Center for a Secure Retirement
How Does Health Insurance Work?

How Does Health Insurance Work?

Millions of Americans rely on health insurance to access treatment and medications and to offset a portion of their health care costs. But not every plan offers the same coverage and many are substantially different, especially when you consider private vs. public health insurance. So, how does health insurance work, exactly?

Whether you're just trying to figure out what all the information on your medical bill means or are planning ahead to cover health care expenses in retirement, here's what you will want to know.

Understanding Health Care Networks

Each health plan has its own provider network. A provider network is a group of doctors, nurses, clinicians and health care facilities that your insurer has an agreement with to provide care. Providers are in-network if they have a contract with your insurance provider to provide discounted health care services and are out-of-network if they do not.

Understanding provider networks is critical because it can affect your health care costs. You will get more affordable health care services if you go to a health care provider or facility that is in-network. It's also important to consider provider networks if you are switching health insurance, as you will want to make sure that your current health care provider is in-network with your new health insurer. Otherwise, you may have to switch providers or pay more out-of-pocket for your health care costs. Typically, your provider network will consist of health care workers and facilities within your state, but this may not be the case for certain health plans.

While plans may have different sets of providers and hospitals within their networks, they must meet state and federal requirements and standards. Requirements vary by state, but they generally include rules around the number of providers and hospitals within a network, geographic service area boundaries and access standards so health plan members don't have to travel far or wait long to receive care.

Federal requirements apply to private health plans, Medicare and Medicaid plans (two government-run health insurance programs), and plans that operate within the state health insurance exchanges created by the Affordable Care Act. These regulations include access to care requirements, different quality measures, and accreditation standards based on the number of providers and hospitals within a network and the number of patients that network serves.

To find out which doctors are in your health plan's network, you can either go to your insurer's website and review its plan directory or call the member services department and ask whether a specific doctor or hospital is in their network.

Private vs. Public Health Insurance

About 55% of Americans have health insurance through their employers, according to the U.S. Census, while people who are self-employed or working part-time may have a plan through a private insurer or the health insurance marketplace created by the Affordable Care Act.

If you work for a private company, you may be able to access private health insurance through your employer. Using this coverage for yourself or your family is typically more affordable than getting private insurance on your own because an insurer can offer a company discounted group rates if the company has many employees.

You can also get health insurance on your own if you're self-employed or don't have access to a plan through your employer. You can work with an independent insurance agent or broker on or off the health insurance exchange to compare plans and select one that meets your needs and budget. If you sign up for a plan through the health insurance marketplace, depending on your income, you may qualify for subsidized coverage or tax credits to reduce your monthly premium — the amount that you pay every month out-of-pocket for health care coverage.

You can also access public health insurance, if you qualify. Low-income Americans who qualify can get coverage through Medicaid, while people over the age of 65 can qualify for Medicare. Though Medicaid is a government-sponsored program, it is administered at the state level, which means it operates differently in every state. Medicaid allows people who can't afford private health insurance to access more affordable health care coverage, limiting their out-of-pocket expenses for a broad range of services. To do so, the federal government provides states with matching dollars to offset much of the cost.

Medicare, the public health insurance program for seniors, works a bit differently. The program works with contracted providers and health care facilities to provide care to seniors, and beneficiaries pay a deductible (a set amount paid out-of-pocket) before Medicare begins covering the cost of health care services, such as in-patient stays, preventive services and home health care.

Whether you have insurance through your employer, the marketplace, Medicaid or Medicare, it's important to understand how insurance companies charge for their services and what that means for your health care expenses.

How Insurance Companies Bill for Services

When you schedule an appointment to visit a doctor, undergo surgery or pick up a prescription, the cost is typically billed under a specific code.

After you receive care, your provider or doctor's office will fill out a claim form and send it to your health insurer to bill for the services you received. Once your insurer reviews and verifies the claim, they will decide whether to approve it and pay for the services or reject it. If they reject it, you would have to cover the expenses out-of-pocket. Though you can appeal a rejected claim, it's important to look over the details of your health plan before you seek care so that you understand which services are covered and which are not in advance.

For any health care service, your share of the cost will depend on your plan and your coinsurance, which is the percentage that you pay for a specific health service. For example, if you go to the ER with a sprained arm and the total bill is $1,000 and your coinsurance is 20%, you would pay 20% of the bill, or $200, and your insurance company would pay the rest. This same rule also applies if you visit an allergist to get tested for suspected allergies or your primary care doctor to get a chest X-ray for a suspected case of pneumonia.

What Health Insurance Could Mean for You

Even though health insurance can reduce health care costs, it's important to understand that you may still have to pay for certain expenses out-of-pocket. Your monthly premiums, deductible, coinsurance and copay (a fixed amount you pay for covered services at the time of your visit) can all contribute to health care costs. If you're on Medicare, purchasing Medicare Supplement insurance, or Medigap, can help cover some of these expenses.

You can also limit your costs by simply learning more about how your specific health insurance works. Talk to your insurance company or visit its website to review what prescription drugs and services are covered and get information about which providers are in-network. Some health plans also offer discount programs for prescription drugs as well as dental, vision and hearing services, which can help you save money. You also might qualify for subsidies and tax credits if you purchase a marketplace plan and meet certain income requirements.

Keeping these points in mind as you review your health care plan and benefits can help you get the care you need and manage your health care costs effectively.

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