Health Insurance 101: How Does Health Insurance Work?

It's important to maintain comprehensive health insurance in case you become sick or injured, which is why around 89% of people in the U.S. have private or public health insurance.¹ In fact, the cost for treating a broken leg is upwards of $7,500 and a three-day hospital stay could set you back $30,000!²

While you might think health insurance will always cover all of your medical expenses, there are many costs that health insurance doesn't cover. In fact, many struggle to understand the terms of their health insurance policies, and they may be caught off guard by unexpected out-of-pocket expenses or limitations to their plan.

To understand how your health insurance plan works, start by learning the terms of your policy and the different types of health insurance policies that are available.

How Health Insurance Works in 3 Steps

Health insurance policies help cover the cost of medical expenses — including routine care, surgeries and prescriptions. Here's how health insurance policies typically work:

1. Each month you pay a fee called a health insurance premium. Premiums can vary based on your age, where you live, whether you use tobacco and the type of plan you choose. So, say you smoke and are 42, then your policy will cost more than a policy for a 21-year-old or a 42-year-old who doesn't smoke.³
2. Before your health insurance policy covers any of your care, however, you must meet your health insurance deductible for the year. For example, someone with a $2,000 deductible getting surgery will need to pay $2,000 of that expense before their health insurance will help pay for the rest. This number resets each year.⁴
3. Once you have met your deductible, when you go to the doctor for care, the health insurance policy may cover only a percentage of your bill, called coinsurance, or you may need to pay a flat fee toward your care, called a health insurance copay.⁴ The copay and coinsurance rates are predetermined amounts set by your health insurance company and agreed to by the doctor.⁵

Many employers pay part of their employees' health insurance costs. If your employer provides health insurance, your premiums are usually deducted from your paycheck.

If you don't have employer-based health insurance, you can buy your own policy on the Health Insurance Marketplace through HealthCare.gov, but only during open enrollment periods. Open enrollment typically happens between November 1 and December 15.⁶

Common Health Insurance Terms

Some of the terms you'll run into when dealing with health insurance can be confusing. Here's a breakdown of some of the most common ones:

• Waiting period: The period of time before your health insurance kicks in after you sign up for a policy.⁷
• Pre-existing condition: A health issue, such as cancer or diabetes, that exists prior to enrolling in a health insurance plan. Plans cannot refuse coverage — or charge you more for these conditions — according to the Affordable Care Act.⁸
• Deductible: A deductible is a set amount that you must spend on medical care before your health insurance begins to pay for your care.⁴
• Health insurance premium: The amount of money you pay each month or biweekly to maintain your health insurance coverage.⁹
• In-network provider: Insurance companies have agreements with certain doctors who agree to be paid the insurance company's rates. These doctors are classified as being in your network.¹⁰
• Out-of-network provider: Doctors who do not agree to the health insurance company's rates are “out-of-network." Some policies have a separate deductible for out-of-network care, and some do not cover out-of-network providers at all.¹⁰
• Out-of-pocket expense: Medical expenses you must pay on your own that are not covered by insurance.¹⁰
• Copay: The set amount of money you must pay out-of-pocket for your healthcare expenses, including your doctor visits, emergency room visits and prescriptions.⁴
• Deductible: The amount of money your health insurance policy allocates before they begin cost-sharing for your covered health expenses.¹⁰
• Coinsurance: The percentage of covered health care costs you pay after you have met your deductible.⁴
• Out-of-pocket maximum: The limit you pay each year out-of-pocket for your covered medical care and expenses before your health insurance will pay 100% of the covered costs you incur. For those with an Affordable Care Act health insurance plan, this maximum is $8,700 for a single individual and $17,400 for a family in 2022.⁴
• Preventive care: This type of care includes such things as annual checkups with your doctor or screening tests like colonoscopies and mammograms. Health insurance typically covers these expenses at 100% regardless of your deductible.^{9, 10}
• Prior authorization: The approval needed for your health insurance to cover medical procedures such as surgery or medications that aren't usually covered.^{11, 12}
• Primary care physician (PCP): The health care practitioner who you designate as your primary point of contact for medical services. The PCP will also provide referrals to specialists.¹³

Different Types of Health Insurance Policies

Health insurance policies help cover the cost of medical expenses — including routine care, surgeries and prescriptions. When buying health insurance, you'll notice there are several different types of health insurance policies. These policies specify which doctors you can see and what types of care they cover.

