Health Insurance Basics
Understanding the fundamentals of how health insurance works, what coverage means, and how costs are shared between you and your insurance company.
Health insurance can feel overwhelming if you're new to it—or even if you've had coverage for years. This page breaks down the fundamentals: what health insurance actually is, how it works, and the key concepts you need to understand your mental health benefits.
Think of this as your foundation. Once you understand these basics, navigating terms like "deductible" and "coinsurance" or figuring out what you'll pay for therapy becomes much easier.
What Is Health Insurance?
The basic contract concept and how risk pooling protects you
At its core, health insurance is a contract between you (or your employer on your behalf) and an insurance company. You agree to pay a regular monthly fee called a premium, and in exchange, the insurance company agrees to pay a portion of your covered medical expenses when you need care.
This arrangement is built on the principle of risk pooling. Many people pay premiums into a shared pool of money. Most people in any given year will use relatively little healthcare, while a smaller number will have high-cost needs—hospitalizations, surgeries, chronic conditions, or intensive treatment. By spreading costs across everyone, insurance protects you from financial catastrophe when unexpected or serious health events occur.
The Three-Party Relationship
When you use health insurance, three parties are involved:
- 1. You (the patient/member): You receive care and pay your share of costs (premium, deductible, copay, coinsurance).
- 2. The insurance company (the payer): They process claims, negotiate rates with providers, and pay their portion of covered services.
- 3. The healthcare provider: Your therapist, doctor, hospital, or facility provides the care and bills for services.
Understanding this three-way dynamic helps clarify why billing can feel complicated—your provider submits a claim to your insurance, the insurance processes it and pays their share, and then you're billed for your portion.
What You Get in Exchange for Premiums
Your monthly premium buys you:
- • Access to negotiated rates: Insurance companies negotiate discounts with in-network providers, so your cost is based on the lower "allowed amount," not the provider's full sticker price.
- • Cost-sharing protections: Instead of paying 100% of every bill, you pay a portion (copay, coinsurance, deductible) and the plan covers the rest.
- • Out-of-pocket limits: After you reach your annual out-of-pocket maximum, the plan covers 100% of covered in-network services for the rest of the year.
- • Preventive care: Most plans cover certain preventive services (like annual checkups and screenings) at 100% with no cost-sharing.
How Insurance Coverage Works
What it means for a service to be "covered" and how networks affect your costs
What Does "Covered" Mean?
When a service is covered, it means your insurance plan agrees to pay for part (or in some cases, all) of the cost under the terms of your plan. Covered does not mean free—it means the insurance company shares the cost with you according to your plan's rules.
You'll still pay your portion, which could be:
- • Before your deductible is met: You pay the full allowed amount (the negotiated rate) until you've spent enough to meet your deductible.
- • After your deductible is met: You pay your copay (fixed amount) or coinsurance (percentage of the allowed amount).
- • After you hit your out-of-pocket max: The plan pays 100% of covered services for the rest of the plan year.
Covered vs Excluded Services
Every plan has a list of excluded services— things the plan does not cover at all. If you receive an excluded service, you pay 100% of the cost yourself, and those charges don't count toward your deductible or out-of-pocket max.
Examples of services that might be excluded: couples counseling (on some plans), life coaching, non-evidence-based treatments, cosmetic procedures. Always check your plan's Summary of Benefits and Coverage (SBC) or Evidence of Coverage (EOC) to see what's excluded.
In-Network vs Out-of-Network
Insurance companies create networks—groups of providers who have signed contracts agreeing to accept negotiated rates for their services. Whether a provider is in-network or out-of-network dramatically affects your costs.
| Aspect | In-Network | Out-of-Network |
|---|---|---|
| Cost-sharing | Lower (e.g., $30 copay or 20% coinsurance) | Higher (e.g., 50% coinsurance, separate deductible) |
| Provider billing | Provider bills insurance directly | May require you to file claims |
| Balance billing | Generally not allowed for covered services | Provider can bill you for the difference |
| Coverage | All plan types cover | HMO/EPO often don't cover (except emergencies) |
Key takeaway: Always verify whether your provider is in-network for your specific plan. Even if a provider is in-network with one plan from a carrier (e.g., CareFirst commercial), they may not be in-network with all plans that carrier offers (e.g., CareFirst Medicare Advantage). Learn more about out-of-network benefits →
The Role of Medical Necessity
For a service to be covered, it typically must be medically necessary—meaning it's needed to diagnose, treat, or manage an illness or condition and meets accepted medical standards. Insurance companies may deny claims if they determine a service isn't medically necessary.
For mental health therapy, medical necessity is often based on:
- • Diagnosis and symptom severity
- • Level of impairment (work, school, relationships)
- • Treatment history and current symptoms
- • Safety concerns or risk factors
Understanding Your Plan Year
Why the calendar matters for your insurance costs
Your insurance operates on a plan year (also called a benefit period)—a 12-month cycle that determines when your benefits, deductibles, and out-of-pocket costs reset. Most plans use a calendar year (January 1 – December 31), but some employer plans use a different cycle (e.g., July 1 – June 30).
