Health Insurance: Basic Terms 101
As with any new language, it all seems so complicated and confusing at first. Many times the more you try to understand, the more confused you get. This is especially true with the “Health Insurance Language”. One way we tend to deal with complicated issues is to stick to what we know. We all know “Price”, right? So we look at how much it will cost us each month and try to go with something cheap. Well, that will quickly backfire when it comes to Health Insurance. The minute you really need it, you will be thankful your parents taught you “You get what you pay for”. The more you understand the basic terminology of how insurance works, you will be able to ask the right questions when shopping for the a plan that fits your needs. Below are some basic terms to help you build a foundation of understanding.
- Premium: The monthly fee you pay to the insurance carrier for your policy
- Deductible: The annual amount you pay before the insurance carrier will pay their portion of the bill
- Contracted amount (PPO): The amount an In Network provider is contracted to charge for services rendered
- Co-pay: A stated amount you as the member will pay for certain services that are not subject to the deductible such as “Dr. Office Co-Pay”
- Co-insurance: The percentage you pay for services rendered after you have met your deductible.
- Out-of-pocket maximum: The total annual maximum you will pay for covered services.
This is the monthly amount you will pay to the insurance carrier. Many factors such as the Deductible, Co-insurance and Out-of-pocket max will determine how much your premium will be. In general, the lower your out of pocket expenses are the higher your monthly premium will be. It’s important to look at more than just monthly premium cost when shopping for insurance. This is why speaking to your agent/broker about your medical and financial needs is extremely valuable when comparing options.
Your deductible is the amount you will pay before the insurance carrier will pay their portion for covered services. It’s important to know prior to meeting your deductible, you will pay the entire contracted amount. For example: Your plan has a $500 deductible and you go in for a sore throat. Your PPO provider examines your symptoms and performs a few tests, including a throat culture. The contracted amount is $500 for services rendered. You will be responsible for $500 and that amount will get applied to the deductible. Your provider calls to tell you they need a follow up test to make sure the infection found from your throat culture is gone. The contracted amount for that service totals $200. Since you met your annual deductible at last visit you will only pay your Co-insurance percentage of the $200.
There are a variety of ways the various insurance carriers refer to the contracted amount or discounted rate. However, with a Preferred Provider Organization (PPO) you will have a network of providers that are contracted with the insurance carrier. When you stay in this network of contracted providers, you will be protected by this contract. One way you will be protected is by how much the provider can charge you for covered services. Since you will be required to pay 100% of the contracted amount prior to meeting the deductible, it’s good to know that you will still be getting a discount on the entire amount the provider actually charges. Referring to your sore throat scenario, the total billed for the initial service rendered was $800. However, your doctor was in the PPO network. So the carrier’s contracted amount was $500. The difference of $300 gets written off and the provider cannot balance bill you for that amount according to the contract.
Co-pays are typically fixed dollar amounts that you must pay directly to the provider at the time services are rendered. Co-pay amounts generally are not subject to your annual deductible, therefore do not go towards satisfying your annual deductible or Out-of-pocket max. For example: in the sore throat scenario above, your doctor’s office most likely required you pay the office Co-pay upfront which didn’t include the throat culture or follow up test. You will also pay a Co-pay to the pharmacy when picking up prescriptions.
Co-insurance is the percentage you and the insurance carrier share in paying for services rendered once your deductible is met. Plans are typically 20/80, 30/70, 50/50 etc. This applies to services rendered above and beyond what is included in a basic office visit Co-pay for hospitalization, surgeries, procedures and emergency room services. In using the same sore throat scenario above, if your plan’s Co-insurance is 30%, you will pay $60 of the $200 contracted amount and the insurance carrier will pay $140 (70%).
In my opinion and experience, this is why you pay for insurance. Your Out-of-pocket maximum is your maximum annual financial loss if you are seriously injured or become ill. Once you meet your annual deductible you will pay your co-insurance percentage. Once your co-insurance percentage equals your Out-of-pocket maximum, the carrier will then pays 100% of the bills for the remainder of that calendar year. Going back to the sore throat scenario, your $60 (30%) goes towards your Out-of-pocket maximum. Hospitalization and surgeries can become a significant financial liability. The majority of us will find it near impossible to pay for a serious procedure that can easily be $100,000+ . However, having an Out-of-pocket maximum of $5,000 is much more manageable.
These basics should help you understand the mechanics of how Health Insurance works. Although, there are many other factors to consider when shopping for a policy. Feel free contact me at the email below if I can be of assistance to you and your family or business.
Jolene Bibian, RP
Ca Ins Lic # 0E33032
Leon Rousso & Associates