It may be purchased on a group basis (e.g., by a firm to cover its employees) or purchased by an individual. In each case, the covered groups or individuals pay premiums to help protect themselves from unexpected healthcare expenses. By estimating the overall risk of healthcare expenses, a routine finance structure (such as a monthly or annual premium) can be developed, ensuring that money is available to pay for the healthcare benefits specified in the insurance agreement. The benefit is administered by a central organization such as a government agency, private business, or not-for-profit entity

How it works

A health insurance policy is a contract between an insurance company and an individual or his sponsor (e.g. an employer). The contract can be renewable annually. The type and amount of health care costs that will be covered by the health insurance company are specified in advance, in the member contract or "Evidence of Coverage" booklet. The individual insured person's obligations may take several forms:

• Premium: The amount the policy-holder or his sponsor (e.g. an employer) pays to the health plan to purchase health coverage.
  
• Deductible: The amount that the insured must pay out-of-pocket before the health insurer pays its share. For example, a policy-holder might have to pay a $500 deductible per year, before any of their health care is covered by the health insurer. It may take several doctor's visits or prescription refills before the insured person reaches the deductible and the insurance company starts to pay for care.  Some companies manage deductible by illness, which means if you get sick of a long term sickness, you’ll pay only one deductible lifetime for that specific illness.   If you have two or more illness trough life, you pay one deductible per illness one time.
  
• Coinsurance: The co-insurance is a percentage of the total cost that insured person may also pay. For example, the member might have to pay 10% or 20% of the cost of a surgery, while the insurance company pays the other 90% or 80%. If there is an upper limit on coinsurance, the policy-holder could end up owing very little, or a great deal, depending on the actual costs of the services they obtain.
  
• Exclusions: Not all services are covered. The insured person is generally expected to pay the full cost of non-covered services out of their own pocket.
  
• Coverage limits: Some health insurance policies only pay for health care up to a certain dollar amount. The insured person may be expected to pay any charges in excess of the health plan's maximum payment for a specific service. In addition, some insurance company schemes have annual or lifetime coverage maximums. In these cases, the health plan will stop payment when they reach the benefit maximum, and the policy-holder must pay all remaining costs.   Many insurance carriers even have no limit on the insured amount for many of their plans.
  
• In-Network Provider: A health care provider on a list of providers preselected by the insurer. The insurer will offer discounted coinsurance or co-payments, or additional benefits, to a plan member to see an in-network provider. Generally, providers in network are providers who have a contract with the insurer to accept rates further discounted from the "usual and customary" charges the insurer pays to out-of-network providers.
  
• Prior Authorization: A certification or authorization that an insurer provides prior to medical service occurring. Obtaining an authorization means that the insurer is obligated to pay for the service, assuming it matches what was authorized.
  
• Explanation of Benefits: A document sent by an insurer to a patient explaining what was covered for a medical service, and how they arrived at the payment amount and patient responsibility amount.