How does health insurance work? This is one of the most common questions among millennials. We all kind of know how health insurance works, but we are also usually unpleasantly surprised when we get a hospital bill in the mail. After all, if we have insurance, shouldn’t we not have to pay hospital bills? Shouldn’t the insurance just take care of that? Well, unfortunately no.
There are several different types of health insurances and programs out there. So this article will be for broad strokes purposes. Let me show you how health insurance works for most people. Everyone’s situation will be a little different but the general concept will be the same. So let’s get started.
(1) In/Out of Network
The first main concept with your health insurance that you need to understand is the difference between “in network” and “out of network”.
Nearly all health insurance plans have hospitals, doctors, nurse practitioners, clinics, etc. that they have “partnered” with to offer health care. These are called in network providers.
Any hospital, doctor, nurse practitioner, clinic, etc. that is not in-network, is therefore out of network.
Whenever you need to go see a doctor do your best to go to an in network provider.
In network providers will have pre-negotiated rates with the insurance company. They will nearly always be cheaper than the out of network counterpart and the billing process will be smoother.
Here’s an example of David and Alexis.
David and Alexis both need to have an X-ray done on their shoulder because they hurt themselves riding bikes.
David goes to an in-network provider and Alexis goes to an out of network provider. Each of their X-rays cost $150 and they both have insurance.
David’s insurance has a pre-negotiated rate for X-rays of $100. Even though the doctor’s office originally charged $150 the amount paid to the doctor’s office will be $100.
Alexis’ insurance does not have a pre-negotiated fee with that doctor’s office. So her insurance will also pay $100 but she will be responsible for the remaining $50.
There may be times that you won’t be able to go to an in network doctor, hospital, etc. But do your best to always do so. You will save a LOT of money over the long run.
If you don’t know if a service is in network or out of network, just give them a call and tell them who your insurance is. (You’ll probably have to have your insurance card to verify the plan number, group number, etc.)
(2) Services Usually Covered for Free if You Have Health Insurance
Another major topic of how health insurance works is preventative care. As a general rule, preventive services are going to be automatically covered free of charge if you have health insurance. Depending on the health insurance company, the list of free services will vary. But generally the services will include:
- Annual check-up/physical
- Flu shot (and most other vaccinations)
- Mammogram
- Colonoscopy
- Blood pressure screening
- Well-woman visit
- STD screening
- Etc.
While annual checkups and vaccinations are going to always be covered, make sure to check with your specific health insurance to get the full list of services that will be 100% covered.
(3) Premiums
Premiums are usually pretty easy to understand. Premiums are simply the payment that you make toward your health insurance every month, every paycheck, etc.
If you see that $250 was taken out of your paycheck for health insurance, that was your premium.
It’s important to note that you will have to pay your premiums no matter what. Even if you hit your out of pocket maximum for the year (we’ll talk about that in a minute), you will still have to pay your premiums.
(4) Copayments/Coinsurance
The next part of how health insurance works are copayments (sometimes called coinsurance).
Focus on the first part of the word “copayments”. Co means together. So a copayment means that you and the insurance company will pay for the service together.
Most insurance companies have some sort of copayment structure. And the copayments are usually a flat dollar amount. They are usually $10-50.
You might have to pay a copayment when you see a specialist or have a minor surgery or something to that effect.
So let’s say that you have to go to a cardiac doctor because you have been having chest pains. When you go into the office the entire bill might be $500. But you will likely have to pay your copay before you leave. You might have to pay something like $30 right then.
That is not to say that you won’t get a bill later. You likely will.
Think of it as the insurance company wanting you to have a little skin in the game. They want you to pay a little up front before they pay some (or all of the bill).
Not all services require copayments. Usually any preventative care will not require a copay.
Make sure to check your insurance plan to know what yours is.
(5) Deductibles
This is the part about how health insurance works that gets most people fired up: deductibles.
Deductibles can be infuriating.
A deductible is the amount of money that you are responsible for paying BEFORE the insurance company steps in and starts paying anything. (This does not include preventative care.)
Deductible amounts range GREATLY. There are $0 deductibles, and there are $20,000 deductibles. After you have paid your deductible the insurance steps in and pays a portion of the medical bills while you pay the rest.
