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Health insurance is complicated.
You try to figure out what the best healthcare plan is for you during open enrollment and your eyes glaze over with all the technical terms.
And don’t get me started on the medical bills that arrive in the mail from your insurance company.
You have co-pays, co-insurance, deductibles and more.
For most people, they avoid it as much as possible.
But doing this can end up costing you a lot of money.
This is because studies show up to 80% of medical bills have errors on them!
By understanding health insurance a little better, you can not only make smarter choices for yourself and your family, but also save money at the same time.
So in this post, I walk you through the common health insurance terms you need to understand.
I do my best to keep this as simple as possible so that the next time you have an encounter with your health insurance company, you have a better idea about what is going on.
Table of Contents
Basic Health Insurance Terms You Need To Understand
An HMO, or Health Maintenance Organization, is a type of managed care insurance plan that provides medical services through contracted providers.
In most cases, you can only see doctors and specialists within the plans network.
If you go out of network, any care you receive will not be covered unless it is emergency care.
A PPO, or Preferred Provider Organization, is similar to an HMO except there is usually less restriction on the doctors you see.
The insurance plan will pay for healthcare costs if you see a doctor or specialist outside of the plan’s network.
However, the cost for going out of network will be higher.
Usually this results in higher out of pocket costs to you.
A POS, or Point of Service plan, is very similar to a PPO where you pay less for in-network care and more for out of network care.
Additionally, if you need or want to see a specialist, you need to get a referral from your doctor first.
High Deductible Health Plan
A high-deductible health plan or HDHP, is an insurance plan that only covers preventative services before your deductible is met.
In return for paying more out of pocket, HDHPs offer low monthly premiums because most expenses are paid directly by the participant rather than by the insurer.
In other words, you are shifting the cost from the insurance company to yourself.
To help cover the cost of healthcare, you can open a health savings account.
Also, because the cost of these plans are less for employers, many employers will contribute to their employees health savings account as a way to pass along the savings.
Health Savings Account
A health savings account is basically a savings account to help you pay for medical bills.
In order to have an HSA account, you need to be covered by a high deductible health plan.
There are annual limits to the amount you can contribute to HSA accounts, and these amounts differ for individuals and family plans.
The money you save in an HSA can be carried forwards into future years, to help pay for future medical costs.
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The money you contribute to an HSA is pretax dollars and if you spend the money on qualified medical expenses, you can withdraw the money tax free.
Finally, you can invest the money as well, and avoid capital gains in the process.
Flexible Spending Account
A flexible spending account, or FSA, is a way for people to set money aside for medical bills.
The money you contribute to an FSA must be used during the calendar year, otherwise you lose it.
Pre-tax money is taken from your paycheck to fund the account and you avoid paying tax on the money if you use it for eligible medical expenses.
Health Share Plan
Health share plans, also called medical cost sharing, medical flexibility insurance, or health share ministries are an alternative to traditional insurance.
These health care plans work by having members share medical costs.
You pay a monthly share amount, which is typically seen as a premium.
You also pay an annual unshared amount, which is typically seen as a deductible.
These plans came about as a way for people to afford health insurance when the Affordable Care Act instituted a fine for not having insurance.
Your insurance premium is the amount you pay each month for your health insurance coverage.
If you are covered by a plan at work, then you pay your premium through payroll deductions.
The good news is this money is pre-tax dollars.
This means it lowers your taxable income, saving you money on taxes during the course of the year.
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This is the amount of money you pay before your insurance coverage kicks in and starts to pay.
It is just like your deductible with car insurance.
If you have a $500 deductible and get into an accident where your car needs $1,500 worth of repairs, you will pay the first $500, which is your deductible, and the insurance company will pay the remaining $1,000.
Note that you have an annual deductible that resets at the start of the new health plan year.
And in many cases, the health plan year is not January-December.
This is the amount of money you have to pay when you visit your doctor or hospital or fill a prescription.
A co-pay comes into play after you meet your deductible.
Usually this amount ranges from $10-$20 for doctor office visits and up to $100 for hospital visits.
So if your doctor visit costs $100 and you met your deductible for the year, you only owe the co-pay amount.
If this is $20, then you pay this amount.
If you didn’t hit your deductible, you would owe the entire $100 for the doctor visit.
Understand that copayment amounts vary by health plan, so it is important you know what your copayment amount is before you sign up for a plan.
Co-Insurance is the amount of money you owe for service after meeting your deductible.
In most cases, this is broken down into an 80/20 format where the insurance provider pays 80% of the bill and you pay 20%.
However, this coinsurance rate does vary by health insurer.
Here is an example of how coinsurance works.
Let’s say you go to the doctor and the bill is $500.
If you met your deductible for the year, you pay 20% of the bill or $100.
If you didn’t meet your deductible, then you owe the entire $500.
Out of Pocket Maximum
All plans have different amounts of an out of pocket maximum you have to pay.
Some are $2,500 others are $10,000 with still more in between.
This simply means the higher amount, the more money you pay before the insurance company pays.
Once you reach that limit, you no longer have to pay for health care costs for the year.
Understand though, that lower out of pocket limits tend to have a higher monthly premium.
Here is an example for how out of pocket maximums work.
Note that co-insurance and your deductible come into play here.
You have a procedure for $5,000.
Your insurance company has a maximum out of pocket cost for this procedure of $7,500.
Assuming your deductible is $500, you pay this amount first.
You then pay 20% co-insurance of the remaining amount of $4,500, which is $900.
Your total out of pocket cost is $1,400.
