How Does Catastrophic Health Insurance Work?

Buying health insurance is complicated because there are lots of different types of plans available.

Some of these plans charge very high premiums but have low deductibles and coinsurance, so they pay for almost all of the care that you need. Others charge lower premiums but have higher deductibles or coinsurance costs, meaning you pay more when you actually get care.

One particular type of plan takes the low premium/limited coverage model to the extreme. This type of plan is called a catastrophic health insurance plan.

Catastrophic health insurance plans are available only to a limited number of consumers. Although the monthly costs of buying coverage can be much lower than for other health insurance plans, the actual coverage you receive is very limited.

Before you decide catastrophic coverage is right for you and your family, make sure you really understand how these plans work and the risks you’re taking on.

On this page:

• What is Catastrophic Health Insurance?
• Who is Catastrophic Health Insurance Ideal For?
• Pros of Catastrophic Health Insurance
• Cons of Catastrophic Health Insurance

What is a Catastrophic Health Insurance Plan?

Catastrophic health insurance, sometimes called emergency health insurance, is intended to only provide coverage in the event of a “catastrophe.”

These policies don’t cover the routine care you need during the year or even treatment for minor illnesses or injuries. They only protect you from devastating financial loss if you experience a very expensive medical problem.

In 2019, catastrophic health insurance plans available on the Affordable Care Act (ACA) Marketplace have deductibles of $7,900. This means you’d be responsible for most healthcare costs you incur until you’ve spent almost $8,000.

The good news is you would be able to get at least a little bit of healthcare covered by your plan before meeting the deductible. That’s because catastrophic plans cover up to three visits with your primary care doctor if your deductible hasn’t been met, and also cover some preventative services — such as cancer screenings — at no added cost.

Catastrophic health insurance plans also have to comply with ACA requirements that mandate coverage for ten essential health benefits, including mental healthcare and maternity care. So once you hit your deductible, you’ll be able to get comprehensive care. The problem is you’ll have to shell out thousands of dollars before hitting that deductible.

The tradeoff is that catastrophic health insurance premiums can be much lower than other plans with lower deductibles. If you don’t go to the doctor much or otherwise get sick or injured, you could end up spending way less over the course of the year than if you’d bought a plan that covered more services.

Who is Catastrophic Health Insurance Ideal For?

Those Under 30 or Those Who Are Eligible for the Hardship Exemption of the ACA

Catastrophic health insurance is not available to everyone. You can only buy catastrophic health insurance if you are under the age of 30, or if you fall into a hardship exemption to the ACA requirement.

Exemptions exist if premiums would take up too large a portion of your income or if you experience certain hardships, such as becoming homeless or suffering domestic violence.

Those Who Aren’t Eligible for Medicaid

If you’re able to qualify for Medicaid, you are better off doing so than buying catastrophic health insurance since Medicaid will provide you with additional coverage with no or low monthly premiums depending upon income.  

Those Eligible for Subsidies to Buy an ACA Plan

Many people are also eligible for subsidies to buy an ACA plan that provides more comprehensive coverage than a catastrophic health plan. Since subsidies cannot be used for catastrophic plans, the more comprehensive plan might cost less if you qualify.

Those Who Would Be Uninsured Without It

If you’re not eligible for Medicaid and more comprehensive plans are still too expensive even with ACA subsidies, buying a catastrophic health insurance plan may make a lot of sense for you. It’s definitely better than being uninsured, which could lead to financial devastation if you fall ill or are seriously injured.

Pros of Catastrophic Health Insurance

Catastrophic health insurance plans have some definite advantages:

• Premiums are typically much lower than for other types of health insurance.
• Your coverage provides a financial safety net to protect you from devastating loss.
• If you’re relatively healthy and use little medical services, you may pay less overall for insurance and care.

Consider your health status when deciding if a catastrophic plan is the right choice. If you’re pretty healthy, a catastrophic plan can be a great option, especially if you have an emergency fund available to cover care you need up to the cost of your deductible.

Cons of Catastrophic Health Insurance

Unfortunately, there are also big downsides to catastrophic health insurance plans:

• Your medical coverage will have limited utility since you’ll only get coverage for preventative care, a few primary care visits, and very expensive care.
• Your deductible is very high, so you’ll need to come up with a lot of money if you need healthcare services. This creates a big risk.
• You can’t qualify for ACA subsidies to help pay premiums.
• You cannot have a health savings account (HSA) like you can with other qualifying high deductible health plans. An HSA allows you to put away pre-tax funds to pay for healthcare.

If you’re going to have a baby or otherwise anticipate needing lots of medical care during the year, a catastrophic plan isn’t the right choice for you.

Bottom Line

Catastrophic insurance plans are a unique type of plan designed for healthy people who want to pay minimal premiums for limited coverage. Although these plans protect you from catastrophic loss, you’ll need to pay for much of your medical care yourself if you choose one.

Be sure to consider your health status, budget, and all insurance options available to you before deciding whether a catastrophic plan is right for you.