While insurance plans can vary with what portion the insurance company pays and what portion the individual pays, a very common split is 80% that the hospital pays and you pay 20%. (Remember, this is AFTER you have already paid your deductible.
Here’s how it works:
Maggie has a health insurance plan that has a $4,000 deductible.
She has some health issues that pop up throughout the year and she has to go to the hospital three times.
The first time she goes the bill is $2,000.
The second time that she goes the bill is $1,500.
And the third time that she goes the bill is $500.
Here’s how the payment breakdown would be in this example:
| Amount Owed | Maggie Pays | Insurance Pays | Deductible Remaining | |
| Hospital Visit #1 | $2,000 | $2,000 | $0 | $2,000 |
| Hospital Visit #2 | $1,500 | $1,500 | $0 | $500 |
| Hospital Visit #3 | $500 | $500 | $0 | $0 |
After the third visit to the hospital, Maggie will have exhausted her entire deductible. That means that every dollar (up to the maximum out of pocket that I’ll explain next) will be split between her and her insurance company. She will pay 20% while her insurance company will pay 80%.
Let’s say that after Maggie’s third visit to the hospital, she has to go one more time and the bill is $1,000.
It would look like this:
| Amount Owed | Maggie Pays | Insurance Pays | Deductible Remaining | |
| Hospital Visit #4 | $1,000 | $200 | $800 | $0 |
It is also good to note that there is a direct inverse relationship between premiums and deductibles.
Which is to say, the HIGHER the premium that you pay, the LOWER the deductible.
And the LOWER the premium that you pay, the HIGHER the deductible.
Also, your deductible will reset every year. If you have paid your full deductible on December 31st of the year, you will have a whole new deductible starting on January 1st.
(6) Maximum Out of Pocket
The last major part of how health insurance works is the maximum out of pocket that you can have.
In the last section I told you how a deductible works. After you have met your deductible, you will split each medical bill with the insurance company (usually on an 80/20 basis). You will do this until you have paid your out of pocket maximum.
Out of pocket maximums are generally higher than a deductible, but not always. They can sometimes be the same as your deductible.
Let’s assume that her maximum out of pocket expenses for the year is $10,000. That means that she will pay a MAXIMUM amount in a given year of $10,000. After she has met that maximum, the insurance company will pay 100% of all medical bills.
To better explain this, let’s use the example of Tonya. She has to go to the hospital several times and has a $4,000 deductible and a $10,000 maximum out of pocket amount.
| Amount Owed | Tonya Pays | Insurance Pays | Deductible Remaining | Max Out of Pocket Remaining | |
| Hospital Visit #1 | $2,000 | $2,000 | $0 | $2,000 | $8,000 |
| Hospital Visit #2 | $2,000 | $2,000 | $0 | $0 | $6,000 |
| Hospital Visit #3 | $4,000 | $800 | $3,200 | $0 | $5,200 |
| Hospital Visit #4 | $4,000 | $800 | $3,200 | $0 | $4,400 |
| Hospital Visit #5 | $4,000 | $800 | $3,200 | $0 | $3,600 |
| Hospital Visit #6 | $4,000 | $800 | $3,200 | $0 | $2,800 |
| Hospital Visit #7 | $4,000 | $800 | $3,200 | $0 | $2,000 |
| Hospital Visit #8 | $4,000 | $800 | $3,200 | $0 | $1,200 |
| Hospital Visit #9 | $4,000 | $800 | $3,200 | $0 | $400 |
| Hospital Visit #10 | $4,000 | $400 | $3,600 | $0 | $0 |
Any subsequent medical bills that Tonya would have for that year would be 100% covered by her health insurance.
Most people won’t reach their maximum out of pocket amount. But you can quickly hit that amount if something really bad happens to you like a really bad car accident, cancer diagnosis, open heart surgery, etc.
Also, remember that this amount resets every year. So if Tonya hits her $10,000 maximum out of pocket amount on December 31st, she will have to start over on January 1st.
Final Thoughts
Health insurance can be a really confusing topic. But we all need to have some form of health insurance. And because we all need it (and should have it), we should do our best to understand it.
There will be more articles to come describing what each of these topics are in more detail!
I am here to help you in your adulting and financial journey!
You can do it!
Until next time!
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