## What Is Health Insurance?

Health insurance is a contract between a company and a consumer. The company agrees to pay all or some of the insured person's healthcare costs in return for payment of a monthly premium. Patients are responsible for deductibles and copays, and these can reduce the amount the company pays.

The contract is usually a one-year agreement, during which you are responsible for paying specific expenses related to illness, injury, pregnancy, or preventative care. It's important to understand the various types of health insurance plans, such as those provided as employment benefits, government programs, and private options.

### Key Takeaways

*   Health insurance is a contract where a company covers some medical costs for monthly premiums.
*   Out-of-pocket costs include deductibles and co-pays, capped by federal law.
*   Over half of Americans receive health insurance as an employment benefit.
*   The Affordable Care Act provides health insurance options and subsidies through its marketplace.
*   Government plans like Medicare and Medicaid cater to seniors, disabled individuals, and low-income families.

In the U.S., health insurance generally includes out-of-pocket costs that you must pay before coverage starts, such as:

*   A deductible that requires the consumer to pay certain healthcare costs "out-of-pocket" up to a maximum amount before the company coverage begins
*   One or more co-payments that require the consumer to pay a set share of the cost for specific services or procedures

## Understanding Health Insurance Mechanics

Navigating health insurance in the U.S. can be challenging. It is a sector with a number of regional and national competitors whose coverage, pricing, and availability vary from state to state and even by county.

Over half of Americans have employer-provided [health insurance coverage](https://www.investopedia.com/the-best-health-insurance-companies-8762191), with employers covering part of the premiums. Employer costs are tax-deductible, and employee benefits are tax-free, except for some S corporation employees.

Self-employed people (including freelancers and gig workers) can [buy insurance directly from insurers on their own](https://www.investopedia.com/the-best-health-insurance-for-self-employed-8783556). The [Affordable Care Act of 2010](https://www.investopedia.com/terms/a/affordable-care-act.asp), commonly called Obamacare or ACA, mandated the creation of the [ACA Healthcare Insurance Marketplace](https://www.investopedia.com/terms/h/health-insurance-marketplace.asp), which allows individuals to search for and purchase standard plans from private insurers that are available where they live. The costs of ACA-based coverage are subsidized for taxpayers whose incomes are between 100% and 400% of the federal poverty threshold.

> **Fast Fact**
>
> Some states have their own marketplaces, tailored specifically to their residents' needs.

People over 65 and those with disabilities, End-Stage Renal Disease, or ALS qualify for federally subsidized care via [Medicare](https://www.investopedia.com/terms/m/medicare.asp). Families whose incomes are near the poverty level are eligible for subsidized [Medicaid](https://www.investopedia.com/terms/m/medicaid.asp) coverage.

## Exploring Different Health Insurance Plans

Health insurance can be complex to understand. In the U.S., managed care insurance plans require policyholders to get their care from a network of designated healthcare providers. If patients seek care outside the network, they must pay a higher percentage of the cost. The insurer may even refuse payment outright for services obtained out of network.

Most managed care plans—such as [health maintenance organizations](https://www.investopedia.com/terms/h/hmo.asp) (HMOs) and [point-of-service plans](https://www.investopedia.com/terms/p/pointofservice-plan-pos.asp) (POS)—require patients to choose a primary care physician who oversees the patient's care, makes recommendations about treatment, and [provides referrals for medical specialists](https://www.investopedia.com/ask/answers/08/gatekeeper.asp).

[Preferred provider organizations](https://www.investopedia.com/terms/p/preferred-provider-organization.asp) (PPOs), by contrast, don't require referrals. However, they do set lower rates for using in-network practitioners and services.

Insurers might deny coverage for services not preapproved. They may refuse payment for name-brand drugs if a [generic](https://www.investopedia.com/terms/g/generic-brand.asp) version or comparable medication is available at a lower cost. Check an insurance company's rules before you buy their insurance.

## Navigating Copays, Deductibles, and Coinsurance

Most plans require customers to cover some costs in different ways:

*   The [deductible](https://www.investopedia.com/health-insurance-deductible-4773113) is the amount you pay out of pocket every year before the insurer begins to meet the costs. This is now capped by federal law.
*   [Copays](https://www.investopedia.com/terms/c/copay.asp) are set fees that subscribers must pay for specific services such as doctor visits and prescription drugs even after the deductible is met.
*   [Coinsurance](https://www.investopedia.com/terms/c/coinsurance.asp) is the percentage of healthcare costs that the insured must pay even after they've met the deductible (but only until they reach the [out-of-pocket maximum](https://www.investopedia.com/terms/o/outofpocket-limit.asp) for the year).

Insurance plans with higher out-of-pocket costs generally have smaller monthly premiums. When shopping for plans, weigh the benefit of lower monthly payments against the potential risk of large [out-of-pocket expenses](https://www.investopedia.com/terms/o/outofpocket.asp) in the case of a major illness or accident.

> **Tip**
>
> If you're self-employed, you may be able to deduct up to 100% of health insurance premiums you pay out of pocket.

## An Introduction to High-Deductible Health Plans (HDHP)

One increasingly popular type of health insurance is the [high-deductible health plan (HDHP)](https://www.investopedia.com/terms/h/hdhp.asp). These plans have higher deductibles and lower monthly premiums. Their users are the only ones eligible to open a Health Savings Account (HSA) that has substantial federal tax benefits.