If you had the same procedure done but your out of pocket maximum was only $1,000 you would only be responsible for this amount.
Here, you would pay your $500 deductible, but then would only pay $500 of co-insurance to get to the out of pocket maximum of $1,000.
This is the maximum amount a health insurance plan will pay for a covered healthcare service.
Allowable costs are also called payment allowance, annual limit, allowed amount, or eligible expense.
For example, if you need treatment and it costs $10,000 but your allowable cost is only $7,000 you may be responsible for paying the difference.
This is when a service or procedure costs more than your health care providers are willing to pay for it.
If the procedure costs more, you can be billed for the difference.
Balance-billed charges are not allowed if you use a preferred health care provider.
In Network Provider
In-network providers are doctors, specialists, hospitals, clinics, and other facilities who have contracted with your insurance plan to provide health care services.
When you see a doctor or specialist that is in your health insurance plans network, the costs are lower for you.
Doctors, specialists, hospitals, clinics, and other facilities that have not contracted with your insurance plan.
Depending on the type of insurance plan you have, your plan may cover a smaller portion of your medical bills for out of network care.
In other instances, you make be required to pay 100% of the costs associated with care.
This is approval from a health plan that may be required before you fill a prescription or get medical service.
A child or other family member who is covered under the insured’s health insurance policy.
Typically you will see family coverage which covers either the insured’s spouse and children or just the children.
Physical or mental medical condition or disability which medical care, diagnosis, treatment, or advice was received with 6 months ending on your enrollment date in a health insurance plan.
Many insurers exclude people who have pre-existing conditions from obtaining health insurance, forcing them to go to the Health Insurance Marketplace.
COBRA or Consolidated Omnibus Budget Reconciliation Act, is a federal law that allows you to keep your health coverage temporarily after your employment ends.
If you elect to use COBRA, you are responsible for 100% of the monthly premium, which includes the portion your employer paid.
Many plans also impose additional costs, such as a small administrative fee as well.
Catastrophic Health Plan
This is another type of health insurance for people who are looking to protect themselves from worst case scenarios when it comes to their health.
These plans have very low monthly premiums and very high deductibles.
They are reserved for people under age 30 or for those with a hardship exemption.
Open Enrollment Period
The time period when you can enroll for health insurance for the upcoming year.
Certain life events, like marriage, divorce, birth of a child, or losing other health coverage do not follow the open enrollment period.
If you experience any of these events, you can change your health coverage at that time.
Open enrollment varies by employer, but usually is in early to late fall.
Primary Care Physician
Your primary care doctor who provides medical care for you.
In some plans, you need your primary care physician to give you a referral to see a specialist.
Routine health care that includes annual check ups, screenings, lab work, and patient counseling to help prevent illness or disease.
Affordable Care Act
The Affordable Care Act was signed into law in 2010 and is also referred to as ACA or Obamacare.
Its goal is offer affordable healthcare to more people.
It does this by offering subsidies that lowers the cost of health insurance.
Additionally, it expands the Medicaid program to cover more low income adults.
Health Insurance Marketplace
HealthCare.gov is the place where you can shop for and enroll in health insurance.
This site is run by the Federal government and most states participate in this marketplace.
However, some states do run their own marketplace as well.
Platinum Health Plan
The Platinum plan offers the highest monthly premium but covers just about all medical costs.
As a result, the out of pocket expenses you will need to pay are very little.
Gold Health Plan
One of the health plan categories offered in the Health Insurance Marketplace.
The Gold plan has a higher monthly premium, but has a lower cost out of pocket.
If you have a lot of health problems or take many prescription drugs, a Gold plan could make the most sense for you.
Silver Health Plan
Silver health plans offer moderate monthly premiums and moderate out of pocket costs when you get health care.
Because it falls in the middle, it is the most common plan that users of the marketplace enroll in.
An additional benefit of this plan is that if you qualify for cost sharing reductions, you can save money on deductibles, co-payments, and co-insurance.
Bronze Health Plan
This plan offers the lowest monthly health insurance premiums and higher deductibles and out of pocket costs when you get care.
It is a good choice for healthy people who don’t have many medical issues.
Subsidies or premium tax credits are used to lower your monthly premium to make healthcare more affordable through the Health Insurance Marketplace.
Even if your annual income falls in the ranges of Federal poverty levels, you cannot get a premium tax credit if you don’t get your insurance through the Marketplace.
Depending on how low your income is, you could qualify for free healthcare.
The most common types of subsidized coverage are Medicaid and Children’s Health Insurance Program or CHIP.
An insurance program that offers low cost or free health coverage to anyone whose income falls below a defined poverty level.
Each state sets their own rules for qualifying for Medicaid.
There is no open enrollment period with Medicaid.
You can apply at any time and if you qualify, your coverage will begin immediately.
Children’s Health Insurance Program
This program offers low cost health care coverage to children in families that earn too much to qualify for Medicaid.
Every state offers a CHIP program, and like Medicaid you can apply at any time and get coverage immediately once you qualify.
These are programs offered through your work place that promote health and wellness.
In exchange for taking part, participants usually receive a monthly discount on their premium, or other incentives like cash rewards.
Health plans offer this benefit as a way to help keep costs low.
They understand that the less frequently it’s insured needs to visit the doctors, the less money the insurance company will have to pay.
There are the most common health insurance terms you need to know.
While this won’t make you an expert in the insurance field, it should give you a better understanding of how insurance policies work.
You can then take this knowledge and use it to help you lower the cost of health care expenses you incur.