What to Know Before You Buy Health Insurance

African American doctor with face mask examining boy's throat during a home visit.

HMOs, PPOs, deductibles and copays—wading through the details of health insurance plans might have you reaching for the aspirin. Fortunately, focusing on a few key factors can help simplify the process of choosing health insurance. Before purchasing a health insurance plan, it's important to keep a few things in mind, including: the different types of health insurance plans and networks, the out-of-pocket costs for which you'll be responsible, and open enrollment periods for coverage.

Know Where and When You'll Need to Enroll

Most people get their health insurance through an employer, but you can't just sign up anytime. If you're starting a new job, you may be offered health insurance immediately, but some employers make new employees wait as long as 90 days before they can enroll. Employees who've been with the company for longer than that will have to wait for the company's health care enrollment period before they can enroll in health insurance coverage or make changes to an existing plan. Health insurance open enrollment for employer-sponsored plans can vary depending on the employer, but it generally takes place in the fall.

Find out when your employer's open enrollment takes place so you can be sure to make any changes, such as switching from one type of plan to another.

If you are unemployed or your employer doesn't provide health insurance, you can buy coverage on your state's marketplace, accessible through Healthcare.gov, or directly from an insurance company or agent. Check with your state's marketplace to confirm the open enrollment dates. Open enrollment for plans sold on the health insurance exchange at Healthcare.gov generally runs from mid-November to mid-December. Due to COVID-19, however, most states are reopening their enrollment period for three extra months, from February 15 to May 15.

What if you need health insurance but you missed open enrollment? Generally, you must have a "qualifying event" to enroll in a health insurance plan through your employer or the marketplace. The most common qualifying events include:

  • Involuntarily losing coverage, such as by losing your job. (Voluntarily canceling your insurance doesn't count as a qualifying event.)
  • Gaining a dependent, such as having or adopting a child
  • Getting married
  • Getting divorced
  • Becoming a U.S. citizen or lawful resident
  • Moving permanently
  • Having a change to your income that affects your eligibility for premium tax credits or cost-sharing subsidies on the marketplace
  • Your employer-sponsored health insurance becomes unaffordable or no longer provides minimum value
  • You gain access to a Qualified Small Employer Health Reimbursement Account (QSEHRA) or Individual Coverage Health Reimbursement Arrangement (HRA)

Qualifying events can be complicated and vary from state to state; check with your employer or visit your state's marketplace to confirm what is considered a qualifying event. In most cases, you'll need to provide proof of the qualifying event, such as your marriage license or your new baby's birth certificate.

Understand the Types of Health Insurance Plans and Networks

Your health insurance premiums and out-of-pocket costs can vary widely depending on the kind of health insurance plan you choose. There are four broad types of plans, and each one manages your care to a greater or lesser degree.

  • Health Maintenance Organization (HMO): In this type of plan, you'll browse your HMO's provider network to choose a primary care physician (PCP) who coordinates your medical care. If you need to see a specialist, for example, you'll first have to get a referral from your PCP and preapproval from your insurance company. Except for emergency services, you must see providers within the HMO network in order for care to be covered by insurance.
  • Exclusive Provider Organization (EPO): As with an HMO, services with an EPO are covered only if you use providers within the plan's network (with an exception for emergency services). However, you typically don't need to choose a PCP and can visit any doctor, specialist or hospital you want without a referral as long as you stay in-network.
  • Point-of-Service (POS): With this type of plan, you generally choose a PCP from within the network and need referrals from that provider to see specialists. Unlike an HMO or EPO, you may be able to get referred to specialists outside the network and receive limited benefits for their services; however, services from in-network providers are covered at a higher rate.
  • Preferred Provider Organization (PPO): The most flexible kind of health insurance plan, PPOs generally don't require a PCP and give you the option to see any doctor or specialist you like, inside or outside the plan's network of preferred providers. You don't usually need a referral to a specialist, although you may need preapproval from your insurance company. You'll pay less if you use providers within the PPO network, but care from out-of-network providers is often covered to some degree. PPOs give you more control over your care, but typically charge higher premiums than HMO, EPO or POS plans.

