Whether you’re getting health insurance from an employer or the public marketplace, finding the right health insurance can be daunting. Here’s a breakdown of some key health insurance vocabulary, the most common plan options you can consider, and how to choose the best health insurance for you and your budget.
How to pick the best health insurance for you
1. Know the terms that affect health insurance costs
With almost any health insurance plan, you’ll come across the following words and phrases. Understanding what they mean—and how much you’d pay for each one—could get you closer to figuring out which health insurance is best for your needs and finances.
Annual premium: This is the amount that you pay to your health insurance carrier within a year—in other words, the charge to have health insurance coverage. Typically, this cost is broken up into monthly payments, but can sometimes be broken up into payments every other week or twice a month, especially if you’re paying into an employer plan that takes premiums right out of your paychecks.
In 2022, the average annual premium for single coverage for employer-covered workers was $7,911. For family coverage it was $22,463, according to Kaiser Family Foundation, a nonprofit health research organization.1 Bummer alert: Paying that premium doesn’t mean you have no other health care costs. Likewise, even if your other health care costs are high, you still have to pay your premium.
Deductible: This is the amount you must pay for your covered health care costs each plan year before your insurance starts to kick in. Yes, even though you’re paying premiums, your insurer isn’t necessarily covering your medical costs right away. And your deductible resets at the start of each plan year or when you switch plans. So if your deductible is $7,000, your insurance won’t defray costs for any services until you’ve spent $7,000. (But certain preventative care cost sharing starts before you meet your deductible.) With most plans, the lower your deductible, the higher your premium, and vice versa.
Copay and coinsurance: A copay (or copayment) is the flat fee your insurance company sets as your cost for each covered health care service or prescription. Copays can vary by category—such as prescriptions, lab tests, and specialist and emergency visits—and even within categories. There can be different tiers of copays for prescriptions, for instance. So carefully check out what you’d be responsible for as you consider different insurance plans. Also note: Copays might kick in only after you’ve paid your deductible. So if you've been paying $100 for a drug, but now you have hit your deductible of $1,000, you'll start paying just the copay for that drug, which might be more like $20.
Coinsurance, on the other hand, is the percentage of costs you pay for covered health care services after you’ve met your deductible. So instead of a flat fee for medications, you may have a 20% coinsurance charge for some prescriptions. That would mean you’d pay $20 for a prescription your insurance has approved to cost $100 and $80 for a prescription your insurance has approved to cost $400. Like copays, your coinsurance rate might change based on the category of service or whether the provider is in- or out-of-network.
Out-of-pocket maximum: This is the most you could pay for health care expenses within a plan year. After you reach this amount, your insurance plan pays 100% of covered costs for the rest of the plan year. The Affordable Care Act (ACA) limits 2023 out-of-pocket maximums to $9,100 a year for an individual and $18,200 a year for a family.2 This means you won’t pay more than that amount (or a lower amount your insurer sets) for the plan year, even if you keep receiving health services. Note that your premiums don’t count toward your out-of-pocket max.
2. Understand the different types of health insurance plans
During enrollment, you usually get a few kinds of health insurance plans to choose from, such as HMOs and PPOs. Here’s what those mean.
Health maintenance organization (HMO): An HMO is a network of health care providers who have agreed to accept certain levels of payment for the services they provide. This allows the HMO to keep costs consistent for you. After enrolling in an HMO, you need to choose a primary care physician (PCP) because HMOs require referrals from your PCP to see specialists.
Preferred provider organization (PPO): This is the most common health insurance plan employers offer. Similar to an HMO, a PPO offers a network of providers, but PPOs tend to be more flexible than HMOs, with a wider pool of in-network providers. Going to an out-of-network provider may cost you more in a PPO plan.
Point of service (POS): Think of this as partway between an HMO and a PPO. It’s similar to an HMO because some POS plans require you to choose a PCP. In fact, the name “point of service” refers to your PCP being your first stop for health care. It resembles a PPO because you can stray from the provider network—you just might pay a lot to go outside. If your PCP referred you to an out-of-network provider though, you might get a discount. POS premiums tend to cost less than PPOs’, but POS plans offer less flexibility than PPOs.
High-deductible health plan (HDHP): An HDHP, also known as an HSA-eligible health plan, is similar to the plan types mentioned above and will generally have a broad network of providers. HDHPs tend to have lower monthly premiums than non-HDHPs. This means that you’ll pay less every month, but you’ll also have a higher deductible. If you enroll in an HDHP and meet other eligibility criteria, you can pair it with a health savings account (HSA).
Tip: Don’t forget about tax-advantaged ways to save on medical expenses. A health savings account (HSA) is considered a triple tax-advantaged account.3 Because it can be funded with dollars you haven’t paid taxes on yet, HSAs can potentially help you gain tax-free interest and investment returns on funds contributed to the account (provided the money stays in the account), and you don’t have to pay taxes on any funds you withdraw to pay for qualified medical expenses. Your employer might also contribute money to your HSA every year, and the money is yours forever—even if you switch employers or take some time off from work.
That’s not the case for health reimbursement arrangements (HRAs)—which can only be funded by employers—or flexible spending accounts (FSAs), with funds you have to use (or lose) each year. Still, they both allow you to use pre-tax dollars on qualified medical expenses.
3. Review the plans’ networks
As we learned above, health insurance plans have a network of providers that they’ve contracted to offer services at a certain cost. These are your in-network providers; health practitioners outside that network are out-of-network providers, and their services tend to cost more. So make sure you check that doctors you want to visit are in-network before signing up.
Consider, too, the 2 sets of deductibles and out-of-pocket maximums: one for in-network coverage and another for out-of-network coverage. You might be willing to take a smaller set of in-network providers for a lower premium, but factor in the higher deductible and out-of-pocket max for going out of network when you’re crunching numbers if your doctors or health care facilities are not covered.
4. Consider your health needs to estimate your costs
Now that you know plan components, you’re ready to compare costs. Look at premium and copay/coinsurance costs, as well as deductible levels and out-of-pocket maximums. Then, if you’ve had health insurance before, check out how previous health coverage has suited you. Did you meet your deductible? Were some preventive services covered or not before you met the deductible? Did you pay a lot in premiums and barely seek out services? If you didn’t come close to meeting your deductible, and you didn’t need a lot of care, a plan with lower premiums and a higher deductible might be worth considering.
Even if this is your first time choosing health insurance, ask yourself: Does your employer contribute to an HSA if you pick a plan that offers one? That could lead to what’s essentially free money. Or do you want an HSA for its tax advantages? If so, you might want to pick an HDHP that comes with an HSA.
Also ask yourself: Would you rather have a higher premium, and get higher levels of coverage, or a higher deductible? A lower premium and higher deductible might work better if you don’t anticipate getting a lot of care. If, on the other hand, you have a chronic condition or anticipate many health care visits for the plan year, then a lower-deductible health plan might save you money overall. Or if you see your PCP regularly and want a budget-friendly option, an HMO might be for you.
Consult an online health insurance plan calculator to get an idea of costs for each available option and then make your pick. Remember: If you don’t choose the best health insurance plan this time around, you’ll be able to switch in the open enrollment period next year.