If you’ve ever left a doctor’s appointment wishing you knew a little more about health insurance, you’re in the right place. Here at Free the Facts™, we spend a lot of time exploring Medicare, the federal health insurance program that primarily serves Americans 65 and older. But to understand this program and the challenges facing it, it’s important to start with the basics: What is health insurance? How does it work? And what does it mean for you?
Health insurance helps people manage the cost of medical care, covering everything from routine checkups to emergency surgery. While these plans won’t always make your medical services free, they can prevent you from having to foot the entire bill. This can be especially valuable when an unexpected injury or illness occurs.
More than 300 million Americans have some form of health insurance. They usually pay a monthly fee for it, and how much they owe after insurance kicks in will vary from plan to plan. Keep reading to learn more about how these different plans work.
How health insurance works
Your first health insurance expense usually comes before you even set foot in a doctor’s office. It’s called your premium, and it's the monthly payment that keeps your coverage active whether you get medical care that month or not. Plans with higher premiums usually cover more of your medical expenses, while plans with lower premiums tend to be more bare-bones.
When it’s time to make an appointment, where you go can change what you pay. Doctors and hospitals that have already agreed to accept certain rates from your insurance plan are considered “in-network,” and often get you the least expensive care. Go “out-of-network,” and you’ll usually pay more. Some plans only cover out-of-network care in certain situations, such as emergencies.
Even if you stay in-network, you will have to pay some bills yourself before your plan starts chipping in. That’s where your deductible comes in. Your deductible is a set amount that you are responsible for paying before your insurer pays its share. If your deductible is $1,000, that means you pay the first $1,000 of your medical expenses each year before your insurance starts helping with the bills. Your plan may help pay for some services, like annual wellness visits, before you hit that mark.
Your plan may also ask you to share the cost of care through copays or coinsurance. A copay is a fixed amount you pay for a covered service, like $15 for a prescription or $50 to see your primary care doctor. Coinsurance is the percentage of a covered service’s cost that you pay after meeting that deductible we just talked about. This percentage varies depending on your plan, but a 20% coinsurance is most common.
If you need a lot of care in one year, those bills can add up. But most plans have what is known as an “out-of-pocket maximum,” which caps what you pay for covered, in-network care. Once you hit it, your plan picks up the full cost of that care for the rest of the plan year. Premiums, services your plan doesn’t cover, and most out-of-network costs don’t count toward that cap.
Meet Eleanor
That’s a lot to keep straight. Let’s see how these terms come together when someone actually needs care with our example patient, Eleanor.
Eleanor pays a $250 monthly premium for health insurance. Then she breaks her leg. She gets covered care at an in-network hospital, where her plan has agreed to pay a total price of $10,000 for the treatment, split between Eleanor and her insurer.
Eleanor hasn’t paid anything toward her $1,000 deductible this year, so she pays the first $1,000. She then pays her plan’s 20% coinsurance on the remaining $9,000, which comes to $1,800. All told, Eleanor pays $2,800 for her hospital care, and her insurer pays $7,200. She also pays a separate $15 copay when she picks up her prescription.
What if Eleanor needs more care later that year? She’s already met her deductible, so she’ll pay any applicable copays or coinsurance until she reaches her out-of-pocket maximum.
What this means for you.
Whether you’re on your parents’ health plan or choosing one of your own, this information can help you get a better understanding of how your own health insurance works.
Understanding costs like premiums and deductibles can also help you make sense of Medicare and some of the real challenges facing the Americans who rely on it. For example, Medicare’s Hospital Insurance has a funding problem that could result in significant benefit cuts starting in 2033.
As policymakers consider how to address these funding challenges, understanding who pays for care today can help you see what different proposals could mean for beneficiaries and taxpayers.
Stay tuned for the release of our Medicare policy library to learn more about how the program works and the choices policymakers face. Check out our policy newsletter for the latest policy updates from Washington.
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