It’s no secret that healthcare in the United States is really expensive. Americans are projected to spend an astonishing $3.7 trillion dollars on medical care in 2018. That means 18.2% of the entire US economy is spent on healthcare, or about twice as much as every other developed country, plus we get substantially worse overall health outcomes for our money. In fact, medical bills are the leading cause for why people declare bankruptcy.
This guide is designed to answer all of your essential health insurance questions, teaching you the most important terms and definitions, how to shop for coverage, and how to think through various medical decisions.
What is health insurance?
Health insurance covers medical expenses resulting from illnesses, injuries, and other conditions. It’s complicated and expensive, so let’s start with some basic definitions.
Understanding how health insurance works can be confusing. No matter where your insurance comes from, all policies share a common language, and although comparing policies between providers can be challenging, it’s not impossible. Here’s a list of the most important definitions to help you get started.
A premium is the amount of money you pay each month to purchase the insurance. For people who get their insurance through work, the employer usually pays a significant chunk of the total premium.
A policy’s deductible refers to the amount you have to pay out-of-pocket for medical care before your health insurance kicks in. Deductibles are usually big round numbers, like $500 or $3,000. In general, policies with lower deductibles have higher premiums.
Coinsurance means that you are required to pay a percentage of the total cost of care after your deductible is met. One of the most common types of coinsurance is an 80/20 split requiring you to pay 20% of the cost, in addition to the deductible, while your insurer picks up the remaining 80%.
An out-of-pocket maximum caps the total amount you are liable for when receiving healthcare. Policies with low caps are more expensive. Common thresholds for out-of-pocket maximums can range anywhere from $5,000 to $15,000.
A co-pay refers to a flat non-negotiable fee you must pay whenever receiving a medical service. Co-pays usually range from $5 to $30, depending on the type of policy.
A Flexible Spending Account (or FSA) is a tax-sheltered savings vehicle to help you pay for healthcare. You can contribute pre-tax dollars to a special fund to offset the costs of things like deductibles, co-pays, and over-the-counter medications. The IRS limits your total contributions to FSAs to $2,650 for 2018. Keep in mind you can only roll over $500 of any unused funds from one year to the next. You forfeit whatever else you don’t spend.
A Health Savings Account (or HSA) is slightly more flexible than an FSA. Contributions to an HSA can be changed throughout the year, whereas FSA deposits are determined only at the start of each year. Rollovers from one year to the next are also permitted within HSAs, letting you keep your money. Only taxpayers with high-deductible health plans qualify for HSAs.
A Health Reimbursement Account (HRA) is a relatively rare, though highly valuable employer-provided benefit. Unlike FSAs and HSAs, HRAs are fully funded by an employer to help workers pay deductibles and coinsurance. Check with your employer for specifics, but a typical arrangement would mean a company sets aside $500 into an HRA for each employee. If the employee does not use it, that $500 would roll over to the next year, plus an additional $500 deposit. Provided the employee never uses the HRA, a maximum $1,000 would continuously roll over year after year.
How does this all work?
Let’s illustrate how all these definitions work in practice.
Imagine that John pays $300 per month for a health insurance policy with an 80/20 coinsurance split, a $1,000 deductible, an out-of-pocket maximum of $5,000 and a $30 co-pay. He also contributes $500 a year to an FSA, and his employer provides $500 to an HRA.
John breaks his leg and goes to the emergency room. To keep things simple, let’s assume the total cost of medical care comes out to $10,000, including a $30 co-pay for visiting the emergency room. How much money will his insurance policy pay, and how much does he owe?
$30 for the co-pay to visit the emergency room
$1,000 to meet his deductible for his insurance to kick in
20% of the balance for the remaining bill, or $1,794
In this situation, John needs to come up with $2,824, and he has a couple options. One option is to pay for the entire balance in cash and save both his HRA and FSA for another day, like the follow-up rehabilitation bills and pain prescriptions he will no doubt need. Or, he can max out one or both accounts to lower his immediate bill. Remember, his employer contributed the $500 to his HRA at no expense to him, and the balance in his FSA is with pre-tax dollars. Changing any of the components in John’s insurance policy would result in different out-of-pocket totals.
