Top Ten Terms You Should Know About Health Insurance
Have you ever gotten a medical bill or health insurance statement in the mail and weren’t quite sure what all the jargon meant?
Have you ever been in open enrollment at work (the time to enroll in a new health insurance plan if you so choose) and you didn’t understand the details of the different plans?
Well, I have. Health insurance and its associated terms can be very confusing and difficult to understand. The only way I learned how to interpret the language of health insurance was to research every individual term and try to figure out what it meant. And I’m a physician for crying out loud.
The goal of this post is to save you the work of looking all these terms up yourself and review what I feel are the top ten terms you should know about health insurance.
Before we dive into the top ten terms, it is important to understand what health insurance is, and what it is not.
Health Insurance is insurance that helps cover the costs of medical and/or surgical expenses when you are sick or injured, or to prevent you from becoming sick or injured. It is one of the most important types of insurance you need to have, and as such, it is imperative that you have a basic understanding of it, what it covers, and what you are paying for it.
Health insurance is not life insurance. There are many different forms of life insurance, but at its most basic level life insurance pays a cash benefit to someone designated in your policy (the beneficiary) if you die. Health insurance does NOT do this.
Health insurance is not disability insurance. Disability insurance pays you a regular amount of money if you become disabled (unable to work). Some people mistakenly believe that if a medical condition makes it so they can’t work, they will be alright because it is a medical condition and they have health insurance. This is NOT the case. Health insurance will only pay for the medically related expenses for the associated condition, it will NOT give you money to live on.
With that, here are the top ten terms I think you should know about health insurance to be financially literate. You may notice that one very important term, the Health Savings Account (HSA), is not on this list. This is because I’ll be writing a whole post on HSAs in the near future.
The first five terms are important to understand when determining how much your health insurance will cost you. The next five terms outline the basic types of plans that are available to help you determine which type might be best for you.
Premium
Your premium is the amount that you pay to an insurance company on a regular basis, usually monthly, to maintain your coverage. Most people are familiar with this term since it is common to most kinds of insurance, including health insurance, and it is a regular payment most people make. For those with employer sponsored health insurance plans, your employer will often cover a large portion of your premium payments, and is one of the greatest benefits of being employed. Most people consider the premium payment the major cost of health insurance. However, the costs of health insurance come in a number of different forms, so be sure to review the other terms below because they are also a significant part of the total cost.
Deductible
Your deductible is the amount of money you pay annually for covered health services BEFORE your health insurance company starts to pay a portion of these expenses. For example, if your plan has a $2,500 deductible, you will have to pay this amount out of pocket before the insurance company will start to pay some of your bills. This means if your health care costs are only $2,000 during the year, you will be responsible to pay all of this on your own, even though you have heath insurance.
The amount you have paid toward your deductible usually resets every calendar year. When you hear the term “I’ve met my deductible” it means that a person has paid the full amount of their deductible for the year and their health insurance will help cover the costs of any future covered expenses for the rest of that calendar year.
There is a broad range in the amount of the deductible from plan to plan, and typically there is an inverse relationship between the amount of the annual deductible and the monthly premium payment. What this means is that health insurance plans with a lower deductible typically have a higher monthly premium payment. Conversely, plans with a higher deductible typically have a lower monthly premium.
The exception to all of this are preventive health services. In accordance with the Affordable Care Act (Obamacare), most health care plans are required to cover many preventive health services at no cost to the insured. This means that you DO NOT have to pay a co-payment, co-insurance, or meet your deductible to have these services completely covered by your health insurance. Common preventive health services that fall under this coverage include an annual physical exam, well-child check ups, immunizations, and screening tests for certain diseases such as common cancers, type 2 diabetes, and depression.
Copayment
A copayment or copay is a fee you may be required to pay each time you access a certain service. These are usually a fixed dollar amount associated with a specific service. For example, you may have a $25 copay every time you see your primary care provider, a $50 copay when you see a specialist, and a $10 copay when you fill a prescription. This, of course, varies from company to company and between policy types.
Insurance companies also vary on whether or not your cumulative copayments are applied to meeting your deductible for the year. Likewise, there is variation on whether or not co-payments are included as contributions to your out of pocket maximum for the year. To figure this out, you’ll either have to read the fine print in your policy or speak to your health insurance company.
Coinsurance
OK, after you have met your deductible for the year, the insurance company is going to start paying all of your medical bills, right? Wrong. Most insurance companies now have you pay something called the coinsurance, which is typically a percentage of your medical bills at that point. For example, my health insurance plan requires I pay 20% coinsurance for in-network providers after my deductible is met. This means if I have met my deductible and have a $1000 medical bill with an in-network provider (more on this in-network stuff below), then I will be responsible to pay $200 and the insurance company will pay $800. I will have to continue to pay this coinsurance until I have met my out-of-pocket maximum for the year.
