How Does Health Insurance Work? Demystifying Your Policy

Everyone has health insurance these days because the health care law mandates it. But, how does health insurance work? Employers and individuals pay for costly health insurance every year without really knowing what it's about. We're here to enlighten you on the subject matter.

How Does Health Insurance Work?

What is it exactly and how does health insurance work? A health insurance policy is an insurance policy which fully or partially covers the cost of medical expenses because of sickness or injury of the policyholder. A health insurance policy provides insurance coverage for medical expenses, losses from an accident, disability, or accidental death and dismemberment.

So, how does health insurance work? A health insurance policy is a contract between the health insurer and the policyholder that requires the insurer to shoulder some or all of the medical costs incurred by the policyholder for a premium. This premium can be paid on a monthly, quarterly, semi-annual, or annual basis. Having a health insurance policy defrays the financial impact of paying out-of-pocket medical costs especially for care and treatment of critical illnesses and injuries. The extent of health insurance coverage will depend on the terms and conditions stated in the insurance policy that the insurer and the policyholder mutually agreed upon. The benefits of a health insurance policy are administered by a private business, a government agency, or a not-for-profit entity.

What Makes up a Health Insurance Policy?

family under an umbrella portraying how does health insurance work

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How does health insurance work in terms of its components? To gain a better understanding of how health insurance works, let's look at the definition of terms.

1. Health Insurance Premium

​A health insurance premium is a fee you pay on a regular basis in order to take advantage of medical coverage and treatments found in your policy. An underwriting process establishes this premium by classifying policyholders under specific risk categories determined by factors such as medical history, age, and gender. Underwriting ensures that premiums are set high enough to regulate the use of health insurance; those who are most likely to use it frequently will use it less and those who are least likely to use it will be encouraged to use health insurance more. Underwriting strikes a balance and makes a cross-selection of risks so as not to only accommodate those who are ill or who expect to use their health insurance often.

​2. Deductible

​A deductible is a fixed amount that a policyholder must pay within a given time period (typically a year) before his or her health insurance benefits take effect. The general rule is that as the amount for the deductible increases, the premium amount decreases.

​3. Copayments

​A copayment (or copay) is a fixed amount paid by the policyholder for receiving a specific medical service with the remaining balance being paid by the health insurer. A copayment usually kicks in after a policyholder has paid his or her deductible in full. Copayments may vary for different services found in the same plan. For routine exams, such as an annual physical or a bloodwork test, the copayment will most likely be lower or might not even be required. For specialized treatments, the copayment will most likely be higher.

​​​​​​​4. Coinsurance

​Coinsurance is usually paid after the deductible has been met by a policyholder. A coinsurance limits excessive utilization by sharing costs between the health insurer and the policyholder. Cost sharing can range from 20 percent to 60 percent. If your coinsurance is at 20 percent, that means your insurer will only pay 80 percent of your covered health care services while you pay for the rest.

​5. Out-of-Pocket Maximum (OOPM)

​Out-of-Pocket Maximum (also known as Out-of-Pocket Limit) is the maximum amount that a policyholder is obligated to pay for covered medical services within a plan year. When this maximum amount has been reached, the insurer will need to pay for all covered medical services. Copayments, deductible, and coinsurance paid are included in the OOPM.

​6. Exclusions

​Typically, not all medical expenses are covered by a health insurance policy. These non-covered expenses are considered as exclusions. Any excluded medical service will be paid for in full by the policyholder. Excluded medical expenses also do not apply to the deductible amount.

​7. Coverage Limits

​Health insurance companies limit the amount of their liability by defining the maximum amount that they will pay for medical expenses. The maximum amount of limitation usually ranges from $500,000 to $1 million. There are also annual and lifetime coverage limits. For example, if a policyholder has a lifetime limit of $300,000 and an annual limit of $50,000, his or her insurer will pay up to $50,000 for any 12-month period, but the policyholder will only be left with a $250,000-lifetime limit. Once a policyholder reaches the maximum limit, his or her health insurer will no longer cover payments for medical expenses, and he or she will be liable for paying medical costs.