Why the Plan Year Matters
- • Your deductible resets: At the start of each plan year, your deductible goes back to $0. Any amount you paid toward your deductible last year doesn't carry over.
- • Out-of-pocket max resets: Similarly, your out-of-pocket maximum resets annually. If you hit your max in November, it resets in January.
- • Benefits and costs may change: Your employer or insurance carrier can change premiums, deductibles, copays, covered services, and network providers when the plan renews each year.
- • Benefit limits restart: Some plans have annual limits on certain services (though mental health visit limits are often illegal under parity laws). These limits reset with the plan year.
Late-Year Considerations
If you're starting therapy late in the year (November or December), you may want to consider timing:
- • If you've already met your deductible, therapy sessions may be less expensive now than they will be in January when the deductible resets.
- • If you haven't met your deductible and don't expect to, you'll be paying the full allowed amount regardless of when you start.
- • If you've hit your out-of-pocket max, your therapy is covered at 100% for the rest of the year—but will reset in January.
Open Enrollment Basics
Open enrollment is the annual period when you can sign up for health insurance, change plans, or drop coverage. Outside this window, you generally can't make changes unless you qualify for a Special Enrollment Period due to a life event (losing coverage, moving, marriage, birth/adoption, etc.).
- • Marketplace plans: Typically November 1 – January 15
- • Employer plans: Set by your employer (often in the fall)
- • Medicare: October 15 – December 7 (for changes effective January 1)
Coverage Categories
How plans organize different types of healthcare services
Most health insurance plans categorize services into different groups, each with its own cost-sharing structure. Common categories include:
Services designed to prevent illness or detect conditions early. Under the Affordable Care Act, most plans must cover preventive care at 100% with no cost-sharing when you see an in-network provider.
Examples: Annual physical exams, immunizations, certain cancer screenings, well-child visits, and some mental health screenings (like depression screening).
Visits to your primary care physician (PCP) or general practitioner for non-preventive care. Often has a lower copay than specialist visits.
Example cost-sharing: $25 copay per visit after deductible (or before, depending on plan).
Visits to specialists—providers who focus on a specific area of medicine. Mental health providers (therapists, psychologists, psychiatrists) typically fall into this category.
Example cost-sharing: $40 copay or 20% coinsurance per visit after deductible.
Care received in an emergency department (ED) for true emergencies. Under federal law, emergency services must be covered even if the hospital is out-of-network, and you can't be charged more than in-network cost-sharing.
Example cost-sharing: $500 copay per ED visit (waived if admitted to hospital).
Inpatient care when you're admitted to a hospital. This is where high deductibles and out-of-pocket limits really come into play, as hospital stays are expensive.
Example cost-sharing: 20% coinsurance after deductible; plan pays 80%.
Medications prescribed by your provider. Most plans have a multi-tier system (generic, preferred brand, non-preferred brand, specialty) with different copays or coinsurance for each tier.
Example cost-sharing: $10 generic / $40 preferred brand / $80 non-preferred brand.
Outpatient therapy, counseling, psychological testing, psychiatry, and substance use disorder treatment. Under federal parity laws, these benefits must generally be comparable to medical/surgical benefits.
Example cost-sharing: Same as specialist visits—$40 copay or 20% coinsurance. Learn more about mental health coverage →
Essential Health Benefits
Under the Affordable Care Act, most individual and small group plans must cover 10 categories of "Essential Health Benefits," including:
- • Ambulatory patient services
- • Emergency services
- • Hospitalization
- • Maternity and newborn care
- • Mental health and substance abuse
- • Prescription drugs
- • Rehabilitative services
- • Laboratory services
- • Preventive and wellness services
- • Pediatric services (including dental/vision)
Large employer plans are not required to cover all EHBs, though most do. Self-funded plans and grandfathered plans may have different coverage requirements.
Your Insurance Card
Understanding what each element means and why you need it at every visit
Your insurance card is your key to accessing healthcare. It contains critical information your provider needs to verify your coverage and submit claims. Here's what you'll typically find on it:
Member ID
Your unique identifier in the insurance company's system. This is how they look up your coverage and benefits. Always provide this when calling your insurance or visiting a provider.
Group Number
Identifies your employer or plan sponsor and the specific plan design. Two people with the same carrier but different group numbers have different benefits.
Plan Name / Network Name
Indicates your plan type (PPO, HMO, etc.) and which provider network applies. This tells providers which fee schedule and network to use.
Copay Amounts
Many cards list copays for different service types (e.g., "PCP: $25, Spec: $40, ER: $500"). This gives you a quick reference, but it's not comprehensive—always verify your full benefits.
Phone Numbers
Typically includes Member Services (for general questions), Prior Authorization (if required for certain services), and often a separate Behavioral Health line for mental health benefits.
