Understanding health insurance - A basic overview

Suppose you’re ready to select a health insurance policy for the first time—whether from your employer or the individual market. But as you start looking at health plans, you realize that unfamiliar coverage options and terms can make the process overwhelming.

Without a clear understanding of health insurance, you risk choosing a plan that doesn’t fit your needs. This could leave you with unexpected costs or inadequate coverage when you need it most. However, understanding the basics will help you make a confident decision when choosing a health plan that’s right for you, your family, and your specific medical needs.

In this blog post, you’ll learn:

• The basics of how health insurance works, including premiums, deductibles, and out-of-pocket limits.
• The various types of health insurance coverage, such as employer-sponsored, individual, and government-funded options.
• Key tips for choosing the right health insurance plan based on coverage and costs.

What is health insurance, and how does it work?

Health insurance is financial protection for medical costs. It’s essentially a contract you make with an insurance company. In exchange for paying a monthly premium fee, your insurer shares the cost of your healthcare expenses for the plan year. Health insurance protects you from costly medical bills, enabling you to afford the cost of doctor visits, routine care, medications, and more.

Here’s how health insurance typically works:

1. You pick your preferred health plan. This can be a plan from your employer, the individual market, or a government-funded program (if you qualify).
2. You pay a premium. You pay a fee to your health insurance provider, usually monthly, to maintain coverage.
3. You receive medical care. You choose the healthcare services and items that you need. You’ll pay for this care out-of-pocket until you hit your plan’s annual deductible.
4. The plan’s cost-sharing kicks in. Once you meet your plan’s deductible, your insurer will cover a percentage of your healthcare costs.
5. You reach your out-of-pocket maximum. Most health plans have an out-of-pocket maximum. Once you reach this limit, your health insurer will pay 100% of your covered healthcare costs for the remaining plan year. The costs must be in-network and medically necessary for your insurance company to pay.
6. You renew or change your plan at the end of the year. At the plan year's end, you can renew your current policy or change health plans. You can only enroll in a new individual health insurance policy during the Open Enrollment Period. You can also change coverage if you qualify for a special enrollment period. For group plans, you can enroll during your employer’s annual enrollment period.

What are the different types of health insurance?

There are different forms of health insurance available. Some depend on employment, while others require you to qualify to receive coverage. There are also plans on the individual market that aren’t employment-based or funded by a government program.

Here’s a brief overview:

There are supplemental health plans—which help you pay for specific healthcare services, like prescription medications—and ancillary plans, such as dental and vision insurance. These policies don’t provide comprehensive healthcare coverage like major medical plans. But they can offer you even greater protection.

You can buy a supplemental or ancillary benefit directly from a health insurance company at any time, regardless of your current health insurance status.

You may also have an employer-funded health benefit known as a health reimbursement arrangement (HRA). If you have a qualified small employer HRA (QSEHRA) or individual coverage HRA (ICHRA) from your employer, they can reimburse you tax-free for your individual health insurance premiums. This allows you to shop for a plan that best fits your needs.

What are the four most common health insurance plans?

If you’re shopping for health insurance, you may find the number of plans intimidating. But it’s essential to compare your options carefully. The type of plan you choose determines where you can get care, what services your plan covers, and what you can expect to pay out-of-pocket.

Here are the most common types of health plans:

1. Preferred provider organization plans (PPOs). PPOs are a flexible option. With this plan, you’ll pay less when you receive healthcare from the plan’s network of preferred providers. But you can also receive out-of-network care for a greater cost.
2. Health maintenance organization plans (HMOs). These plans have a smaller provider network than PPOs, and members must receive in-network care. HMOs have lower monthly premium rates and out-of-pocket costs than other types of health plans. However, members can’t visit a specialist without a referral from their primary care physician (PCP).
3. Exclusive provider organization plans (EPOs): An EPO has elements of HMO and PPO plans. For example, members must receive care from the plan’s preferred provider network. However, they can visit a specialist without a referral.
4. Point of service plans (POSs). You can receive in-network and out-of-network care if you have a POS plan. But you’ll save money if you visit an in-network medical provider. Additionally, you’ll need a referral PCP to see a specialist.

