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What is Health Insurance, and How Does It Work?

What is Health Insurance, and How Does It Work?

Posted Jun 01, 2016 by Jenifer Dorsey

The Affordable Care Act requires most Americans to have health insurance under its shared responsibility provision. Some of us are new to having health insurance, and some of us have had it for as long as we can remember. But what exactly is it?

The U.S. Centers for Medicare & Medicaid Services formally defines health insurance as[1]:

A contract that requires a health insurer to pay some or all of your healthcare costs in exchange for a premium. A health insurance contract may also be called a “policy” or “plan.”

Let’s break that definition down a bit and take a look at some of those terms:

Health insurer – A company that sells health insurance plans/policies.

Benefits – The healthcare costs (e.g., medical services, treatments and supplies) covered by your health insurance policy.

Premium – The dollar amount you (or your employer) pay to an insurance company for the benefits and coverage of an insurance policy. This may be paid monthly, quarterly or annually, depending on your plan and preference.

Policy – The health insurance coverage purchased by an individual or an employer and provided by a carrier. Also referred to as a plan. A policy lasts for a specific amount of time. For an Obamacare plan, it is typically January 1 through December 31 of the same year.

            Check out our Guide to Health Insurance Terms and 10 Essential Obamacare Terms for more definitions.

In other words, you buy a health insurance plan (i.e., major medical insurance, Obamacare) from a health insurance company. That plan is a contract that requires the insurer to pay a certain amount for certain types healthcare expenses you incur, as outlined, for a specific amount of time.



Putting it all together. How health insurance works.

You shop for coverage, choose a health insurance plan, and complete an application. Then what? Health insurance helps you pay for medical care, but how does it actually work?

Example: Joe buys a health insurance plan on December 12. His policy will begin on January 1 of the new year.

A week before his plan becomes effective, Joe receives his member ID card, which he places in his wallet. He reads over his benefits and takes note of those related to care he frequently uses.

Joe needs to visit the doctor for a checkup related to his diabetes. His plan requires he pay a $30 office visit copay when he visits the doctor. He presents his insurance card when he checks in for his appointment and pays this amount upon the receptionist’s request.

A few weeks after his visit, Joe receives mail from his health insurance company. Inside is an explanation of benefits, which states “this is not a bill.”

Joe learns that his visit cost $180—this amount is discounted from $200 because he visited a network provider and thereby receives discounted care. His health insurance plan will cover 70 percent of the charge based on the plan’s stated coinsurance amount for such care—Joe has met his $3,500 silver plan deductible for the year, which means he and the insurance company share his cost of care. He will owe $54. At this time, however, he takes no action.

Joe’s insurance company pays his healthcare provider $126 (i.e., 70 percent of his $180 bill). The provider then sends Joe a bill for his share.

Joe receives a bill from his healthcare provider. His provider offers online payment options, so he logs in and pays his $54 bill before it is due.

Of course, this is a basic overview of individual health insurance and how it works. You will also want to learn about your plan deductible and how it works, how to shop for coverage, and supplemental benefits that complement your Obamacare plan.



Don’t go it alone. Work with the professionals!

Contact your health insurance company with questions about your current health insurance plan and the benefits it provides.

If you have questions about buying affordable health insurance or supplemental health plans, work with a health insurance producer. Call the number at the top of your screen to speak with a certified advisor who can answer your questions and help you find Obamacare plans and other types of coverage.

Legal Disclaimers

[1] Centers for Medicare & Medicaid Services. “Glossary of Health Coverage and Medical Terms.” Accessed May 27, 2016. https://www.cms.gov/CCIIO/Resources/Forms-Reports-and-Other-Resources/Downloads/UG-Glossary-508-MM.pdf