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Does health insurance work?

Traditional health insurance requires you to pay a premium to insure against future health-related expenses and to soften the blow of the big medical bills. This operates much like car insurance, where you pay a premium to protect yourself in the event of an accident. Usually with car insurance you have a deductible, an amount of money to pay out-of-pocket before your insurance company will begin to pay for damages.

Health insurance works in much the same way. There are various kinds of health insurance, but they generally work through a claims system. Your doctor provides treatment, and your insurance company receives notice of your claim. The company determines if your insurance policy covers this treatment, and the bill is settled. If any balance remains after the insurance company has paid their portion, then you must pay the remaining bill. This is what all that “Deductible” and “Coinsurance” stuff is all about.

If you go to the doctor, most of the time you pay a fee, regardless of your coverage under health insurance. Some health insurance plans come with a deductible. Others come with a per-use payment called a co-pay. Some come with coinsurance. Most plans come with all of the above: a co-pay, a deductible, and coinsurance. This amount can vary by plan.

A copay is a fee you pay, regardless of the bill or the service you’re having done. This is typically just a flat fee, depending on the type of procedure or the type of doctor you’re seeing. A deductible is the portion of the bill that you’re responsible to pay, up to a certain dollar amount. Once your deductible is met, coinsurance kicks in. You might see that coinsurance is 80% / 20%. This means that after you meet your deductible, your insurance company will step in and pay 80% of every bill. You will be responsible for the remaining 20% of the bill. Then, you can be thankful for the “Maximum Out of Pocket”: after you’ve met the deductible, you’ll pay 20% of every medical bill until you reach the maximum out of pocket. Then you’ll be finished paying medical expenses for the year.

All of these elements are designed to spread the risk among multiple people so no single person or family becomes responsible for 100% of the bill. This is the true definition of insurance: spreading the payments amongst multiple people.

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