Health Insurance Literacy

How Insurance Works

Health insurance uses the contributions of all members of the plan to cover a share of the cost of medical care for everyone under the plan. Every member pays a set premium each month. If you end up needing care, the plan will pay a portion of it.

How much it covers depends on your plan. Most plans have you share in the costs—up to a certain amount—through a copayment, coinsurance, and/or deductibles, but it’s likely much less than paying for health care all on your own.

By spreading the costs among the group members, you are protected if your care costs more than the amount you actually paid in premiums.

Health insurance policies vary in their purchase price and in the percentage of the costs of services they’ll pay. Understanding how your health insurance works is your responsibility. It's your framework to help you manage choices and costs.

Key Terminology

Premium: Your membership fee. The amount you pay to be covered by your health insurance plan.

Coinsurance: Your split of the bill. It’s a percentage you pay of the covered service cost. The remaining percentage is paid by your health insurance.

Copay: Your per-visit fee. A flat fee you pay each time you use a service.

Deductible: Your full-price hurdle. In a policy year, you pay the full cost of some benefits until you meet this specified dollar amount. Then—and only then—will insurance pay its share.

Out-of-pocket maximum: Your financial burden ceiling. It’s the most you’ll have to pay each policy year for covered services.

Network: For many health plans, you pay less for care when you use “in network” providers—doctors and facilities affiliated with an insurance company. If you use a provider outside the network, you’ll typically pay much more in copays, coinsurance, and deductible costs.