What Is a Simple Explanation of How Health Insurance Works?

Health insurance is basically a contract, written in the form of a policy, in which consumers agree to make monthly payments in exchange for insurance companies agreeing to pay for things such as doctor and hospital visits if policyholders get ill, notes Lee Ann Obringer and Melissa Jeffries for HowStuffWorks. The monthly payments made by consumers are called premiums. Some insurance policies also cover expenses related to prevention of health problems and pay for visits such as annual physicals.

When companies issue health insurance policies, they assume they will take in more money through premium collections than they will pay out to customers, states Obringer and Jeffries. Health insurance policies may include a breakdown of how much insurance companies pay and how much policyholders pay by specifying co-payments. Co-payments are the amount a policyholder pays for visits. For example, a policy may specify a patient pays $30 for a single visit, while his insurance company pays the rest.

Health insurance policies may also contain deductibles, which are minimum amounts that bills must reach before insurance companies contribute toward payments, according to Obringer and Jeffries. If a patient has a $100 deductible and his doctor bill is $90, the insurance company does not contribute toward the bill. Insurance companies may also offer health insurance policies that include maximum amounts they are willing to pay toward medical bills. People can get health insurance through their jobs if their employers offer coverage or purchase coverage on their own. Different types of health insurance policies are available that cover individuals, spouses and children, and other dependents.