There are four different types of health insurance policies:¹⁴

1. Exclusive Provider Organization (EPO)

An EPO plan only covers in-network care, except in the case of some emergencies. This means you can only see providers within their health insurance network — with the exception of some emergency room visits — and if you see someone outside the network, the costs aren't covered.

2. Health Maintenance Organization (HMO)

HMO plans cover in-network care within a specific geographic area. Out-of-network care may be limited or covered only in emergencies. If you need to see a specialist, your primary care physician (PCP) will need to provide a referral. For example, if you have a skin issue and need to see a dermatologist, you'll need to see your PCP first to get a referral to have the costs of your visit covered.

3. Point-of-Service (POS)

POS plans have discounts for in-network care but may cover some types of out-of-network care. This means that if you do see a doctor who is out-of-network, the visit could be partially covered. Just as with HMOs, though, you'll need a referral to see a specialist.

4. Preferred Provider Organization (PPO)

PPO plans have lower rates for in-network providers but more options for out-of-network care than other types of plans.¹⁴ This type of plan also doesn't require a referral to see a specialist, so if you need to see one (like a urologist), you can just make an appointment without visiting your PCP first.

What Affects the Cost of Health Insurance?

Health insurance premiums vary based on your age, location, the type of plan you choose and your risk factors.³ Note that the Affordable Care Act and other regulations mandate that premiums for older adults max out at three times the premium costs for a 21-year-old.¹⁵

For example, if an insurance company charges $200 per month for a plan for a 21-year-old, a plan for a 64-year-old will cost no more than around $600. Some states may even mandate that all plans cost the same, regardless of age. And those who are 65 years old and older can qualify for Medicare.¹⁵

Generally, health insurance plans with a higher deductible will cost less than those with a smaller one, but that means they won't pay for as many of your medical services during the year. For example, a plan with a $5,000 deductible will cost less than one with a $1,500 one, but if you have very high medical costs, you'll pay much more out-of-pocket, which is more expensive long-term.¹⁶

What Does Health Insurance Cover?

Health insurance covers most medically necessary doctor visits, treatments and procedures. Even before you meet your deductible for some covered services, your insurance will help save you money on them. These include:⁹

• Doctor visits: While preventive visits for things like your annual check-ups are usually paid for in full by your insurance, other doctor visits may only be paid for after you meet your deductible for the year.
• Vaccinations: Most childhood vaccinations and things like your annual flu shot or a COVID shot are paid for as preventive care.
• Annual screenings: Your insurance will pay in full for tests like mammograms, colonoscopies and cholesterol screenings as part of your preventive care.
• Hospitalization: Your insurance will help pay for your hospital stay after you meet your deductible.
• Emergency room visits: Most plans cover emergency room visits and emergency procedures like surgeries (in any hospital), but your deductible may apply.
• Lab work: Your insurance will cover things like blood tests, urine tests and pap smear tests. For some tests, your deductible may apply.
• Urgent care visits: Much like emergency room visits, your insurance will cover visits to urgent care, although you may need to visit an in-network facility.¹⁷

Determining if Your Doctor and Medication Are Covered

When shopping for the right health insurance plan, it's important to research whether the new plan will cover your current doctors and medications. The easiest way to find out? Call the plan you're interested in to determine if they will cover your doctor, medication or even your preferred hospital.

