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What is Health Insurance

Health insurance is a contract that requires an insurer to pay some or all of a person’s healthcare costs in exchange for a premium. More specifically, health insurance typically pays for medical, surgical, prescription drug, and sometimes dental expenses incurred by the insured. Health insurance can reimburse the insured for expenses incurred from illness or injury, or pay the care provider directly.

It is often included in employer benefit packages as a means of enticing quality employees, with premiums partially covered by the employer but often also deducted from employee paychecks. The cost of health insurance premiums is deductible to the payer, and the benefits received are tax-free, with certain exceptions for S corporation employees.

How Health Insurance Works

Health care is expensive. Health care costs are increasing every year. Without health insurance it would be difficult for most people to afford their health care bills.

Health insurance is a way for people to:

  • Protect themselves from extreme financial medical care costs if they become severely ill
  • Ensure that they have access to health care when they need it

There are two types of health insurance:

  • Taxpayer-funded: funded by federal and state taxes; examples are Medicare, Medicaid and Children’s Health Insurance Program (CHIP)
  • Private-funded: provided primarily through employer-sponsored plans; examples are Blue Cross and Blue Shield plans, non-Blue commercial plans, HMOs and self-funded employer plans

Taxpayer-funded health insurers are funded by state and federal taxes. Examples include:

  • Medicare
  • Medicaid
  • CHIP
  • Federal/state employee health plans
  • Veterans Health Administration (VHA)

Private health insurance is primarily funded through benefits plans provided by employers.

  • 160 million individuals are insured through employer-sponsored health insurance
  • About 15 million individuals buy health insurance on their own

Examples include:

  • Blue Cross and Blue Shield health insurance companies
  • Non-Blue commercial health insurance companies
  • Health Maintenance Organizations (HMOs)
  • Self-funded employer-sponsored benefit plans
  • To receive health insurance, employees choose to participate in their employer-sponsored plan. They pay a premium. In return, they receive an insurance card that gives them access to the doctors, hospitals and other health care providers that are part of the insu



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