Understanding Health Insurance Terms Before Choosing a Policy

1. Premium

Your premium is the amount you pay to your insurance company for your health plan, typically on a monthly basis. Think of it as a subscription fee for your health coverage. Even if you don't use any healthcare services during a given month, you still need to pay your premium to keep your insurance active.

Several factors influence premium costs, including:

• Your age
• Your location
• Whether you smoke
• The type of plan you choose
• Whether the plan covers just you or includes dependents

Generally, plans with lower premiums will have higher out-of-pocket costs (deductibles, copays, and coinsurance) when you need care. Higher premium plans typically cover more of your costs when you receive healthcare services. When comparing plans, consider both the premium and the coverage level based on your anticipated healthcare needs.

2. Deductible

A deductible is the amount you must pay for covered healthcare services before your insurance plan starts to pay. For example, if your deductible is $2,000, you'll pay the full cost of eligible services until you've paid $2,000 out of pocket. After that, your insurance will begin paying its share.

Some important points about deductibles:

• Deductibles reset annually, typically at the beginning of each calendar year or plan year.
• Some services, like preventive care, are often covered before you meet your deductible.
• Plans with lower premiums generally have higher deductibles, while plans with higher premiums typically have lower deductibles.
• Family plans often have both individual deductibles for each family member and a family deductible that applies to the entire family.

When choosing a plan, consider how the deductible aligns with your healthcare needs and financial situation. If you rarely need medical care beyond preventive services, a high-deductible plan might make sense. However, if you have ongoing medical needs, a plan with a lower deductible could be more cost-effective, even with a higher premium.

3. Copayment

A copayment, often called a copay, is a fixed amount you pay for a covered healthcare service. Copays typically apply after you've met your deductible, though some plans provide certain services with copays before the deductible is met.

Copays vary by service type and plan. For example, you might have:

• $25 copay for a primary care visit
• $50 copay for a specialist visit
• $15 copay for generic prescription medications
• $300 copay for an emergency room visit

Copays are usually due at the time of service. They provide predictability, as you know exactly how much you'll pay for specific services regardless of the actual cost. This can be helpful for budgeting, especially for services you use regularly, like prescription medications or therapy appointments.

4. Coinsurance

Coinsurance is your share of the costs for a covered healthcare service, calculated as a percentage of the allowed amount for the service. Unlike a copay, which is a fixed amount, coinsurance varies based on the total cost of the service.

Here's how coinsurance works:

• After you meet your deductible, you pay coinsurance and your insurance pays the rest.
• If your coinsurance is 20%, you pay 20% of the allowed amount for the service, and your insurance pays 80%.
• For example, if a procedure costs $1,000 and your coinsurance is 20%, you pay $200, and your insurance covers $800 (assuming you've met your deductible).

Coinsurance continues until you reach your out-of-pocket maximum for the year. Some plans use a combination of copays for certain services and coinsurance for others. When comparing plans, pay attention to both the coinsurance percentage and the services to which it applies.

5. Out-of-Pocket Maximum

The out-of-pocket maximum (or out-of-pocket limit) is the most you could pay during a policy period (usually one year) for your share of covered healthcare services. This amount includes your deductible, copayments, and coinsurance, but not your premiums.

Once you reach your out-of-pocket maximum, your health insurance plan pays 100% of the allowed amount for covered services for the remainder of the policy period. This provides important financial protection against catastrophic medical expenses.

For example, if your out-of-pocket maximum is $8,000:

• You pay for covered services (through deductible, copays, and coinsurance) until you've spent $8,000.
• After that, your insurance covers all allowed costs for covered services for the rest of the year.
• You continue paying your monthly premium.

Family plans often have both individual out-of-pocket maximums and a family out-of-pocket maximum. The out-of-pocket maximum is a key consideration when evaluating health plans, especially if you expect significant medical expenses.

6. Network

A network is a group of healthcare providers (doctors, hospitals, labs, etc.) that have contracted with your insurance company to provide services at negotiated, discounted rates. Understanding how networks work is essential for controlling your healthcare costs.

Providers typically fall into one of three categories:

• In-network: Providers who have contracted with your health insurance company. You'll pay less when using these providers.
• Out-of-network: Providers who haven't contracted with your insurance. Using these providers often results in higher out-of-pocket costs, or your insurance might not cover their services at all.
• Non-participating: Providers who don't accept any insurance and require full payment from you.