Most insurance plans also have a provider directory you can search to determine whether or not your physician is an in-network provider.¹⁸ It's important to note that if your doctor is not considered in-network, your health insurance generally won't cover your visits or will cover a small portion of your visits.⁹

For prescription coverage, most insurance plans also offer a searchable database of medications they cover.¹⁸ If your medication isn't on this list, you can request that your doctor submits a prior authorization to get insurance to cover the medication.¹²

Health Insurance Timelines

When you sign up for health insurance, it won't kick in right away. Your initial waiting period may last up to 30 days before your health insurance will be available for you to use. And some employers may even require that you work for up to one year before providing health insurance.¹⁹

Once your policy is active, health insurance generally takes time to approve procedures and process claims. While you won't need prior approval for things like doctor visits and emergency room care, if your doctor recommends a surgical procedure then your insurance will have to approve it before covering it. This process generally takes several days to a week.¹¹

Once approved, your insurance will cover your treatment. For procedures that aren't approved, your doctor can submit an appeal, which will take a week or more to review.¹¹

Prior authorizations are also needed for things like prescriptions, especially those not normally covered by your insurance plan. If a prescription isn't normally covered, your doctor will have to submit paperwork to show you have tried other medications that are covered and have not worked.¹² The approval time is much the same as it is for surgical prior authorizations.¹¹

What Health Insurance Won't Cover

Health insurance generally covers doctor visits, medical procedures, medical treatments and prescriptions they deem medically necessary to maintain your health. However, some treatments are generally not covered by your health insurance, including:⁹

• Alternative medical treatments: Treatments such as acupuncture, herbal medications and massage.
• Cosmetic surgery: Surgical treatment that is not considered medically necessary for your health including things like liposuction, rhinoplasty, spider vein surgery and plastic surgery.
• Experimental treatments: Surgeries and other medical treatments that are medically unproven.
• Weight-loss surgery: Procedures such as gastric bypass surgery are generally not covered unless they are deemed medically necessary for your health.
• Elective or unapproved medical care: Medical procedures and care that your doctor cannot provide medical necessity for, or that your insurance does not have prior authorization for.

Why is Health Insurance Important?

Even if you're healthy now, health insurance protects you if you become sick or injured later. You never know when a medical emergency might occur. If or when it does, you don't want to owe the hospital or doctor thousands of dollars in fees. And delaying your care due to cost can lead to even more serious illnesses.²⁰

Health insurance can help you pay for preventive care as well. Your health insurance policy might cover vaccines, physicals and blood work to help diagnose problems early or even avoid them altogether.⁹ This can help prevent costly medical conditions that may develop later.²

Now that you know the basics of health insurance, you can make smart decisions about your medical treatment. If possible, find a health insurance plan that covers your medical needs at a cost you can manage. Make sure to fully understand the terms of your health insurance policy, so that you know what types of health insurance benefits it includes and excludes.

How to Pay for Out-of-Pocket Costs

If you'd like financing to help pay for out-of-pocket costs or procedures not covered under your health insurance policy, consider the CareCredit credit card. CareCredit offers special financing with convenient monthly payment rates to qualified applicants.* And this way, you won't need to delay care for medical issues that could become much more serious down the road.²⁰

You can use the CareCredit credit card to pay for doctor copays, coinsurance costs and prescription costs that your health insurance doesn't pay for.* CareCredit works with many doctors, medical facilities and pharmacies across the country who will accept your card to pay for these expenses. Use our Acceptance Locator or download the CareCredit Mobile App to find a qualified health care provider near you who accepts the CareCredit credit card.

Author Bio

Susan Paretts is a freelance writer with 18 years of experience covering health and wellness, pet care, and more. Her work has been published by the American Kennel Club, Bayer Animal Health, Elanco, LIVESTRONG.com, Care.com, City National Bank, The San Francisco Chronicle, Chewy, and more.

Our Experts

Patty Caballero and her team of consultants together have more than 35 years of health insurance knowledge working for some of the biggest health insurance companies in the US. She has knowledge in building brand and strategic initiatives to help consumers better understand their health benefits.