How Health Insurance Works

As mentioned previously, health insurance comes in many different forms.  Some will pay for doctor’s office visits and hospitalization.  Others will pay only for hospitalization.  And then the amounts that they pay will vary from policy-to-policy and vary from company-to-company.  It is very important that new immigrants have a solid understanding of how health insurance works as many are unlikely to have been exposed to it much in their home countries.  And it is equally important to have an understanding of the various terms used in the health insurance industry. 

The particular health insurance plan you buy from an insurance company is called an insurance policy.  An insurance policy is just a contract.  You agree to pay a certain amount of money periodically for a certain level of medical coverage as spelled out in the policy.  In return, the insurance company agrees to pay out money for the delivery of covered medical services as spelled out in the insurance policy.

It is important to understand how to pay for the insurance policy. Group health insurance is paid for usually by having your employer deduct the cost from each pay check you receive. Individual health insurance policies are usually paid for monthly upon receiving a bill from the insurance company. Often insurance companies also give you the option to pay every 3 months, every 6 months, or every year.  The amount of money that you pay periodically for the insurance policy is called the premium.

You need to understand the pre-existing condition clause that is in many health insurance policies.  The definition of pre-existing condition varies among insurance companies but generally it is considered to be any medical condition for which you have sought medical advice or treatment or had symptoms within a specified time period before applying for coverage.  The specified time period also varies among insurance companies.  Some insurance companies will pay for treatment of a pre-existing condition after a certain amount of time has passed while on your new insurance policy and others will not. Always be sure to understand the insurance company’s exact definition of a pre-existing condition on any insurance policy you are considering buying.

Most health insurance policies have co-pay, which is the amount of money you must pay for each illness or doctor’s office visit.  For example, if your co-pay is $20 then you must pay $20 when you see the doctor and the doctor’s office will send a bill to the insurance company for the rest of the charges. Generally co-pay is for each illness and is separate from deductible.

Most health insurance policies require you to pay a certain amount of your own money, in addition to co-pay, during the year, before the insurance policy begins to pay.  The amount you are required to pay first is called a deductible. An example might be that your annual deductible is $250, which means you must pay the first $250 dollars of medical bills before the insurance policy begins to pay anything.

Many health insurance policies also have what is called co-insurance.  This is the percentage of the medical bill that you must pay AFTER you have satisfied your deductible and when the health insurance policy starts to pay.  Co-insurance is really sharing costs.  For example, you might pay 20% of the bill while the insurance company pays 80% of the bill. Your co-insurance would be 20% and the insurance company’s co-insurance is 80%.  

Many health insurance policies may have an annual out of pocket maximum which is a maximum amount that you are required to pay in deductible and co-insurance, after which the insurance policy pays everything.  For example, if your annual out of pocket maximum is $1,250, then after you have paid a total of $1,250 in deductibles and co-insurance for that year you will not be required to pay any more deductibles or co-insurance for the remainder of the year.  The insurance policy will pay 100% of the medical bills for the remainder of the year.

Each health insurance policy will have a lifetime benefit maximum, which is the total amount the health insurance will pay.  If the lifetime benefit maximum of the health insurance policy is $1 million dollars, they will pay only a total of $1 million dollars in your lifetime.  The lifetime benefit maximum varies from company-to-company.

Most health insurance policies are managed care plans such as HMOs or PPOs that encourage you, or require you, to use health care providers such as doctors, clinics, laboratories, facilities, or hospitals within a network they create called a provider network in order to keep costs lower.  The insurance company will negotiate lower fees for services and procedures from these providers in the provider network. The way the insurance company encourages you to go to their approved providers is by paying a much higher percentage of the medical bill for those approved providers than they will pay if you go to a provider who is not in the provider network.  This is typical of PPO plans. For example if you go to a provider in the insurance company’s provider network, they might pay 80% of the medical bill as part of their co-insurance, whereas if you go to a provider outside of the provider network they might pay only 50% of the medical bill as part of their co-insurance. HMO plans usually require you to see only providers in the provider network and will not pay anything for providers seen outside the provider network.

Background
Types of Health Insurance
Options within Each Type of Health Insurance
Buying Health Insurance
How Health Insurance Works: You are here.
Glossary of Terms