Health insurance jargon exists to confuse you. Or at least it feels that way when you’re staring at a plan comparison chart trying to figure out the difference between an HMO and a PPO, or whether a $3,000 deductible with a $200 premium is better than a $1,000 deductible with a $400 premium. Here’s how to make sense of it.
The four numbers that define every health plan
Every health insurance plan boils down to four numbers:
- Premium: what you pay monthly to have the plan. This comes out of your paycheck or bank account whether you use the plan or not.
- Deductible: what you pay out of pocket before insurance starts covering things. A $2,000 deductible means you pay the first $2,000 of medical costs yourself.
- Copays/coinsurance: what you pay after meeting your deductible. A copay is a flat fee ($30 per doctor visit). Coinsurance is a percentage (you pay 20%, insurance pays 80%).
- Out-of-pocket maximum: the most you’ll pay in a year. After hitting this number, insurance covers 100%. For 2025, the federal limit is $9,200 for an individual.
The out-of-pocket maximum is the number that matters most for catastrophic scenarios. If you’re hospitalized for a week, your total cost for the year is capped at that number regardless of the total bill.
HMO vs. PPO vs. HDHP
HMO (Health Maintenance Organization): you pick a primary care doctor who coordinates your care. You need referrals to see specialists. You generally can’t go out of network except in emergencies. Premiums are lower, but flexibility is limited.
PPO (Preferred Provider Organization): you can see any doctor in the network without a referral and go out of network at a higher cost. More flexibility, higher premiums. If you want to choose your own specialists without asking permission, PPO is the way to go.
HDHP (High Deductible Health Plan): lower premiums but higher deductibles (at least $1,650 for individuals in 2025). These pair with Health Savings Accounts (HSAs), which let you save money tax-free for medical expenses. If you’re generally healthy and don’t expect many doctor visits, an HDHP with an HSA can save significant money over time.
HSAs are the best tax deal most people ignore
A Health Savings Account is available only with an HDHP. The tax benefits are triple:
- Contributions are tax-deductible (or pre-tax through your employer).
- The money grows tax-free.
- Withdrawals for qualified medical expenses are tax-free.
No other account type offers all three. In 2025, you can contribute up to $4,300 as an individual or $8,550 for a family. The money rolls over year to year. There’s no “use it or lose it” rule like with FSAs.
If you can afford to pay current medical costs out of pocket and let your HSA grow, it becomes a powerful retirement account. After age 65, you can withdraw for any purpose (not just medical) and pay ordinary income tax, just like a traditional IRA.
How to pick a plan during open enrollment
Estimate your expected medical usage for the coming year. If you’re healthy and rarely visit the doctor, a high-deductible plan with lower premiums and an HSA usually wins on total cost. If you have ongoing conditions, take regular medications, or are planning a surgery, a plan with higher premiums but lower deductibles and copays may cost less overall.
Run the math on total annual cost: (monthly premium x 12) + expected deductible costs + expected copays/coinsurance. Compare that total across plans, not just the monthly premium.
Don’t forget prescription drug coverage
Check each plan’s formulary, which is the list of drugs the plan covers. If you take a medication regularly, make sure it’s covered and check which tier it falls in. A drug that costs $15 per month on one plan might cost $60 on another because of different formulary tiers.
What to do if you don’t have employer coverage
The Health Insurance Marketplace (healthcare.gov) offers plans during open enrollment, typically November through mid-January. Subsidies based on income can significantly reduce your premium. A household earning $50,000 might qualify for hundreds of dollars per month in premium tax credits.
If you miss open enrollment, qualifying life events (losing other coverage, getting married, having a baby, moving) open a special enrollment period of 60 days.
Medicaid covers individuals and families below certain income thresholds, which vary by state. If your income is near the poverty line, check your state’s Medicaid eligibility before buying a marketplace plan.
Health insurance is confusing by design, but the actual decisions come down to math. Estimate your costs under each plan option, factor in HSA benefits if applicable, and pick the plan with the lowest total expected cost for your situation.