Out-of-Pocket Maximum
Alright, you’ve been making your premium payments, you pay copayments each medical visit, you’ve met your deductible for the year, and now you’re paying coinsurance on your medical bills. When do you have to stop paying so much? The answer is when you have reached your out-of-pocket maximum.
Just as the term implies, for each policy there is a maximum amount of money you are required to pay ou-of-pocket each calendar year. This typically includes the total sum of your deductible, copayments, and coinsurance payments (but may vary from plan to plan). Once you hit that max number, you should no longer have to pay out of pocket for any other covered health services during that calendar year. Next year, it starts all over again.
It is important to remember a couple of key points when calculating how much you have paid toward your out-of-pocket maximum for the year. First, premium payments usually do not count toward this amount. Second, only money you pay toward health services covered by your insurance plan count toward your out-of-pocket maximum. For example, if your plan does not cover elective plastic surgery and you decide to get a nose job for $10,000, none of this will count toward your out-of-pocket maximum.
EXAMPLE:
Let’s run through an example to better understand how this all works together. Let’s say Michelle has health insurance through her employer. The premium payments are $300 per month, and her employer pays $250 of this. This means she is responsible to pay $50 per month, which she has directly deducted from her paycheck. Remember, this does not count toward her out-of-pocket maximum.
Here are some other facts about her policy. Her annual deductible is $1,000. She has copayments of $25 for primary care visits, $50 for specialists, $10 for generic prescription drugs, and $100 for emergency room visits. Once her annual deductible is met, she has 20% coinsurance. Her annual out-of-pocket maximum is $3,000. For simplicity we will assume that her copays count toward her deductible and that her copays, deductible, and coinsurance all count towards her out-of-pocket maximum. Remember, this is not always the case.
Now, let’s say at the beginning of the year Michelle sees her primary care provider (PCP) for her annual physical. It is recommended that she has a mammogram. Because these are both preventive health services, under the Affordable Care Act guidelines Michelle does not have to pay for either of these services.
A month later Michelle slips and falls on the ice and has the onset of severe pain that starts in her back and radiates down the back of her leg. It is so severe that she goes the the emergency department (ED), where she has to pay a $100 copay. She is evaluated by the ED physician who orders x-rays of her lumbar spine to rule out a fracture (it is negative), and gives her some IV pain medication and a muscle relaxer. It is recommended she follow up with her primary care provider. The total ED bill is $800, which she has to pay herself since she has not yet met her deductible.
At this point she has paid $100 (copay) + $800 (ED visit) = $900 toward her deductible and her out-of-pocket maximum.
Three days later Michelle is evaluated by her PCP, for which she pays a $25 copay. She is still in significant pain and now has developed weakness in her foot (a foot drop). Her primary care provider recommends an urgent MRI of the lumbar spine given the new neurological deficit. The PCP visit costs $75 and the MRI costs $1,500, for a total cost of $1,600.
Michelle has to pay the $25 for the PCP copay and $75 for the PCP visit. When this is added to the $900 from the ED visit, she has paid $1,000 so far this year.
At this point she still has to pay for the MRI. In this case she will have to pay the first $500 of the MRI bill, which brings her to a total of $1,500 when added to the $1,000 from above, which meets her annual deductible.
However, there is still $1,000 of the MRI bill remaining. Now her coinsurance portion of the policy kicks in. She has to pay $200 (20%) and the insurance company will pay the remaining $800 of the bill.
This brings her out-of-pocket total to $1,700 at this point.
The MRI shows a large herniated disc and she is urgently referred to a neurosurgeon who sees her the next day, with a $50 copay. This brings her total out-of-pocket payments to $1,750. The neurosurgeon agrees she has a significant neurological deficit with the foot drop, which correlates well with the MRI findings, and recommends an urgent discectomy surgery which is planned for the following day.
Fortunately Michelle does well in surgery and fully recovers over the next few months. The total surgical bill, including anesthesia services, is $10,000. Since her coinsurance is 20%, she is responsible for paying $2,000 of this bill. However, since her annual out-of-pocket maximum is $3,000, and she has already paid $1,750, she only owes $1,250 since this will put her at the $3,000 annual limit. Her insurance company then has to pay the rest of the bill.
For the rest of the year, Michelle will not have to pay anything out-of-pocket for covered medical services. So, if she has really bad luck and needs her appendix out, it would be completely paid for. On January 1st of the next year, this all starts over.
Hopefully this example helped make things a little more clear.
WARNING:
These next five terms are types of health care plans you can choose from when buying health insurance. There probably is not a more boring subject to read about . . . I get that. But with that being said, it is extremely important that you understand them. Why? First, you need to know if you are enrolled in the best type of plan for your needs and situation. Second, you need to understand what is covered in your plan so you can know if you are being billed correctly. Third, if you are in a position where you need to choose a new plan (new job, current plan not meeting your needs, etc.), you need to understand what your options are.
So for the next few minutes, try to suck it up and focus. I have tried to write about these as succinctly as possible to help you through it. You are on the path to FI and I know you can do it!
