These 9 Health Insurance Terms Confuse You … and Everybody Else

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Now that we’re all being required to buy health insurance thanks to the Patient Protection and Affordable Care Act, it would be nice if we understood what we’re getting, right?

Unfortunately, a study published last month in the journal Health Affairs raises some serious doubts about whether we really understand what the insurance companies are selling us.

Researchers from the Urban Institute surveyed more than 7,000 people between the ages of 18 and 64 and found that not quite half said they weren’t even somewhat confident they knew the meaning of nine common health insurance terms. Among the uninsured, fewer than 1 in 4 said they knew the meaning of all these common words and phrases.

These are the terms that tripped them up:

  • Premium.
  • Deductible.
  • Co-pay.
  • Coinsurance.
  • Maximum annual out-of-pocket spending.
  • Provider network.
  • Covered services.
  • Annual limits on services.
  • Excluded services.

In case you’re scratching your head over some of these terms too, here’s a handy guide to help clear the confusion.

1. Premium

The premium is the amount you pay to the health insurance company to keep your policy in effect. Think of it as your membership fee. Premiums are often assessed on an annual basis but may be paid monthly, quarterly or biannually depending on your insurer.

2. Deductible

More than three-fourths of those surveyed by the Urban Institute said they were somewhat or very confident they understood what a deductible meant. That’s good, because a deductible can add up to some serious cash coming out of your pocket.

However, less than half of those who are uninsured understood deductibles. If you fall into this category, pay close attention.

A deductible is the annual out-of-pocket cost you pay before your health insurance coverage kicks in. So if your deductible is $1,000, your insurance company will not pay for a dime of your care (other than for some preventive services mandated by the health reform law) until you pay $1,000 out-of-pocket in medical costs. And no, your premium payments don’t count toward the deductible.

Here’s an example: Let’s say you have a policy with a $5,000 deductible, and you need an MRI. Other than one doctor office visit, you haven’t had any other medical care for the year. The MRI costs $3,000. Now, how much is the insurance company going to contribute toward that $3,000? Zero. That’s right. Zip. Zilch. Nada. It’s all on you.

Understanding your deductible is crucial because in order to keep premiums low, some insurance companies are raising deductibles. A high-deductible plan can make perfect sense for some people, but if you have a chronic condition or need regular medical care, you might want to keep shopping.

3. Co-pay

Co-pay is the most widely understood health insurance term, according to the Urban Institute survey. A co-pay is your portion of the bill after the deductible has been met. Co-pays are fixed rates, such as $20 per office visit.

4. Coinsurance

While most people are confident they know what a co-pay is, coinsurance is the least understood term. Only 57 percent of all survey respondents said they felt somewhat or very confident they knew what the word meant, and less than a third of those uninsured said the same.

However, coinsurance is almost the same thing as a co-pay. It’s your portion of a medical bill. The only difference is that coinsurance is a percentage while a co-pay is a fixed amount.

You might see coinsurance referred to in terms of 80/20 or 70/30 coverage. Those numbers mean you pay for 20 percent or 30 percent of the bill, respectively. Then, your insurance company will pick up the tab for the rest of the approved amount.

5. Maximum out-of-pocket annual spending

You want this number to be as low as possible. Maximum out-of-pocket annual spending means that once you have paid a certain amount for the year, your insurance company will begin paying 100 percent for all covered services. Your co-payment and coinsurance requirements essentially disappear at that point.

In 2014, health insurance sold on the government exchanges cannot have out-of-pocket spending limits higher than $6,350 for individual plans or $12,700 for family plans. Be aware that premiums and some costs you may have to pick up for out-of-network care do not count toward this out-of-pocket maximum.

6. Provider network

It’s unusual to find a health insurance plan that doesn’t include a provider network nowadays. The network includes all the providers who have an agreement in place with the health insurance company to accept patients from their plans. The agreement typically also stipulates an acceptable price for the provider to charge for certain services.

If you use a provider outside your health plan’s network, your insurer could charge you a higher co-pay or coinsurance or they could refuse to pay your bill altogether. Before switching plans, always check to see if your preferred health care professionals and facilities are in the provider network.

7. Covered services

Just like it sounds, covered services are those your health insurance plan will pay. Under the Affordable Care Act, there are 10 essential health benefits all plans must cover. These range from mental health services to prescription drug coverage.