Before receiving care, it's important to verify that providers are in your network, as networks can change. Your insurance company's website typically has a provider directory, or you can call the provider directly to confirm they accept your specific insurance plan.

7. HMO vs. PPO

Health Maintenance Organizations (HMOs) and Preferred Provider Organizations (PPOs) are two common types of health insurance plans with different structures for provider networks and referrals.

Key features of HMOs:

• You choose a primary care physician (PCP) who coordinates your healthcare
• You need referrals from your PCP to see specialists
• Generally limited to in-network care (except in emergencies)
• Typically have lower premiums and out-of-pocket costs
• Usually have simpler administrative processes

Key features of PPOs:

• No required primary care physician
• No referrals needed to see specialists
• Coverage for both in-network and out-of-network care (though you pay more for out-of-network)
• Generally higher premiums and potentially higher out-of-pocket costs
• More flexibility in choosing healthcare providers

Other plan types include Exclusive Provider Organizations (EPOs) and Point of Service (POS) plans, which combine features of both HMOs and PPOs. When choosing between plan types, consider your preferences for provider choice, whether you mind getting referrals, and how the cost structures align with your healthcare needs and budget.

8. Explanation of Benefits (EOB)

An Explanation of Benefits (EOB) is a statement from your health insurance company that explains how a medical claim was paid. It's not a bill, but rather a document that helps you understand what your insurance covered and what you may owe.

Key information in an EOB typically includes:

• The service received and date of service
• The provider's charge (their original full price)
• The allowed amount (what your insurance has negotiated to pay for the service)
• How much your insurance paid
• How much you may owe (your responsibility)
• Any adjustments or denials, with explanation codes
• How much you've paid toward your deductible and out-of-pocket maximum

It's important to review your EOBs carefully and compare them with bills you receive from healthcare providers to ensure accuracy. If you notice discrepancies or have questions about a claim, contact your insurance company for clarification.

9. Prior Authorization

Prior authorization (also called preauthorization, prior approval, or precertification) is a requirement from your health insurance company to approve a healthcare service, treatment plan, prescription drug, or durable medical equipment before you receive it. The purpose is to ensure the service is medically necessary and appropriate.

Services commonly requiring prior authorization include:

• Hospital admissions and inpatient procedures
• Complex imaging (MRIs, CT scans, etc.)
• Outpatient surgeries
• Specialty drugs
• Durable medical equipment
• Certain specialist referrals (for some plans)

If prior authorization is required but not obtained, your insurance may deny coverage for the service, leaving you responsible for the entire cost. The process of obtaining prior authorization is typically initiated by your healthcare provider, but it's important to verify that it has been approved before proceeding with the service.

10. Formulary

A formulary is a list of prescription drugs covered by your health insurance plan or prescription drug plan. Drugs on the formulary are typically organized into tiers, with different cost-sharing requirements for each tier.

Common formulary tiers include:

• Tier 1: Generic drugs (lowest cost-sharing)
• Tier 2: Preferred brand-name drugs (medium cost-sharing)
• Tier 3: Non-preferred brand-name drugs (higher cost-sharing)
• Tier 4/Specialty: Specialty and very high-cost drugs (highest cost-sharing)

Formularies can change, with drugs moving between tiers or being added or removed entirely. Your insurance plan should notify you of these changes. If a prescribed medication isn't on your plan's formulary, your doctor may need to prescribe an alternative or request an exception through a process called a formulary exception.

When choosing a health plan, it's wise to review the formulary, especially if you take prescription medications regularly. Verify that your medications are covered and note their tier placement to understand your expected costs.

Conclusion

Understanding health insurance terminology is a crucial step in making informed decisions about your healthcare coverage. By grasping these key terms, you can better evaluate plan options, anticipate costs, and navigate the healthcare system with greater confidence.

When comparing health insurance plans, consider how the premium, deductible, copayments or coinsurance, and out-of-pocket maximum align with your budget and healthcare needs. Also evaluate network coverage, plan type, and formulary to ensure the plan meets your specific requirements.

Remember that the lowest premium plan isn't always the most affordable option overall, especially if you require regular healthcare services. Assess your healthcare usage patterns and financial situation to find the best balance of costs and coverage for your circumstances.