Even within the same type of health insurance plan, benefits can vary greatly, so be sure to read the details of a specific plan carefully before making a decision. If you want to see specific doctors, contact the doctors to confirm they accept the plan you're considering. Need to take ongoing medications? Find out if the plan covers those prescriptions before you enroll.

Additionally, plans within the marketplace are broken up into four "metal" categories that differ in terms of the level of coverage you'll receive: Platinum, Gold, Silver and Bronze. Lower-tier plans, such as Bronze and Silver, can save you a lot on your monthly premium but you'll be responsible for paying more out of pocket when and if you do need to use your coverage.

If you missed the enrollment period for health insurance or don't qualify for marketplace subsidies and can't afford the full premiums, you may want to consider a short-term health insurance plan. These plans typically have low premiums and offer coverage that takes effect right away, with no waiting period. Despite their name, you may be able to renew short-term health insurance for as long as 36 months, depending on your state's regulations.

However, short-term health insurance has some important limitations to be aware of. It usually does not cover pre-existing conditions, and may not cover routine exams or preventative care, maternity visits, mental health care or prescriptions. As a result, short-term health insurance is best used as a stopgap measure, rather than a long-term health care solution.

Compare Out-Of-Pocket Costs

For most of us, cost is a key concern when purchasing health insurance. To get the most for your money, be sure to consider the following out-of-pocket costs when comparing different plans.

  • Co-insurance: When a health insurance plan has co-insurance, the insurance company pays a certain percentage of your medical costs, and you pay the rest. Co-insurance is the amount you're responsible for, so in a plan with 10% coinsurance, you pay 10% of your health care costs and the insurance company pays 90%.
  • Copayments: Copays are flat fees you pay when you receive health care services; with your insurance company handling the remainder of the bill. For example, if a doctor visit costs $120 and your copay for a doctor visit is $20, you pay $20 and the insurance company covers the other $100. Health insurance plans generally have different copays for different types of care, such as office visits, emergency room visits or visits to specialists.
  • Deductibles: Some plans require you to pay out of pocket until you hit a set amount called the annual deductible before insurance coverage for your health care expenses kicks in. In most cases, there is one deductible for prescriptions and a separate deductible for health care. Often, certain health care services, such as preventive or maternity care, are not subject to the deductible.
  • Out-of-pocket maximum: Insurance plans set limits on the amount individuals and families must pay out of pocket each year for copays, coinsurance and deductibles. Once you reach your out-of-pocket maximum, the insurance company covers all of your medical costs for the rest of the plan year.

Just as with car insurance or homeowners insurance, health insurance premiums are the monthly fee you pay for coverage. If you get health insurance through your employer, the employer typically covers the lion's share of the premiums. If you get your insurance from the marketplace, you may be eligible for premium tax credits that drastically reduce your premium costs—in some cases, to nothing.

Consider a Health Care Savings Plan

Looking for ways to save on health insurance? You may be able to reduce the cost of premiums and health care by setting up a health care savings plan. There are two types of plans available: HSAs and HRAs.

A health savings account (HSA) can be used to set aside pre-tax money you will use for qualified health care costs, such as copayments, coinsurance, medication and medical procedures. You must have a high deductible health plan (HDHP) to qualify for an HSA.

You may have access to an HSA through your job; if not, you can set up your own. For 2021, the maximum annual HSA contribution limit is $3,600 if you have individual coverage and $7,200 if you have family coverage. Because HSA contributions are deductible on your federal income tax, they may reduce your income enough to qualify you for marketplace tax credits and subsidies. Some employers contribute to their employees' HSAs, which can lower your health care costs even more.

A health reimbursement arrangement (HRA) is an account your employer opens for you. The employer contributes to your account; you can use the money for qualified health care costs, tax-free. There's no contribution limit, but you can't put money in the account yourself, so you'll be limited by how much your employer decides to contribute. And since your employer owns the HRA, you'll lose any money in the account if you lose or leave your job.

Make the Right Choice

Buying health insurance may not be as exciting as shopping for a new car, but it's an important purchase that can help ensure an unexpected illness, accident or surgery doesn't leave you with a massive medical bill. Unpaid medical debt can damage your credit score if it's sent to a debt collector, potentially making it harder to qualify for loans or credit cards in the future. Choosing the right health insurance for your needs can help keep both your body and your bank account in good shape.