How does health insurance work? How do you plan for health expenses? Learn how to determine the right health insurance plan for you based on your health needs.
What is health insurance?
Health insurance is a type of insurance that helps to pay for the cost of medical expenses, such as prescription drugs or hospital stays. Without health insurance, you are required to pay the sticker price of these expenses, which in some countries can be extremely expensive.
Health insurance reduces the amount of money you must spend out of your own pocket for these items. If you have private health insurance, or even a government-subsidized plan in the U.S., you pay an insurance premium, monthly premium, or a monthly fee that the insurance plan charges, to ensure your health expenses are covered.
If you live in a country that provides government-sponsored health care to all its citizens, such as the UK, France, or Canada, then you might not need to pay for it directly. Instead, your health insurance may be financed through taxes or other means.
Copayments and deductibles
Copayments (copays) are your portion of the costs that you share with your health insurance. Your health insurance will charge you a certain amount for any health expenses that are not fully covered under your plan.
Usually, this amount is still less than the price of the medicine or procedure because your insurance will pay the difference. Even in countries with universal healthcare, you still may need to pay a copay for some medical expenses, such as medication.
Your healthcare plan’s deductible determines how much you will have to pay for your health expenses before your insurance coverage kicks in. Premiums and some copayments do not count towards your deductible. After you reach your deductible, you still must pay any copayments and coinsurance specified in your insurance policy.
For example, Casey pays $25 each month for medication, and her deductible is $100. After 4 months, she reaches her deductible, and her insurance plan starts to share the cost of her medication. For the rest of the year, she only has to pay $10 per month for her medication.
Coinsurance and out-of-pocket maximum
Coinsurance is the percentage that you are responsible for paying after you exceed your deductible, the amount you must pay out of pocket before your insurance kicks in.
For example, an insurance policy could specify that you must pay 25% of your health expenses and they will pay 75%. If you have already paid all your deductible, and you have a doctor’s appointment that costs $100, you will pay $25 while your insurance pays $75.
Out-of-pocket maximum is the total amount your insurance can require you to pay for your covered healthcare costs, including your deductible, your coinsurance, and your copayments. Each private health insurance plan has its own limits. After you reach this maximum amount, your insurance pays for the rest of your expenses.
Private versus public plans
In many countries with universal healthcare, you will automatically qualify for health care coverage from your country of residence, but you can also choose to pay for private health insurance if you want coverage that goes beyond what your government’s insurance policy covers.
In the United States, many people have private health insurance that they pay for themselves or that is provided by their employer, who shares the costs of their premium with them.
Seniors who are 65 or above qualify for Medicare, a government health plan that has lower costs, and the U.S. also has some government and government subsidized health care plans that can lower the costs of health insurance if you qualify for them based on your income, such as Medicare and Affordable Care Act plans.
Choosing a healthcare plan
If you are choosing between health insurance plans, you want to consider how much you will pay in premiums each month, but also how often you think you will need to use your health insurance and whether you have health issues that may lead to expensive costs, such as diabetes or high blood pressure.
Usually the higher your premiums, the less you will have to pay in deductibles, coinsurance, and copayments. If you think you will not use your health insurance often, you might opt for a cheaper monthly premium, but you would rack up a higher out-of-pocket cost if you did need to use health services.
Health insurance is a way of reducing the financial risk of health issues, so if you are more prone to caution, you may want to choose a slightly more expensive plan just in case.
Dental, vision, and mental health
Dental healthcare and eye care are not always included in healthcare plans. For example, in Australia, seeing an optometrist is not covered under the government-sponsored Medicare.
To reduce the amount of money you spend when you go to the dentist or purchase new glasses, you may need dental or vision insurance. Sometimes employers cover these plans, but not always.
Mental health services are included in regular health insurance plans, but it’s always important to check your policy to see what is covered. Some plans limit you to a certain number of free therapy sessions.
In the United States, many people have access to counseling services through their employer via an employee assistance plan (EAP). However, there are also many therapists in the U.S. who do not accept health insurance.
Health flexible spending accounts
One way to fund healthcare costs in the United States are Health Flexible Spending Accounts (FSAs). If your employer offers FSA accounts as a benefit, you can elect to have a certain amount taken out of your paycheck every month and set aside to pay for any out-of-pocket healthcare costs, like copayments for a doctor’s visit or medication. You cannot use FSAs to pay for your insurance premium.
The main advantage of FSAs is that the amount taken from your paycheck is not taxed, which reduces the total amount of taxes you must pay.
The main disadvantage of FSAs is that you must use the funds within a year, although some of the funds can be rolled over into the next year. If you know that you will have some out-of-pocket health expenses, you can put money in an FSA to pay for those expenses, but you don’t want to put more than you need, since you will lose the money if you don’t use it by the deadline set in your plan.
High deductible health plan
High deductible health plans are private health insurance plans that have a low monthly premium but have a high deductible, meaning you will pay a lot of money out-of-pocket for health expenses before your insurance starts to cover them.
High-deductible plans are usually a better option for healthy people who don’t anticipate needing to use their health insurance often.
In the United States, if you have a high-deductible plan, you can save for medical expenses in a Healthcare Savings Account (HSA) which is not taxed.
HSA accounts allow you to accumulate money over the years, so if you are healthy and don’t need to use your medical benefits when you first make the account, you can use it to save for medical expenses in future years.
When people lack the means to pay for health expenses, unpaid medical bills become debt. Unpaid medical debt in the United States affects your credit score after a year. The best way to prevent medical debt is to choose an insurance plan with good coverage and save for medical expenses.
If you cannot pay your medical bills, you can work with the hospital or medical provider to negotiate payments of your bill, allowing you to pay it off over time or have some of it forgiven.
You can also request charity care, financial assistance for people with low incomes, from most medical providers, but receiving this support requires documentation proving financial need.