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Health Insurance in the U.S. – How Does It Work?

Healthcare in the United States can be expensive.

Like really expensive. 

Between prescription drug costs, doctor appointments, medical procedures, these costs can quickly become overwhelming.

Health insurance offers a way for people to reduce these costs to more manageable amounts.

But how does it work?

What is Health Insurance?

In the United States, getting sick can cost you.

In fact, a single visit to the doctor could run you anywhere from $100 to a couple thousand depending on where you are.

And that doesn’t even include the cost of any medication you might need.

Most of us would not be able to afford this type of expense if we get sick. In addition, we don’t know when we will become sick and injured, or how much it might cost to get taken care of.

Health insurance is a way for us to effectively manage these expensive and often unforeseen costs.

How Does Health Insurance Work?

There are many different types of health insurance, each with their own intricacies. However, they all have the same basic premise.

You and other plan members (the insured) pay an upfront fee to the insurance provider (the insurer).

In exchange, when you get sick or injured, the insurer helps reduce the cost of any care or treatment you might require.

Any money left over from the upfront fees taken in by the insurer minus the money paid out for care or treatment is the insurer’s profit.

Simple enough right?

In this way, you can think of health insurance as risk and cost sharing.

You share the costs of healthcare services with other plan members and reduce your financial risk of expensive or unforeseen medical bills.

Why Do I Need Health Insurance?

The main reason you need health insurance in the U.S. is to protect your health and your wallet.

Without insurance, emergency medical bills can leave you in a mess of debt, or worse, the high cost could force you to forgo treatment.

This can be a disaster for a lot of people in the U.S. who are already living paycheck to paycheck.

But emergency medical expenses aren’t the only reason you need it.

Even planned expenses can become overwhelming without a good insurance plan.

For example, if you take prescription medication, it can cost thousands of dollars each month without insurance!

How Do I Choose a Good Health Insurance Plan?

There is no such thing as a perfect health insurance plan.

Everybody has different individualized needs and the best plan for you will depend on what your individual circumstances are.

And just as those circumstances may change over time, so will the plan that is “best” for you.

You should always compare different plans to figure out which one will be right for you.

Here are a few things that will help to know when comparing different plans.

What is An Insurance Premium?

An insurance premium is just the fee you pay to your insurance company for coverage.

It is usually paid on a monthly basis and it must be paid regardless of whether you use your insurance.

Failure to pay the premium may result in your policy being cancelled.

While a low premium might seem like a good thing, keep in mind there are other things to consider.

Are Health Insurance Premiums Tax Deductible?

The short answer is yes, but it depends.

According to the IRS:

If you itemize your deductions for a taxable year, you may be able to deduct expenses you paid that year for medical and dental care for yourself, your spouse, and your dependents. You may deduct only the amount of your total medical expenses that exceed 7.5% of your adjusted gross income.

The term medical care expenses refers to a variety of things.

This includes payments for diagnosis, cure, mitigation, treatment or prevention of disease.

It also covers payments for treatments affecting any structure or function of the body.

For more information, take a look at the IRS website and speak with a tax expert about your individual situation.

How Does Health Insurance Deductible Work?

A deductible is the fixed amount you have to pay upfront each year for medical care, with the exception of some free preventative care, before your insurance plan starts to cover the cost.

For example, if you have a $100 deductible you will pay the first $100 of any medical expenses.

Once the deductible has been met, your insurance will help cover your medical expenses.

However, while a low deductible might seem ideal that is not always the case.

Generally speaking, a lower deductible means you will pay higher premiums each month.

So figure out what your individual needs are and choose a premium/deductible combination that minimizes your out of pocket costs.

What is Out of Pocket Cost?

Out of pocket costs are just what they sound like.

It is the amount of medical expenses that you pay for out of pocket. In other words, the money you pay for directly opposed to insurance.

For example, if I pay for a $100 prescription using insurance then I might pay a $20 copay while my insurance company covers the remaining $80.

In this case, my out of pocket cost would be $20.

What is Out of Pocket Limit?

An out of pocket limit is just a cap on the total amount you will pay for medical expenses in a given year.

This does not include premiums and typically requires you to stay within your insurance network’s approved list of providers.

After you meet this limit, your insurance will pay for 100% of expenses covered by your policy.

What Does the Health Insurance cover?

Generally speaking, most plans will cover a wide range of services and treatment.

These include but are not limited to doctor visits, hospital stays, prescription drugs, medical devices, and wellness care.

Coverage will vary depending on the specific plan you or your employer chooses.

What Does Health Insurance Not Cover?

Typically, health insurance does not cover vision services, hearing aids, cosmetic procedures, beauty treatments, weight loss programs, uncovered prescription drugs, acupuncture and other alternative therapies.

Be sure to consider what your individual needs will be before committing to a specific insurance plan.

How to get Health Insurance?

Many people get health insurance through their employer.

However, if you are looking on your own, here are some valuable resources help you get started.

https://www.healthcare.gov/choose-a-plan/your-total-costs/

https://www.healthcare.gov/choose-a-plan/comparing-plans/

Your Step-by-Step Guide to Choosing a Health Insurance Plan

https://www.npr.org/sections/health-shots/2019/11/01/775391311/open-enrollment-is-here-6-tips-for-choosing-a-health-insurance-plan

https://www.usa.gov/finding-health-insurance

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