase it through a marketplace or get it from an employer. State exchanges and the federal exchange can offer consumers both public health insurance and private health insurance.

On-exchange private health insurance

On-exchange private health insurance policies are plans that are sold on government-run exchanges, like a state exchange or Healthcare.gov, the federal exchange. On-exchange plans must cover the ten essential benefits, plus any additional services that are mandated by your state government. Additionally, any insurer that wants to participate in a government-run exchange must offer a plan at every metal tier (which we’ll discuss in more detail later). On-exchange private plans are the only plans for which premium tax credits and cost-sharing reductions (i.e., government subsidies for qualifying applicants) are available. Note: President Donald Trump has said he will cease paying out cost-sharing reductions to insurers, which has led to increased premiums, particularly on silver plans, this year.

Off-exchange private health insurance

Off-exchange private health insurance policies are plans that are sold either directly by the health insurance company, through a third-party broker, or a privately-run health insurance marketplace. Off-exchange plans must cover the ten essential benefits and follow other rules dictated by the Affordable Care Act - meaning you don’t have to worry about any loopholes or ‘gotchas’ on off-exchange plans. The caveat with off-exchange plans is that you cannot apply any subsidies (e.g., the premium tax credit or cost-sharing reductions) to these plans. Providing an off-exchange plan may allow an insurer more flexibility. For example, because they don’t have to offer a plan at every metal tier, insurers can offer just one type of health insurance plan. Ultimately, if you’re shopping for private health insurance and ineligible for a premium tax credit, looking at off-exchange plans gives you more options at potentially lower price points.

Employer-provided health insurance

Employer-provided health insurance plans, also called group plans, are private plans purchased and managed by your employer. Employer-provided plans need to follow the same rules as other private insurance plans and cover the ten essential benefits. If you’re eligible for an employer-provided plan, you do not need to purchase additional coverage through the marketplace. Talk to your human resources department for more specific information about your plan.

Short term health insurance

Short term health insurance plans provide limited health care coverage for a temporary gap in coverage. However, it’s very important to note that short term health insurance plans do not count as qualifying health coverage, and any time period that you’re covered by only short term health insurance will be ‘uninsured’ time for the purposes of the ACA mandate (and avoiding the tax penalty). However, short term health insurance may still be worth it to cover a short coverage gap of one or two months – for example, if you looking for a new job or a new job has a waiting period before your health insurance kicks in. Many large health insurers offer short term options. Be aware, however, that short-term health insurance may have limits that regular health insurance does not have (e.g., caps on annual benefits paid). However, for stopgap coverage, these plans are a good option.

Medicare

Medicare is a federal health insurance program for Americans above the age of 65. Anyone above the age of 65 can buy health insurance, regardless of their income level. There are four parts to Medicare that cover different healthcare services. Two parts – Parts A and B – are paid for by taxes, while the other two parts – Parts C and D – are paid for by the program participant. If you’re above the age of 65, you can apply for Medicare through Healthcare.gov or your state exchange.

Medicaid and the Children’s Health Insurance Program (CHIP)

Medicaid is a federal and state health insurance program for low-income families and individuals. Medicaid has eligibility requirements that are set on a state-by-state basis, but it is primarily designed for those with low incomes and low liquid assets. It is also designed to help families and caretakers of small children in need. You can typically check if you qualify for Medicaid through Healthcare.gov or your state exchange.

The Children’s Health Insurance Program (CHIP) is a federal and state program that is similar to Medicaid, but specifically designed to cover children below the age of 18. The program is primarily aimed at children in families who have incomes too high to qualify for Medicaid, but too low to afford private health insurance. Like Medicaid, you can typically see if you qualify and apply on Healthcare.gov or your state’s exchange.

The different types of private health insurance

All private health insurance plans, whether they’re on-exchange or off-exchange, work by partnering with networks of healthcare providers. But the way that these plans work with the networks can vary significantly, and you want to make sure you understand the differences between these plans.

HMO: Health Maintenance Organization

HMO plans are the most restrictive type of plan when it comes to accessing your network of providers. If you have an HMO plan, you’ll be asked to choose a primary care physician (PCP) that is in-network. All of your care will be coordinated by your PCP, and you’ll need a referral from your PCP to see a specialist. HMOs do not cover any out-of-network healthcare costs.

HMO plans typically have cheaper premiums than other types of private health insurance plans.