Health Maintenance Organization (HMO)
A health maintenance organization or HMO is a type of health care plan that works with a limited network of hospitals, clinics, and providers. An HMO will typically only cover medical expenses from providers that are “in-network” meaning that they have a contract with the insurance provider. Medical expenses from providers that are “out-of-network” are typically not covered by the HMO and are your responsibility to pay for. The exception to this are true medical emergencies, which require facilities to bill as in-network providers no matter where you receive care.
HMOs also require that you have an in-network primary care provider (PCP) who coordinates all of your general and specialty care. You cannot see an in-network specialist without a referral from your PCP.
While this type of plan may seem very restrictive with the least flexibility, the benefit is that HMOs typically have the lowest associated costs. This means lower premiums and lower deductibles compared to other plans.
An HMO may be a good option for those that prefer lower cost over flexibility, have good local providers within their HMO network, and don’t require frequent specialized care.
Exclusive Provider Organization (EPO)
An exclusive provider organization or EPO is very similar to an HMO in that you are restricted to services provided by a specific network of hospitals, clinics, and providers. However, in an EPO you do not have to designate a PCP, allowing you to see a specialist within your EPO’s network without a referral. This offers a little more flexibility than an HMO since you don’t need the referral, but is still somewhat restrictive given that out-of-network services remain uncovered, with the exception of true medical emergencies.
Given that coverage is limited to in-network services, EPOs are also on the lower end of the cost spectrum.
EPOs might be right for someone who wants lower costs similar to an HMO, but wants a little more flexibility than an HMO, and doesn’t mind being limited to a network of providers.
Preferred Provider Organization (PPO)
Preferred provider organizations or PPOs are one of the most popular plans types today due to their flexibility.
PPOs have in-network providers just like HMOs and EPOs, but the networks are usually larger and more comprehensive.
Unlike an HMO or EPO, in a PPO you are not only covered for services with in-network providers, but also with out-of-network providers. Furthermore, you typically do notneed to designate a PCP and no referrals are required to see any provider, in- or out-of-network.
This flexibility, however, comes with a price. The premiums and deductibles of PPOs are typically much more than HMOs and EPOs. Also, even though services by out-of-network providers are still covered, your out-of-pocket expense for these services is usually significantly higher when compared to similar in-network services.
PPOs are a good option if you value flexibility over cost, regularly require out-of-network care, or want to be able to see a specialist without the need for a referral.
Point of Service Plan (POS)
A point of service plan or POS is a hybrid of a PPO and HMO. Like a PPO, out-of-network services are covered by the plan. On the other hand, similar to an HMO, a POS usually requires you to choose an in-network physician as your primary care provider to coordinate your overall care.
In a POS, in-network care coordinated by your PCP will be cheaper, but may be more limited. Out-of-network care will cost you more and typically requires you to file the necessary paperwork for claims.
Given these factors, a POS is generally cheaper than most PPOs, but more expensive than most HMOs.
A POS may be right for you if you value having a PCP coordinate your in-network care, but value the flexibility of being able to see out-of-network providers when you choose.
High Deductible Health Plan (HDHP)
High deductible health plans or HDHPs have become increasingly popular in recent years. As the name suggests, the key characteristic of these plans is that they have a high deductible. For 2019, the IRS defines an HDHP as any plan with a deductible of at least $1,350 for an individual or $2,700 for a family. Why would anyone want a high deductible? Well, there are at least a couple of reasons.
First, HDHPs typically have very low premiums. This is very appealing to those with few medical expenses who rarely meet their annual deductible. However, this comes with the risk of having to pay the larger deductible if you have more than anticipated healthcare needs within a given year.
Second, an HDHP allows you to open a Health Savings Account (HSA). In an HSA you can save pre-tax money to pay for future qualified medical expenses. The money in this account can be invested, much like a 401(k) or IRA, and grows tax free. If ultimately spent on qualified medical expenses, the money is also distributed tax free. I will dedicate an entire post to HSAs in the near future.
HDHPs can have characteristics of either a PPO or an HMO. Each plan may vary. The key distinguishing feature is really the high deductible.
An HDHP may be right for someone that is generally healthy, doesn’t utilize healthcare frequently, and wants the benefits of lower premiums combined with the ability to contribute to an HSA.
Conclusion
Health insurance can be very confusing. But if you understand these basic terms you are way ahead of the majority of population. Through financial literacy, you transition from a place of vulnerability and insecurity to a position of strength and control over your destiny.
Now that you are more financially literate with regards to health insurance, I challenge you to analyze what type of coverage you currently have. Is this appropriate for your needs and current situation?
Moving forward, I recommend you compare your medical bills and your explanation of benefits statement to make sure everything is correct. Be sure to do the following:
- Make sure you aren’t paying more than you should.
- Keep track of how much you have paid toward your deductible and out-of-pocket maximum each year.
- Make sure you are getting all the benefits listed in your policy.
That’s it for today. Thanks for reading. Good luck as you continue to work towards Freedom Through FI!
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