Health Insurance Basics

What is health insurance?

Health insurance is a promise by the insurance company to provide and pay for a range of health care services that the insured person needs. In return, the insured person must pay the insurance company a premium.

There are different kinds of health insurance: Fee-for-service plans, also known as indemnity plans, and managed care plans, such as HMO, PPO and POS.

Most people get health insurance through work. Some people buy health insurance on their own. Many people get health coverage through government programs. And, sadly, millions of people are uninsured.

Wherever you get health coverage, it can be your ticket to health care. When you don't have health insurance, there are some places to seek help.

Key Terms You Need to Know:

Accident-only policies. These policies pay for care you need as a result of an accident, but not for care you need to treat an illness.

Balance billing. The practice of billing a patient for the difference between the fee that the health insurer allows and what the non-network provider actually charges.

Centers for Medicare and Medicaid Services (CMS). This is a federal agency within the United States Department of Health and Human Services (DHHS) that administers the Medicare program and works in partnership with state governments to administer Medicaid, the State Children's Health Insurance Program (SCHIP), and health insurance portability standards.

COBRA. This stands for the Consolidated Omnibus Budget Reconciliation Act, a federal law in effect since 1986. COBRA permits people to remain temporarily covered under their employer-based plan following certain events, such as a layoff, retirement, or divorce.

Comprehensive coverage. Insurance is either comprehensive or limited. Comprehensive means broader coverage. The insurance company covers most of the insured person's health care needs so the patient doesn't have to spend much out-of-pocket for medical care.

Coinsurance. This is a percent of the bill that the insured person is required to pay.

Co-payment (or co-pay). This is a fixed dollar amounts that the insured person must pay per service, for example, a copay could be $25.

Cost sharing. This is a portion of the medical bill that the insured person must pay.

Coverage gap. This is also known as the "donut hole." A gap in coverage under Medicare Part D prescription drug plans. While you are in the coverage gap, you pay the entire cost of your prescription drugs.

Deductible. This is the amount of money the insured person must pay out-of-pocket before health benefits begin.

Discount medical plans. Discount medical plans are not health insurance. These plans never pay out any money. Instead, plan network providers are supposed to reduce fees, but responsibility for paying the discounted fee rests with the patient.

Disease/case management. Disease management programs are designed to reduce the risk of complications associated with chronic conditions and to reduce health care service use and costs associated with avoidable complications, such as emergency room visits and hospitalizations.

Dread disease policies. These policies pay only for costs related to treatment for specific diseases, such as cancer.

Dual eligible. Individuals who are dual eligible are entitled to coverage under both Medicare and Medicaid.

ExtraHelp. This is a financial assistance program run by the Social Security Administration for people in Medicare Part D prescription drug plans.

FMLA. This is a federal law that guarantees up to 12 weeks of job-protected leave for certain employees when they need to take time off due to serious illness, to have or adopt a child, or to care for another family member.

Fee-for-service. This is also known as indemnity insurance. The insured person chooses his/her own doctor or hospital, and the insurance company pays a portion of your bill.

Formulary. This is a list of drugs that the health insurer will cover.

Group health plans. These are health insurance plans for employees and their family members, sponsored by an employer or union.

Health maintenance organization (HMO). This is a type of health insurance plan that usually limits coverage to care from doctors who work for or contract with the HMO.

High-risk pools. These are programs in more than 30 states that offer individual health insurance coverage to people with high-cost conditions, including bone marrow diseases, who might have trouble buying coverage on their own.

HIPAA. This stands for Health Insurance Portability and Accountability Act. HIPAA helps people buy and keep health insurance, even when they have serious health conditions. The law sets basic requirements that all health plans must meet.

Hospital indemnity policies. These policies pay cash benefits for each day you are in the hospital. They are not the same thing as health insurance.

Individual health insurance. These are health insurance policies for people not connected to an employer group.

Legal Services Corporation (LSC). This is a federally funded organization with a mission to provide high-quality civil legal assistance to people with low-incomes.

Medicaid. This is a joint federal and state health insurance program for people with low incomes and limited resources. Medicaid programs vary from state to state.

Medical Benefits Package. This is a standard health care plan, under the Veterans Program, that offers a full range of outpatient and inpatient services.

Medicare. This is the federal health insurance program for people 65 years of age or older, certain younger people with disabilities, and people with permanent kidney failure.

Medicare Advantage Plan (MAP). This is a private managed care health plan options that are part of the Medicare program (Medicare Part C).

Medicare Rights Center (MRC). This is a national, nonprofit consumer services organization that provides one-on-one counseling to individual regarding their Medicare rights and options.

Medicare Summary Notice (MSN). This is a statement that clearly lists your Medicare claims information. The MSN lists the details of the services you received and the amount you may be billed by the provider.

Medigap. This is private health insurance designed to supplement the coverage provided under Medicare Parts A and B.

Network providers. This is a list of providers who joined a managed care plan and who are willing to accept its contracts.

Out-of-pocket maximum. This is the amount the insurer will require the insured to pay out-of-pocket towards the cost of care. Once the limit is reached, insurance usually provides full coverage for the rest of the year.

Point-of-service (POS). This is a blend between an HMO and a PPO. The HMO gives the insured person the option of seeking care from doctors and hospitals outside of the HMO network.

Pre-existing condition. This is a medical condition that existed before the health insurance was purchased.

Preferred provider organization (PPO). This is a fee-for-service plan that has a network of doctors, hospitals, and clinics, but it also gives the insured person the option to choose his/her own provider.

Prior authorization/approval. This is the process by which the insured must seek approval from the health insurer prior to receiving services.

Referral. This is written permission from the insured's primary care doctor before he/she can see a specialist.

Spend down. This is the process by which some states will subtract your medical expenses from your income until you reach the income eligibility limit for Medicaid.

State continuation coverage. This is a program similar to COBRA. If you are about to lose group health plan coverage from an employer with fewer than 20 employees, you may be eligible for state continuation coverage.

State Health Insurance and Assistance Programs (SHIP). This is a national program that offers one-on-one counseling and assistance to people with Medicare and their families.

Step therapy. These are rules imposed by plans that require you to try less expensive drugs to treat your condition before your plan will pay for a more expensive drug.

VA Health Care. This is a health coverage program run by the U.S. Department of Veteran Affairs.