PPO: Preferred Provider Organization

PPO plans are the least restrictive type of plan when it comes to accessing your network of providers and getting care from outside the plan’s network. Typically, you have the option between choosing between an in-network doctor, who can you see at a lower cost, or an out-of-network doctor at a higher cost. You do not need a referral to see a specialist, though you may still choose a primary care physician (some states, like California, may require that you have a primary care physician).

PPO plans typically have more expensive premiums than other types of private health insurance plans.

EPO: Exclusive Provider Organization

EPO plans are a mix between HMO plans and PPO plans. EPO plans give you the option of seeing a specialist without a referral. However, EPO plans do not cover out-of-network physicians.

EPO plans typically have more expensive premiums than HMOs, but less expensive premiums than PPOs.

POS: Point of Service

POS plans are another hybrid of HMO and PPO plans. You’ll have a primary care provider on an HMO-style network that can coordinate your care. You’ll also have access to a PPO-style network with out-of-network options (albeit at a higher cost). The HMO network will be more affordable, and you will need to get a referral to see HMO specialists.

POS plans typically have more expensive premiums than pure HMOs, but less expensive premiums than PPOs.

What are the metal tiers?

Remember earlier when we talked about how all health insurance plans split some of the costs between the insurer and the consumer? Metal tiers are a quick way to categorize plans based on what that split is.

Some people get confused because they think metal tiers describe the quality of the plan or the quality of the service they’ll receive, which isn’t true.

Here’s how health insurance plans roughly split the costs, organized by metal tier:

Bronze – 40% consumer / 60% insurer Silver – 30% consumer / 70% insurer Gold – 20% consumer / 80% insurer Platinum – 10% consumer / 90% insurer

These are high level numbers across the entirety of the plan, taking into account the deductible, coinsurance, and copayments, as dictated by the specific structure of the plan, based on the expected average use of the plan. These percentages do not take premiums into account. They also do not represent the exact amount that you’ll actually pay for medical services.

In general, Bronze plans have the lowest monthly premiums and Platinum have the highest, with Silver and Gold occupying the price points in between. As you can see from the cost-sharing split above, Bronze plan premiums are cheaper because the consumer pays more out of pocket for healthcare services. If you frequently utilize healthcare services, you’ll probably end up paying more out-of-pocket if you choose a Bronze plan, even though it has a lower premium.

If you qualify, you can use a health insurance premium subsidy to help you afford a plan in a higher tier, ultimately saving you money.

There’s a fifth category of health insurance plans that you may see on the marketplace, called “catastrophic” plans. Catastrophic plans have very high deductibles – often, the deductible is the same as the out-of-pocket max – which means they’re really only useful for preventing an accident or serious illness from causing you to go into severe debt. Catastrophic plans are only available for people under 30 or people with a hardship exemption. You cannot use a subsidy on catastrophic plan premiums, but catastrophic plans do count as qualifying health care when it comes to the health insurance mandate.

Key features that decide how much you pay

When you shop for a health insurance plan, it’s important to know what the key features are that decide how much you’re actually going to pay for healthcare. These can be boiled down into five major features of your health insurance plan:

Premium

It’s easy to think of your premium as your monthly bill. Every month, you pay a premium to a health insurance company in order to access a health insurance plan. As we’ll get into in a second, while your monthly premium may be how much you pay for health insurance, it’s not equivalent to how much you pay on healthcare services. In fact, choosing a plan with lower premiums will likely mean that you’ll pay more out-of-pocket if you need to see a doctor.

Deductible

A deductible is how much you need to pay for healthcare services out-of-pocket before your health insurance kicks in. In most plans, once you pay your deductible, your health insurance company will still use copayments and coinsurance to split costs with you (up to the out-of-pocket max, after which the plan pays for 100% of services). Plans with lower premiums tend to have higher deductibles.

Copayment

A copayment, often shortened to just “copay,” is a fixed amount that you pay for a specific service or prescription medication. Copayments are one of the ways that health insurers will split costs with you after you hit your deductible. In addition to that, you may have copayments on specific services before you hit your deductible. For example, many health insurance plans will have copayments for doctor’s visits and prescription drugs before you hit your deductible. You will pay copayments until you hit your maximum out-of-pocket amount.

Coinsurance

Coinsurance is another way that health insurers will split costs with you. Unlike a copayment, coinsurance isn’t a fixed cost – it’s a percentage of the cost that you pay for covered services. For example, if you have a coinsurance of 20%, you’ll pay 20% of the cost of covered services until you reach your out-of-pocket maximum.