Thanks to the Affordable Care Act (ACA), health insurers must categorize plans on the individual market by four “metallic tiers” of coverage: bronze, silver, gold, and platinum. Gold and platinum plans have higher premium rates, but your insurer will pay more of your healthcare costs. In contrast, bronze and silver plans have lower monthly premiums. But you’ll pay more out-of-pocket costs when you need care.

Want to learn more about the various types of health plans? Check out our full blog.

What are the common terms used in health insurance?

Now that you know the difference between several types of health plans, you must understand certain health insurance terminology to compare plans effectively and choose the proper coverage.

Below are common terms you’re likely to encounter when shopping for a health plan:

Browse through our glossary to learn even more health insurance terms.

What medical expenses does a health insurance plan cover?

The federal government requires all individual and small group plans to cover the 10 essential health benefits. Once you've reached your plan’s out-of-pocket maximum, your insurer will cover 100% of the cost for these services.

A few of the essential health benefits include:

• Emergency services
• Hospitalization
• Pregnancy, maternity, and newborn care
• Prescription drug coverage
• Laboratory services
• Preventive services

Besides the essential health benefits, insurers can choose what services and items your individual plan covers. One health insurance policy may have more benefits than another. So, compare plans carefully before enrolling.

In general, your health plan won’t cover the following expenses:

• Monthly health insurance premiums
• Medical expenses your plan doesn’t cover
• Out-of-network health care
• Any costs that exceed the allowed amount for a particular service

Review your policy’s summary of benefits and coverage (SBC) document before receiving care to confirm which services your plan does and doesn’t cover. This will keep your out-of-pocket costs as low as possible.

The top five tips for choosing the right health insurance plan

Whether you’re selecting an employer-sponsored group plan or an individual policy, picking the best health insurance plan is a critical decision—but don’t get overwhelmed! There are a few key factors you consider that can help you choose the right plan for you.

Below are five tips for choosing a health insurance plan:

1. Think about your healthcare needs. Do you have a family? Are you planning on having a child? Do you have a chronic illness? These are all essential questions to ask yourself when comparing plans. It’ll help ensure you choose a policy with enough coverage for your current and upcoming medical situations. You should also list your current prescriptions to confirm the plan you’re considering covers what you need.
2. Consider the total health insurance costs. Don’t just look at the monthly premium when signing up for health coverage. Look at the plan’s annual deductible, out-of-pocket maximum, copay amounts, and coinsurance rate to get an accurate snapshot of what you’ll likely have to pay through the plan year to ensure it works for your budget.
3. Review the plan’s provider network. If you have a list of providers you currently use, make sure the plan you’re considering has them in its preferred network. If they’re out of your plan’s network and you receive care from them, you may have to pay a higher cost-sharing amount, or your plan may require you to cover the bill entirely out-of-pocket.
4. Check the policy’s covered services. Most insurers will list the plan’s SBC when shopping for health insurance—even if you haven’t enrolled in the plan yet. The SBC includes detailed information about covered services, limitations, and exclusions. If you need a plan with coverage for a specific medical situation, like fertility treatment, review the SBC carefully to see the plan’s benefits.
5. Determine if you want to deal with referrals. If you choose an HMO or POS plan, you must get a referral from your PCP before visiting a specialist. Even though these plans may have a cheaper premium, you may not have the time to deal with this potential inconvenience. If you prefer greater flexibility, you can save time (and pay a higher premium) by selecting an EPO or a PPO.

Conclusion

The health insurance industry has complex ins and outs. But knowing the basics can help get you started. By learning how health insurance works, familiarizing yourself with key terms, and comparing your different plan options, you can successfully choose a policy that provides the coverage and peace of mind you need to stay happy and healthy.

This article was originally published on July 26, 2013. It was last updated on February 14, 2025.