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: The amount you pay for your health insurance coverage. 

Coinsurance: The percentage of costs of a covered health care service you pay (20%, for example) after you have paid your deductible.

Copayment: A fixed amount (for example, $15) you pay for a covered health care service, usually when you receive the service. 

Deductible: The amount you pay for covered health care services before your insurance plan starts to pay. With a $300 deductible, for example, you pay the first $300 of covered services yourself. The deductible may not apply to all services. 

Out-of-pocket maximum: The most you will pay for covered medical expenses during the plan year. Once the out-of-pocket limit has been met, the plan will pay 100% of covered charges for the rest of that plan year. This limit never includes your premium, balance-billed charges or health care your health insurance or plan does not cover. 

Network: The facilities, providers and suppliers your health insurer or plan has contracted with to provide health care services. 

Prior Authorization: A decision by your health insurer or plan that a health care service, treatment plan, prescription drug or durable medical equipment is medically necessary. Sometimes called prior authorization, prior approval or precertification. Your health insurance or plan may require preauthorization services before you receive them. Note: Prior authorization is not required during medical emergencies.