For 2024, a high-deductible health plan is one that has deductibles of at least $1,600 for an individual or $3,100 for a family. Total out-of-pocket maximums are $8,050 for an individual and $16,100 for a family. For 2025, those amounts rise to $1,650 and $3,200 minimum deductibles and maximum deductibles of $8,300 and $16,600, respectively

With an HDHP, you can open a [health savings account](https://www.investopedia.com/terms/h/hsa.asp) with pretax contributions for medical expenses. These plans offer a triple tax benefit in that:

*   Contributions are tax-deductible
*   Contributions grow tax-deferred
*   Qualified withdrawals for healthcare expenses are tax-free

> **Fast Fact**
>
> You can withdraw money from an HSA after age 65 for any reason with no tax penalty, but you will pay income tax on the withdrawal if the money is not used for qualified medical expenses.

## Overview of Federal Health Insurance Options

Not all health insurance in the US is provided by private companies. Medicare, Medicaid, and the [Children's Health Insurance Program (CHIP)](https://www.investopedia.com/terms/c/childrens-health-insurance-program-chip.asp) are federal health insurance plans that extend coverage to older, disabled, and low-income people.

### The Affordable Care Act (ACA)

In 2010, President Barack Obama signed the Affordable Care Act (ACA) into law. In participating states, the act expanded Medicaid, a government program that provides medical care for individuals with low incomes.

The Affordable Care Act has prohibited insurance companies from denying coverage to patients with preexisting conditions and has allowed children to remain on their parents' insurance plan until they reach the age of 26.

In addition to these changes, the ACA established the federal Health Insurance Marketplace and allowed states to set up their own exchanges if they desired. ACA also prohibits insurance companies from denying coverage to patients with [preexisting conditions](https://www.investopedia.com/terms/p/preexisting_condition.asp).

The ACA Marketplace helps individuals and businesses find quality insurance plans at affordable rates. Insurance available through the ACA Marketplace is required to cover 10 essential health benefits.

Originally under ACA, taxpayers were required to carry medical insurance that met federally designated minimum standards or face a tax penalty. However, the [Tax Cuts and Jobs Act](https://www.investopedia.com/taxes/how-gop-tax-bill-affects-you/) removed that penalty after Dec. 31, 2018.

A Supreme Court ruling in 2012 struck down an ACA provision that required states to expand Medicaid eligibility as a condition for receiving federal Medicaid funding. As a result, a number of states chose not to expand their Medicaid programs.

> **Fast Fact**
>
> As of 2024, an estimated 45 million people have health coverage through the Affordable Care Act.

### Medicare and CHIP

Two public health insurance plans, Medicare and the Children's Health Insurance Program (CHIP), provide subsidized coverage for disabled individuals and children. Medicare, which is available to people age 65 or older, also serves people with certain disabilities, End-Stage Renal Disease, and ALS. The CHIP plan provides health coverage for low-income children under the age of 19.

> **Important**
>
> Medicaid can help older seniors pay for long-term care in a nursing home, but Medicare does not. This is why Medicare recipients often pay for supplemental coverage through a private insurer.

## What Is Health Insurance?

Health insurance is an agreement in which an insurance company agrees to pay for some or all of your medical expenses in exchange for a monthly premium payment.

## Who Needs Health Insurance and Why?

Everyone [needs health insurance](https://www.investopedia.com/articles/personal-finance/120815/dont-have-health-insurance-whats-worst-could-happen.asp). Health insurance offsets the costs of minor medical issues and major ones, including surgeries and treatment for life-threatening ailments and debilitating conditions. It ensures you can pay for any medical bills while staying in good financial health.

## How Do You Get Health Insurance?

If you [need health insurance](https://www.investopedia.com/how-to-get-health-insurance-4772855), there are several options available. If your employer offers health insurance as part of an employee benefits package, you can be covered, although you will probably have to pay a portion of the costs. If you are self-employed, you can purchase health insurance through a federal or state Health Insurance Marketplace. People over the age of 65 qualify for federal Medicare insurance, although many of them also supplement its coverage. Low-income individuals and families qualify for subsidized coverage through the federal Medicaid or Medicare programs.

## How Much Does Health Insurance Cost?

The cost of health insurance varies widely based on the scope of coverage, [the type of plan you have](https://www.investopedia.com/types-of-health-insurance-7486292), the deductible, and your age when you sign up. Copays and coinsurance also add to your expenses. You can get a good sense of the costs of plans by looking at the four levels of coverage offered by the federal Health Insurance Marketplace. It categorizes plans as bronze, silver, gold, or platinum, with each category priced according to the level of coverage provided and their corresponding costs to the user.

## The Bottom Line

Unlike many countries, the U.S. does not have a universal government health care system. Instead, it uses private insurers, subsidies, and tax incentives to make health care more affordable. Health insurance in provides financial protection against healthcare costs, covering both minor and major medical issues.

If you are employed, you probably have health insurance through your employer. Those who are self-employed can get insurance directly from a private insurer. If your income is low, you can also get a government subsidy for the cost of a policy purchased through the ACA Health Insurance Marketplace. If you are elderly or disabled, you can get coverage through the federal Medicare or Medicaid programs.

There are several types of health insurance plans, including high-deductible health plans (HDHPs) and their associated benefits, such as Health Savings Accounts (HSAs). HMO, PPO, and POS plans can be state-specific.

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