​​​​​​​​8. Explanation of Benefits (EOB)

​An Explanation of Benefits (EOB) is a statement sent by the health insurer to a policyholder to elaborate on the medical treatments or services that were paid for on the policyholder's behalf. The EOB statement usually describes the following:

  • ​Payee, payer, and the patient
  • ​Medical service performed (i.e. date of service, description, insurer's code, name of the person or place that provided the service and the patient's name)
  • ​Doctor's fees and the amount the insurer covered
  • The amount that the patient is liable for
  • Reasons for adjustments and adjustment codes

How Do You Go about the Process?

How does health insurance work in terms of the process for the policyholder? To use the benefits of a health insurance policy, a policyholder needs to go through the following steps:

​1. Enroll in and Purchase a Health Insurance Policy

For individual major medical health insurance coverage in the United States, the open enrollment period usually runs from November to December. However, special consideration and accommodations are given to those who meet the following qualifications:

  • ​Life-changing events (such as losing a spouse or having a child) qualifies you for a special enrollment period
  • ​Belonging to a federally recognized American Indian Tribe or
  • ​Being a shareholder in the Alaska Native Claims Settlement Act (ANCSA) allows you to enroll in a marketplace at anytime
  • ​Meeting the criteria set by Medicaid or the Children's Health Insurance Program (CHIP) to avail of federally subsidized health insurance (year-round enrollment)

​After purchasing your health insurance policy, you will be notified of an effective date when your coverage begins. Per policy terms, your coverage will last for a year unless you decide to cancel your health insurance which can be done anytime.

​​​​2. Read and Understand the Terms and Conditions of Your Health Coverage

​Before your coverage begins, your health insurance company will send you a packet of materials (including your ID card or proof of coverage) to explain the benefits of your coverage and other helpful information (e.g. healthcare providers in your network). It's important that you read through and familiarize yourself with the terms and conditions of your health coverage, so you'll become aware of the limitations and the circumstances which might require you to pay out-of-pocket (if applicable). Make sure to keep your ID card, as you will need to present it as proof of coverage every time you avail of medical services.

​3. Pay Your Premium to Stay Covered

​To stay covered, you need to pay your premium on the schedule that you agreed to when you purchased your health insurance policy (i.e. monthly, quarterly, semi-annual, or annual premium payment). Failure to make premium payments by the end of the grace period may terminate your policy, and you will no longer be able to avail of its benefits. Remember that premium payments don't count toward your deductible.

​4. Check if You Need to Make a Copayment When You Avail of Healthcare Services

​Some health insurance policies require the policyholder to copay for medical services; this is a flat fee that you have to pay when you visit your doctor’s office. However, a copayment may vary depending on the terms of your policy.  There may be separate copayments for prescription drugs, ER visits, surgery, hospital confinement. etc.

​5. Depending on the Terms of Your Coverage, You Might Need to Shoulder Some of Your Medical Expenses

​After you've availed of any medical service from your healthcare provider, your physician will file a claim with your health insurance company. Soon after, you will receive an Explanation of Benefits from your health insurer to elaborate on the details of the charges for the medical services you received, which part of the charges your policy covers, and the amount you will have to shoulder.

​6. Pay the Amount You are Responsible For

​Your health insurer will send you an official bill for the amount that you need to pay for. Make sure to follow the instructions provided by your health insurer and pay the billable amount on time using an acceptable form of payment. Once you've paid your dues, keep a record of the receipt of payment.

​Conclusion

cartoon of a doctor with health insurance

Image Via Pixabay

While familiarizing yourself with the terms and conditions of your health insurance is a must for any policyholder, the only way to know how does health insurance work is to go through the process. Any type of insurance (not just health insurance) is bound to confuse a policyholder with all its terminologies and conditions; all you really need to know are the basics.

After reading through the terminologies and the whole process, the answers may still not completely address the question, how does health insurance work? The fine print will seem endless; that's just the way insurance works.

Before choosing and enrolling in a health insurance plan, there are only two things that you need to keep in mind: how much healthcare you will need in a year and how much you can afford to pay.

 

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