Understanding the tricky terms around health insurance or the different plan types can be the difference between having affordable care or being left with excessive out-of-pocket costs in an emergency.
Key health insurance terms
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The term premium refers to the ongoing amount to be paid for your health plan. For those who receive coverage through their employer, this cost is split between them and the employer and is typically paid monthly, quarterly or sometimes annually. Those who don't receive benefits through an employer may be eligible for subsidies to help cover the premium through the Affordable Care Act (ACA) if they purchase a plan through Healthcare.gov or through a state marketplace.
Premiums will vary based on several factors such as your location, age, tobacco use, how many people are covered by your plan (spouse and/or dependents) and your plan category. Premiums can also change from year to year.
The premium is not the only cost you will pay for your coverage; deductibles, out-of-pocket maximum, coinsurance and copay will also determine how much you'll be responsible for out of pocket.
The deductible is the dollar amount a policyholder is responsible for before the insurance policy begins covering any costs. Unlike deductibles in other forms of insurance, the health insurance deductible is quoted annually, with all medical claims going towards the amount. Say a policy has a $3,000 deductible, you would be responsible for the first $3,000 of all medical costs in a given year before any coverage begins. However, some policies may have certain provisions that reduce costs of specific medical services even before a deductible has been met. Keep in mind that preventative care services are typically excluded from the deductible.
Copay and coinsurance
While copay and coinsurance may seem similar, their definitions have several differences. Both copay and coinsurance refer to the share of health care costs for which the policyholder is responsible. Copays are set as whole dollar amounts, while coinsurance is set as a percentage. Both copays and coinsurance come into effect only after deductibles have been met and before out-of-pocket maximums. A $50 copay means that the consumer is required to pay $50 for a procedure. As for coinsurance, assuming the deductible has been met, a policy with 20% coinsurance means that for a $1,000 claim, the policyholder would be responsible for $200 dollars. Keep in mind that the coinsurance percentage may vary depending on the care provided.
The term out-of-pocket maximum refers to the most a policyholder would have to share in health care costs on an annual basis. This includes any amounts paid towards deductibles, coinsurance and copays (more on differences)between out-of-pocket maximum and deductible here). Out-of-pocket maximums generally do not include the monthly premiums paid for insurance. After the out-of-pocket maximum has been met, the insurance company and policy will pick up 100% of all medical costs. Under the ACA, the highest an out-of-pocket maximum can be is $8,700 for an individual and $17,400 for a family.
Health savings account (HSA)
A health savings account (HSA) allows individuals to save pretax dollars, which they can then spend on qualified medical expenses. Regulations allow individuals to put in up to $3,650 (or $4,650 if you’re at least 55) in pretax dollars to be used for medical expenses. Unlike a flexible spending account (FSA), HSA funds do not need to be spent before a certain date because they roll over year over year.
Flexible spending account (FSA)
Similar to an HSA, a flexible spending account (FSA) allows individuals to put pretax dollars into a savings account to be put towards medical expenses. There are a few key differences between FSAs and HSAs:
Flexible spending account
Health savings account
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Insurance plan type terms and definitions
Health management organization (HMO)
A Health Management Organization (HMO) plan is a health plan that provides care through a network of providers (doctors, hospitals, pharmacists) to deliver medical care. The providers on the network agree with the HMO to lower rates for plan members. Under this type of insurance coverage, the cost of care is only covered if the policyholder visits a provider in the network. Furthermore HMOs require that the policyholder select a primary care physician (PCP) who acts as the health care gatekeeper for the consumer. Under an HMO, a policyholder must first visit the PCP and receive a referral in order to see a specialist or receive treatment or services such as imaging and diagnostic tests.
Preferred provider option (PPO)
A preferred provider option plan (PPO) is a type of health plan that contracts with a system of medical providers to create a network of participating, or preferred, providers. Using these preferred providers within the established network can cost less, and using providers out of network will incur an additional charge. A PPO typically comes with higher premiums and copays than an HMO, but it covers more health services through a wider range of providers.
Exclusive provider organization (EPO)
An exclusive provider organization plan (EPO) offers a network of doctors and hospitals, as with the other plans, and is typically more budget-friendly than a PPO if you stay in-network. Any care received out of network, apart from emergencies, will not be covered. EPO plans typically have lower premiums and higher deductibles.
Point of service (POS)
The term point of service (POS) refers to a type of health insurance plan that charges less for using physicians, hospitals and other providers within the established network. Policyholders are required to choose a PCP who acts as a regular source of care and from whom individuals must receive referrals for specialized care. While many POS plans do not require policyholders to meet a deductible, they result in higher costs for individuals who choose to go out of network for care.
High-deductible health plan (HDHP)
A high-deductible health plan (HDHP), as the name suggests, has a higher deductible than most other health plans. The average health insurance deductible is between $1,902 and $4,786 for plans purchased on the health insurance marketplace, while those who get their insurance through an employer tend to have slightly lower deductibles at an average of $1,644 for an individual. HDHPs have an average deductible of $2,349 for individuals and $5,217 for families. Until your deductible is met, your insurance won't cover much, but you'll be paying relatively lower premiums than other health plans. As well, you'll likely qualify for a health savings account (HSA), which allows you to save pretax dollars to put towards future medical expenses.