Health Insurance may be the most important type of insurance you can own. Without proper health insurance, an illness or accident can wipe you out financially and put you and your family in debt for years. So what is health insurance and how does it work?
Health insurance is a type of insurance that pays for medical expenses in exchange for premiums. The way it works is that you pay your monthly or annual premium and the insurance policy contracts healthcare providers and hospitals to provide benefits to its members at a discounted rate. This is how hospitals and healthcare providers get listed in your insurance provider booklet. They have agreed to provide you with healthcare at the specified cost. These costs include medical exams, drugs and treatments referred to as “covered services” in your insurance policy.
As with any type of insurance, there are exclusions and limitations. To know what these are, you have to read your policy to find out what is covered and what is not. If you elect to have a medical procedure done that is not covered by your insurance, you will have to pay for that service out of pocket.
The range of coverage for expenses varies depending on the type of plan, as will the restrictions. You can purchase the insurance directly from the insurance company through an agent or through an independent broker but most people get their insurance coverage through employer-sponsored programs.
Aside from premiums, there are other costs associated with your health insurance coverage. Let’s explore what these are and how you would calculate them.
Premiums: This is the amount that you pay for coverage.
Deductible: The amount that you pay out of pocket. Like any other type of insurance, the deductible can range in amount depending on how much you would like to pay out of pocket. Generally, the higher the deductible, the lower the premiums.
Co-insurance: The percentage of covered expenses paid by the medical plan. The co-insurance amount is per family per calendar year. For example, in a co-insurance arrangement, there can be an 80/20 split between the insured and the insurance carrier in which the insured pays 20% of the cost of care up to the deductible, but below the out-of-pocket limit set forth by the policy. This is typically associated with coverage provided by a PPO.
Co-payment: Sometimes referred to “co-pay”, this is a set cap amount that you will pay each time you receive medical services. This is typically associated with coverage through an HMO (which will also be discussed a little later). For example, every time you visit your doctor, you may have to pay $20 as a co-payment. These payments usually do not contribute toward out-of-pocket policy maximums. The co-payment and the coinsurance are not one in the same.
Stop-Loss Limit: The cumulative dollar amount of covered expenses in excess of the deductible after which the coinsurance payment stops and the insurer pays 100% of covered expenses. The purpose of to the stop-loss limit is to limit the out-of-pocket costs for the insured individual. The “out-of-pocket max” is the maximum out-of-pocket expense you will incur before your insurance carrier pays 100% of covered services. At this point, all you will have to pay is your premiums.
What’s important to remember for out-of-pocket expenses is that not all expenses go toward meeting the out-of-pocket max. Co-payments and premiums do not apply to the out-of-pocket expense maximum. Your deductible and coinsurance do apply toward this amount. It’s worth noting that this may not be a standard feature with every policy.
Let’s look at an example to clarify what is meant.
Let’s say your health insurance plan has the following features:
- Deductible: $500
- Coinsurance: 80/20 (you pay the 20%)
- Out of Pocket Max: $5,000
Now, let’s say that you go to the hospital and incur $7,500 worth of medical expenses. How much do you have to pay? Let’s do the math.
Let’s start by subtracting your deductible from the total expense amount:
|$7,500 – $500 = $7,000|
Remember that you have to pay the deductible before the insurance kicks in.
Now you have to pay 20% of the $7,000, which would be:
|$7,000 x 0.20 = $1,400|
All in all, you will have to pay $1,900 out of pocket ($500 deductible + $1,400 of coinsurance).
You will have to continue paying out of pocket until your total out-of-pocket expenses reach the $5,000 max set in your policy. At that point, you will no longer pay the coinsurance or deductible.
With out-of-pocket expenses, co-payments, coinsurance and premiums why get insurance at all? The answer is simple: while these costs certainly do put a pinch in your wallet, their costs are not nearly as painful as those from a long-term illness or emergency.
Types of Plans
An indemnity plan, sometimes called a fee-for-service plan, is a type of insurance that reimburses you according to a schedule for medical expenses, regardless of who provides the service. These plans cover things such as:
- Hospital stays
- Surgical expenses
- Major medical coverage
Under these plans, the insurer pays a specific amount per day for a specific number of days. The amount paid can be calculated either as a percentage (80/20) or for actual expenses.
Health Maintenance Organizations (HMO)
The HMO is the most common type of insurance policy people own and the one most frequently provided by employers. HMOs provide a wide range of comprehensive healthcare services to a group of subscribers in return for a fixed periodic payment. With this type of coverage, you select a primary care physician that acts as the gatekeeper for you to receive virtually all the medical care required during a year. The gatekeeper concept is the health insurer’s attempt to control the cost and quality of care by coordinating health services with other providers. Specifically, your primary care physician is responsible for determining what care is required and when a patient should be referred to a specialist.
These policies tend to be the least expensive form of health insurance, but they do come with annoying restrictions. Aside from having a gatekeeper, you can only select doctors and hospitals approved in the insurance carrier’s network. This becomes a problem if you already have a great relationship with a doctor who is not in the network. If you use a non-network provider, your HMO will not cover the costs unless it’s for an emergency. Other than this, most preventive care services are covered.
Preferred Provider Organization (PPO)
PPOs are a group of healthcare providers that contract with an insurance company, third-party administrators, or others (like employers) to provide medical care services at a reduced fee. There are two major differences between HMOs and PPOs in that:
- The healthcare providers in the PPO are generally paid on a fee-for-service basis as their services are needed, much like a traditional doctor’s visit.
- You are not required to use the PPO’s healthcare providers or facilities – you can go outside the network. That said, going outside the network usually means paying a higher co-payment or deductible.
Point of Service (POS)
A point of service plan is a hybrid plan that combines aspects of an HMO, PPO and indemnity plan. This type of plan is more flexible in that it allows you to decide at the time you need services to elect to use the POS plan’s physician to arrange in-network care (HMO feature), or to go outside the network or hospital and pay a higher portion of the cost.