Maximum out-of-pocket amount

The maximum out-of-pocket amount, also called the out-of-pocket limit, is the most you’d ever have to pay for covered healthcare services in a year. Payments made towards your deductible, as well as any copayments and coinsurance payments, go toward your out-of-pocket limit. Monthly premiums do not count. The maximum out-of-pocket limit for 2018 is $6,650 for individual plans and $13,300 for family plans; plans with higher premiums tend to have lower out-of-pocket limits. Note that the maximum out-of-pocket is a consumer protection enacted under the ACA; previously plans didn’t have to cap what a person would be required to spend on healthcare services. This often meant that insured people who had to undergo very expensive treatments (e.g., for cancer or lifesaving surgery) could face unlimited medical bills.

Supplemental health insurance products

Health insurance doesn’t always cover every aspect of your physical health, or your health-related costs, which is why you can buy supplemental health insurance products along with your health insurance plan. Some of these, such as dental and vision, may already be familiar to you.

Dental insurance

Dental insurance is an insurance product designed to help you pay for dental care. Many dental plans are structured similarly to health insurance plans: there are dental HMOs and PPOs, for example. Dental plans are relatively inexpensive – even the richest plans on the marketplace tap out at around $30 per month for an individual. For more information about dental insurance and how it compares to dental discount plans, check out our guide. Note that dental insurance is included in all health insurance plans for children under the age of 18.

Vision insurance

Vision insurance is, you know, for your eyes. It’s designed to help people pay the costs of regular eye exams, eyeglasses, and contact lenses. Major eye surgeries that are medically necessary, such as cataract surgery, are usually covered by health insurance plans. Elective vision corrective surgery may be covered by a vision insurance plan. Vision insurance plans usually cost around the same as dental insurance plans. Note that vision insurance is included in all health insurance plans for children under the age of 18.

Gap insurance

Gap insurance is a supplemental health insurance policy that helps you pay for out-of-pocket costs associated with your healthcare expenses. Designed to cover the “gap” in coverage left by plans with high deductibles, gap insurance can help you reduce your out-of-pocket expenses. Gap insurance plans are not regulated by the Affordable Care Act, and do not offer the same consumer protections as qualifying health coverage.

Critical illness insurance

Critical illness insurance is a type of insurance product that helps you pay for expensive illnesses that impact you and your ability to earn money for multiple years. For example, Alzheimer’s disease, cancer, and stroke are three diseases that a critical illness insurance policy may cover. Each critical illness policy has its own list of illnesses that it will cover. If you are diagnosed one of these illnesses while you’re a policyholder, your insurer will typically pay you a lump sum cash payment. If you own a term life insurance policy, you can also get a critical illness rider attached to your life insurance policy for less money than a separate critical illness plan.

The 10 essential benefits every health insurance plan must provide

The Affordable Care Act, also known as Obamacare, made covering certain healthcare services a requirement for all health insurance plans available to consumers. These required services are known as the ten essential benefits. These ten categories of services are:

  • Ambulatory patient services (a.k.a. outpatient care that you can receive without being admitted to a hospital)
  • Emergency services
  • Hospitalization for surgery, overnight stays, and other conditions
  • Pregnancy, maternity, and newborn care
  • Mental health and substance use disorder services
  • Prescription drugs
  • Rehabilitative and habilitative services and devices (a.k.a. treatment and devices that help people gain or recover mental and physical skills after an injury, disability, or onset of a chronic condition)
  • Laboratory services
  • Preventive and wellness services, as well as chronic disease management
  • Pediatric services, including dental and vision coverage for children

Note that these are categories of services, and that the specific services offered within these categories may differ from state to state. Typically states require that plans offer more services to their customers, rather than restricting services you would expect to find under these categories. State, federal, and private exchanges will show you exactly which services each plan covers before you apply.

Preventative care

All health insurance plans on government-run marketplaces offer a set of preventative healthcare services, such as shots and screening tests, at no cost to plan members (even if you haven’t hit your deductible). As of 2017, these are the 18 free preventative services for all adults, as outlined by Healthcare.gov:

  1. Abdominal aortic aneurysm one-time screening
  2. Alcohol misuse screening and counseling
  3. Aspirin use to prevent cardiovascular disease
  4. Blood pressure screening
  5. Cholesterol screening
  6. Colorectal cancer screening
  7. Depression screening
  8. Diabetes (Type 2) screening
  9. Diet counseling
  10. Hepatitis B screening
  11. Hepatitis C screening
  12. HIV screening
  13. Immunization vaccines
  14. Lung cancer screening
  15. Obesity screening and counseling
  16. Sexually transmitted infection prevention counseling
  17. Syphilis screening
  18. Tobacco use screening and cessation interventions

Note that some of these screenings may only be for specific age groups. Look at your plan or talk to your insurer to check which preventative services are free for you.