Rx Information (BIN, PCN, Rx Group)
Used by pharmacies to process your prescription drug claims. Often managed by a pharmacy benefit manager (PBM) like CVS Caremark or Express Scripts.
Digital Insurance Cards
Most insurance companies now offer digital cards through their mobile apps. These function exactly like physical cards and are accepted by providers. Benefits of digital cards:
- • Always accessible on your phone (no risk of forgetting it)
- • Automatically updated when plan information changes
- • Easy to share with providers electronically
Download your insurance company's app to access your digital card, view benefits, track claims, and more.
Why you need your card at every visit: Providers use the information on your card to verify your active coverage, confirm you're seeing an in-network provider, and submit claims correctly. Even if you've been to the same provider before, always bring your card—insurance information can change.
Provider Networks
What networks are, why they exist, and how they affect your costs
What Is a Provider Network?
A provider network is a group of doctors, therapists, hospitals, and other healthcare providers who have signed contracts with a health insurance company. Under these contracts, providers agree to:
- • Accept negotiated rates (also called "allowed amounts") for their services, which are typically lower than their standard fees
- • Follow the plan's rules for billing, prior authorization, and quality standards
- • Not "balance bill" patients for the difference between their standard fee and the allowed amount for covered services
Why Do Networks Exist?
Networks exist because they benefit both insurance companies and patients:
- • Lower costs: By negotiating discounted rates with large groups of providers, insurers can offer lower premiums and cost-sharing to members.
- • Predictable expenses: Contracted rates mean you know what you'll owe (your copay or coinsurance) rather than facing unpredictable bills.
- • Quality standards: Networks often require providers to meet certain credentialing and quality benchmarks.
How Negotiated Rates Work
Here's a real-world example of how in-network rates reduce your costs:
Scenario: 60-minute therapy session
- • Therapist's standard fee (what they charge self-pay clients): $180
- • In-network negotiated rate (allowed amount): $145
- • Your plan's coinsurance: 20%
- • You pay: 20% of $145 = $29
- • Insurance pays: 80% of $145 = $116
- • Provider writes off: $180 - $145 = $35 (difference between standard fee and allowed amount)
Without insurance, you'd pay the full $180. With in-network coverage, you pay just $29—even though the actual cost of the service is $145 (the allowed amount).
Finding In-Network Providers
To find providers in your network, use your insurance company's online provider directory or call Member Services. When searching:
- • Enter your specific plan name, not just the carrier
- • Filter by specialty (e.g., "Licensed Clinical Social Worker," "Psychologist")
- • Confirm the provider is accepting new patients and participates with your plan
- • Always verify directly with the provider before your first appointment—directories are often out of date
Different Network Types
Some insurance plans use multiple network tiers, each with different cost-sharing:
- • Tier 1 (preferred): Lowest cost-sharing (e.g., $25 copay)
- • Tier 2 (standard): Moderate cost-sharing (e.g., $40 copay)
- • Out-of-network: Highest cost-sharing or no coverage
Ask your provider which tier they're in, not just whether they're "in-network." Learn more about plan types and networks →
How Costs Are Shared
Understanding the building blocks of your healthcare expenses
Health insurance doesn't pay 100% of your healthcare costs (except for preventive care and once you hit your out-of-pocket max). Instead, costs are shared between you and the insurance company through several mechanisms. Think of these as a "cost ladder"—each rung represents a different way you contribute financially.
Premium
The fixed monthly amount you (or your employer) pay to maintain your insurance coverage, regardless of whether you use healthcare services. This is separate from what you pay when you actually receive care.
Deductible
The amount you must pay out-of-pocket for covered services before your insurance starts sharing costs. Deductibles reset annually with your plan year. Some plans have separate individual and family deductibles, or separate medical and prescription deductibles.
Copayment (Copay)
A fixed dollar amount you pay for certain covered services (e.g., $30 per therapy session). Copays are typically due at the time of service. Some plans waive copays for preventive care or charge different copays for different service types.
Coinsurance
Your share of costs as a percentage of the allowed amount (e.g., 20%), paid after you meet your deductible. Unlike copays, coinsurance amounts vary based on the total cost of the service. For example, 20% coinsurance on a $150 session = $30; on a $200 session = $40.
Out-of-Pocket Maximum
The most you'll pay for covered in-network services in a plan year. After you reach this amount, your plan pays 100% of covered services for the rest of the year. Includes: deductibles, copays, and coinsurance. Does NOT include: premiums, balance-billed amounts, or non-covered services.
The Concept of Allowed Amount
The allowed amount (also called "negotiated rate" or "maximum allowable charge") is the maximum your plan will consider paying for a covered service from an in-network provider.
Your cost-sharing (copay or coinsurance) is always based on the allowed amount, not the provider's standard fee. For in-network care, the provider agrees to accept the allowed amount as payment in full (after you pay your share), so you never owe more than your copay or coinsurance.
Understanding these components helps you predict your costs and make informed decisions about your care. For a detailed breakdown of how these elements work together—with real therapy cost examples—visit our Understanding Your Costs page.