What kinds of health insurance plans are there?
If you’re in the market for health insurance, either for yourself as an individual of for your small business, it’s critical to understand the distinctions between different plan options. Here we’ll review the five major types of plans and discuss differences between each one.
1. Preferred Partner Organization (PPO)
People covered through a PPO plan receive coverage from a predetermined list of hospitals and clinics. You can usually see any doctor or medical professional who works inside the covered network. The network, in turn, agrees to see participants in the PPO at a lower rate than the general public.
2. Health Maintenance Organization (HMO)
HMO plans are slightly more restrictive than PPOs, but they are usually cheaper, too. They require participants to pick a specific primary care physician within a predefined network. That person will then make referrals to other specialists inside the network. The most important thing in HMOs is to see doctors inside the network, or else risk not receiving any coverage from the plan. HMOs come with a lower price tag, making them one of the most popular forms of insurance on the market.
3. Point of Service (POS)
A POS plan is somewhere in between a PPO and an HMO, in that it requires you to designate a primary care physician, but it allows you to seek specific service outside the network for a higher out-of-pocket cost. There are lots of different variations on POS plans, making them a good choice if you value flexibility above all else.
4. Exclusive Provider Organization (EPO)
An EPO plan is the most restrictive form of coverage available. It will not provide any coverage for medical expenses incurred outside the given network except in case of emergencies. This means you can save some money on EPO plans compared to other options, but that comes at the price of flexibility.
5. Short-term health insurance plans
Like the name suggests, short-term health insurance plans are designed to offer temporary coverage. They don’t usually meet the minimum standards required by the Affordable Care Act, but they provide a small safety net in case catastrophe strikes. Short-term plans are a good idea if you are between jobs or otherwise have an immediate need for insurance.
What are the largest insurance companies?
The Kaiser Family Foundation collects detailed information about market share among insurance companies across all 50 states. The largest insurers in the country include UnitedHealthcare, Anthem, Aetna, Humana and Cigna.
Frequently Asked Questions
- Am I required to have health insurance by law?
It is not illegal for you to be uninsured, but you may face a tax penalty. Health insurance is all about spreading risk and the associated cost of medical care across a group of people. If you don’t have insurance, but still need medical care, and if you can’t pay for everything out-of-pocket, then the entire healthcare system is forced to absorb the cost of providing care for you. That’s why the Affordable Care Act created for tax penalties for anyone forgoing health insurance.
- What are the tax penalties for not having health insurance?
This is a complicated question. There’s still a tax penalty for forgoing health insurance in 2018, but not in 2019.
For 2018, the penalty is $695 for each adult in your household (up to a family maximum of $2,085), or 2.5% of gross household income, whichever is greater. The penalty for children is $347.50.
In certain situations, taxpayers can receive exemptions from tax penalties. You can get an exemption if you don’t earn enough income, experience a hardship, are a member of a federally recognized tribe, were incarcerated, or were uninsured for no more than 2 months.
Some states have separate penalties and requirements, which may remain in place regardless of what the federal government determines. Always do your own research.
- Can I deduct the cost of health insurance from my taxes?
Yes, although there are certain limits and exceptions.
In general, if someone else pays for your health insurance, like an employer or parent, you cannot deduct their premiums on your tax return.
If you are self-employed and not otherwise eligible for insurance through a spouse’s plan, you can deduct your premiums. You cannot deduct more than what you actually earned in income. If you purchase insurance on your own, directly from a company or through an open exchange, you can take a deduction. Some Medicare plans are also eligible for a tax deduction.
- Where can I find information about purchasing health insurance?
The best place to start researching plans on the open market is HealthCare.gov. You can enter your personal information to receive customized quotes for different coverage amounts.