For everything else, it’s up to the insurer to decide what’s offered in the plan. If it’s important that you have a certain benefit, such as chiropractic care, make sure it is in a plan’s covered services before signing up.

8. Excluded services

After coinsurance, excluded services got the second lowest vote of confidence in the Urban Institute study. However, excluded services are just the opposite of covered services. They’re items your health insurance plan specifically says it won’t cover. Examples of commonly excluded services may include cosmetic surgery or weight loss regimens.

9. Annual limits on services

Health insurance companies sometimes limit how much they will pay for some covered services. Going back to chiropractic care as an example, a health plan might include coverage but limit you to 20 visits per year. Once you hit the limit, you have to pay 100 percent out-of-pocket for future chiropractic care.

Annual limits on services can also be dollar amounts. Once a company has paid a certain amount, they may stop paying for that particular service.

Congratulations! You made it to the end. Reading about health insurance may be about as much fun as studying for college final exams, but your wallet will thank you when you pick a plan that covers the care you need and doesn’t leave you to foot the bill.

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Comments & discussion

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  • V Pavia

    I believe there is an error in the explanation for the most widely understood insurance term – copays. Copays have nothing whatsoever to do with the deductible. They are fixed rates, such as $20 per office visit, that are paid whether or not the deductible has been met.

    • http://www.moneytalksnews.com/ Stacy Johnson

      I’m not seeing a problem with our explanations, V Pavia. The co-pay or co-insurance is related to the deductible in one important way: Until the deductible is met, there’s no co-pay or co-insurance, because the entire cost is paid by the consumer. It’s only after the deductible is met that either comes into play. That’s the way I’m reading this article. You’re not?

      • V Pavia

        The article is correct that a copay is a fixed payment for a service, such as an office visit. However, services that are paid with a copay are not generally subject to a deductible or coinsurance.

        Services performed in a doctor’s office are categorized into different “types.” There is the office visit itself, for which a copay might be charged, if the plan is structured that way, and the copay applies whether or not the deductible has been met. Medical care or diagnostic tests may be performed during the visit and separate fees will be charged. These fees are subject to the deductible and, once the deductible has been met, coinsurance. Some plans don’t have a copay for the office visit so the visit itself will be treated like medical care and be subject to a deductible and coinsurance. (In addition to working at a TPA for the previous 20 years, I double-checked some of my EOBs and found instances where I was responsible for a copay for the office visit as well as a portion of the deductible for medical care and/or diagnostic tests during the same visit.)

        • G Harper

          You are totally correct in your explanation V Pavia. I too work for a TPA and so many people get those 2 confused – including the author of this article. You can have a co-pay even when you haven’t met your deductible. The employer can have an agreement where an office visit at an in-network provider be a set amount no matter if the deductible is met or not.

          • Patrick Seitz

            The author is not confused. I’ve worked in employee benefits for many years, including plan design, and am a Certified Benefits Professional (CBP). While it’s true that many people incorrectly interchange co-pay and coinsurance, and it is also true that co-pays frequently are not subject to a deductible, there is no requirement that co-pays not be subject to a deductible and sometimes they are. For example, I’ve worked with an employer where we designed a two-tier prescription coverage plan with a $10 co-pay for generics and a $35 co-pay for non-generics, but the non-generic drugs were subject to a $250 deductible. So there you had a co-pay that WAS subject to a deductible and the co-pay amount only mattered once the deductible was met (just like it would if it was your run-of-the-mill coinsurance plan). I’ll admit that pairing a co-pay to a deductible is uncommon and will likely be even less common as plans move to mirror the offerings in the healthcare exchanges, but it is certainly not unheard of and it absolutely happens. The author’s explanation is correct: the difference between co-pays an coinsurance is only that one is fixed regardless of the provider’s charges and one is a percentage of the provider’s charges. For practical purposes, the author might have mentioned that in many plan designs, co-pays are frequently not subject to deductibles, but again, sometimes they are.

  • Ann

    I’m still confused by ‘deductible’ and ‘maximum out-of-pocket’ — If deductible is $2,000 and max out-of-pocket is $6,350 and I have an MRI for $3,000……then what?

  • JEngdahlJ

    Here’s a list of articles and studies analyzing how the ACA may impact healthcare premiums. http://www.healthcaretownhall.com/?p=6919#sthash.yNfOAHuT.dpbs