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Health Insurance (Definition), Types and How Health Insurance Works

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There are possibilities that certain casualties might occur at the time we least expect, and depending on the extent damage might leave one in serious debt. But with the help of insurance, we can provide a little protection for ourselves. However, there are various types of insurance policies, and some are more important than others depending on one’s needs. An example of such a policy is health insurance.

Health Insurance

Health insurance as the name suggests is a type of insurance policy that provides coverage or protection by paying the health expenses of the insured. This type of insurance is very essential in the sense that it protects health which gives you the ability to work and earn money that may be used to pay for other important insurance policies. However, in this article, we will provide information in detail about health insurance, its various category and types, how it works, and other related important information.

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Meaning of Health Insurance

Health insurance is the type of insurance policy that provides coverage for medical expenses incurred by the insured. It is a legal agreement between an insurance company or insurer and a policyholder or the insured. In which the insurer promises to pay for medical expenses incurred by the insured in exchange for a fee known as premium. The main purpose of the health plan is to help you pay for medical care and services, therefore it reduces the amount so you don’t have to pay for high medical expenses on your own.

Furthermore, the Health Insurance Association of America defined health insurance as the coverage that provides for the payments of benefits as a result of injury or sickness. Therefore, It includes insurance for losses from accident, medical expense, disability, or accidental death. The insurance policy either can repay the policyholder the medical expenses incurred for sickness or injury, or pay directly for the care services provided.

Moreover, the premium is the amount the policyholder pays to the insurance plan to purchase or in exchange for health coverage. The amount of premium that will be paid is calculated using certain factors such as age, lifestyle which includes tobacco use etc.

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Read Also: Disability Insurance: Meaning, Types and How Disability Insurance Works

Types of Health insurance

However, there are two main categories of health insurance: private and public otherwise known as government health insurance. But there are other specific types of health insurance plans. They include; health maintenance organizations (HMOs), point of service (POS) plans, preferred provider organizations (PPOs), and exclusive provider organizations (EPOs).

Now lets look into each of the aforementioned types for more details:

Health Maintenance Organizations (HMOs):

The health maintenance organization (HMO), is an organization that requires policyholders to choose a primary care physician (PCP) who will work as your home base care provider or family doctor. Then any treatment the patient will receive will only come from specialists and physicians within the chosen care provider network.

In other words the primary care physician oversees the policyholder’s treatment and care, by making recommendations and providing referrals for medical specialist care services. Moreover, this type of health insurance is usually the cheapest plan. It serves as a way to control medical costs through the use of pre-negotiated fee for each medical services.

Furthermore, expenses incurred from the services a physician without the consent or recommendation of the primary care physician may be required to be paid out of pocket.

Preferred Provider Organization (PPO):

The preferred provider organization (PPO), serves as an alternative to the health maintenance organization (HMO). It is also known as a participating provider option, it allows patients to choose their own health care providers at any time without the need of a referral from a primary care physician.

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Moreover, the preferred provider organization also uses the lower cost strategies like HMOs, as it has a network of participating care providers with which it has negotiated costs. The PPO pays a higher percentage of the medical expenses when the patient visits out-of-network or preferred care providers than visits to in-network or participating providers.

Point of Service (POS) Health Insurance Plan:

Point of service plan is a combination of the HMO and PPO plans. The POS plans also requires the policyholder to choose a primary care physician (PCP). The patient will need a referral from the PCP to visit a doctor outside the participating care providers network.

Moreover, just like the PPO the policyholder can choose to see a doctor out-of-network or in-network of providers. Although the costs are usually higher, but patients that require visits still receive some coverage.

Exclusive Provider Organization (EPO):

The exclusive provider organization is similar to the HMO plans, only that the EPO does not require the policyholders to choose a primary care physician. An exclusive provider organization plan also provides the patients a network of participating care providers to choose from. But doesn’t provide coverage for visits out-of-network care except in cases of emergency.

Therefore, the policyholder may face the risk of higher out-of-pocket costs when they receive out-of-network care, but they don’t need the recommendations of a primary care physician.

Check Also: Life Insurance: Meaning, How it Works and Best Life Insurance Companies

Benefits of Health Insurance

However, there are so many benefits one get for having a health insurance plan. The benefits of health insurance include:

  • You get to pay lower out-of-pocket costs for care since it is shared with your health plan
  • It provides coverage for unexpected high cost medical care such as; care for a serious injury, or illness such as cancer etc.
  • Having a health plan gives you a peace of mind that you get all the care you need with little or no additional cost.

Moreover, here are other benefits your health insurance plan may cover:

  • It covers 100% of preventive visits like annual check-up
  • The insurance plan covers some vaccination
  • Hospitalization
  • Additional or supplementary coverage

However, the health benefits that is what is covered and what is not depends on the insurance plan. Most things like surgeries and unauthorized medical care may not be covered by health plan.

How Does Health Insurance Works?

However, the main purpose of health insurance is reduce the amount medical expenses you would have pay. It works by protecting your assets from high cost of medical care, otherwise your entire life savings could be wiped out by a high cost medical bill and may leave you in debt.

Although it may vary depending on the plan, here’s an overview of how health insurance works with associated terms:

  • Premium: This is the amount of money the policyholder pays to the insurance plan to purchase health coverage. The premium fee is usually paid monthly and it is calculated using a certain factors regarding the policyholder or insured person.
  • Deductible: Deductible is the amount of money the you must pay out of your pocket for care until the health insurer starts to pay its share.
  • Co-payment: Is the amount that the must pay out of pocket before the health insurer pays for a particular service. However, not every policy applies co-payments for doctor’s services against your deductible.
  • Coinsurance: Is a percentage of the total cost that you may also pay instead of paying a co-payment. After you meet your deductible, you will start sharing the costs with your health plan. Your share of the cost is the coinsurance, your health plan may pay 80% and you may pay 20% of the medical expenses.
  • The health plan provides 100% coverage for your preventive care

Additional Notes

In conclusion, when purchasing a health plan the insurance company will provide lots of options and choices. But make sure you go through various combination of the terms mentioned above before you choose a plan.

In addition, health insurance only works when you have purchased it. Therefore, when considering whether and when you should get a health plan you keep in mind your lifestyle. Do you live risk-free, or have a chronic health condition that needs treatment. Ensure that you learn about the health plan you want to purchase by going through the terms associated with it.

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