Women and children have their own set of preventative care benefits. For women, many of the free preventative care benefits are related to pregnancy, breastfeeding, and contraception, as well as gender-specific cancers and sexually transmitted diseases. For children, free preventative care is more focused on developmental disorders and behavioral issues, as well as screenings for common chronic illnesses that can develop in children.

How much should a health insurance plan cost?

Thanks to the Affordable Care Act, there are only five factors that go into setting your premium:

  1. Your age
  2. Your location
  3. Whether or not you use tobacco
  4. Individual v.s. a family plan
  5. Your plan category (Bronze, Silver, Gold, Platinum, or Catastrophic)

Health insurance companies are not allowed to take your gender or your current or past health history into account when setting your premium.

Health insurance premiums on the Affordable Care Act’s marketplaces have increased steadily between now and 2016, due largely to political uncertainty around the law. However, nearly 85% of the roughly 10 million people who got healthcare through marketplaces received tax credit subsidies in 2016, so it's unclear how severaly premium increases will affect shoppers directly.

When it comes to buying a health insurance plan, however, you need to look at more than just the monthly premium. As we mentioned in the sections above, health insurance is only one part of your total spend on healthcare services. In fact, if you frequently visit a doctor and you buy a plan with a high deductible and low monthly premium, it’s likely that you’ll spend more money overall than if you bought a plan with higher premiums, a lower deductible, and lower copayments and coinsurance payments.

A premium tax credit may help you afford the right health insurance plan for you. A premium tax credit is a tax credit that you can apply in advance of your tax return in order to reduce the cost of your monthly premiums. You can also take the tax credit when you file your yearly tax return. Tax credits are only available to individuals and families within a certain income range – between 100% and 400% of the federal poverty line in your state.

Premium tax credits are only available on marketplace plans and cannot be used on public health insurance plans, catastrophic health insurance plans, or off-exchange private health insurance plans.

When to buy health insurance

Generally, there is only one period of time in which you are allowed to shop for a new health insurance plan on a government-run or private marketplace. This is the called the open enrollment period. You cannot purchase a health insurance plan outside of the open enrollment period unless you qualify for a special enrollment period.

These enrollment periods exist in order to enforce the health insurance mandate. Because health insurance companies must cover people regardless of preexisting conditions, the Affordable Care Act mandates that everyone buys health insurance, even if they believe they are healthy or do not need health insurance. Premiums from healthier customers who don’t use a lot of healthcare services help offset the cost of covering people who do need to use more health services.

Open enrollment period

Federal open enrollment for 2018 starts on Nov. 1, 2017 and ends on Dec. 15, 2017. Some state-run exchanges have extended their deadlines. You can find a state-by-state guide to 2018 Obamacare open enrollment here.

If you don’t buy health insurance before your state's deadline, you will not be able to purchase health insurance for 2018 unless you qualify for a special enrollment period later in the year.

If you don’t have health insurance for more than two months out of the year, you will have to pay a penalty for every month that you go without coverage. This penalty will be calculated on your tax return for the respective year.

Special enrollment period

A special enrollment period begins, like so many things, with a qualifying event. Qualifying events literally qualify you for a special enrollment period; some examples of qualifying events include turning 26, getting married, and having baby. Moving to a new zip code also qualifies you for a special enrollment period. Some states may have their own additional qualifying events. You do not qualify for a special enrollment period if you fail to pay your premiums and your coverage lapses.

To check if you qualify for a special enrollment period, fill out the form on your state, federal, or private marketplace.

How to find an affordable health insurance plan

Finding a health insurance plan that fits you and your needs doesn’t have to be a pain. When shopping for an affordable health insurance plan, it’s important to know what makes a plan affordable to you, specifically. Do you rarely utilize healthcare services? A high deductible, low premium plan probably makes sense for you. Are you managing a chronic illness? A health insurance plan that has a higher sticker price, but has lower out-of-pocket costs, will probably be more affordable in the long run.

While you can search by these criteria on the state and federal marketplaces, they don’t make it easy. PolicyGenius was specifically designed to help you find a health insurance plan that fits your budget and covers your other needs, such as keeping your doctor or prescription medication. PolicyGenius offers you the ability to see and apply for off-exchange plans, which may provide more options at your price point, and you can take advantage of a premium tax subsidy on marketplace plans sold through Policygenius.