Understanding your health insurance

Is anybody else totally confused by health insurance benefits?

Even when insurers break down plan benefits in neat grids, the lexicon they use can still seem totally foreign. But it’s important to understand this stuff, particularly if you’re shopping for new health insurance coverage, or if you want to try to reduce costs with your current plan.

Before we dive into healthcare payment terms, let’s briefly cover what exactly health insurance is.

Health insurance should help people pay for healthcare expenses. Having insurance gives you an inexpensive way to get the medical attention you need, rather than only when you are ill or hurt. It also covers preventive care such as annual checkups, screenings, and other evaluations.

Health care is expensive, but it’s important to remember that health insurance isn’t only for times of illness or injury. It is possible to benefit from many preventive services provided by your insurance plan, designed to keep you healthy.

When you make frequent physician visits and do all the recommended screenings and evaluations, you’re more inclined to detect severe conditions that might emerge.

All health insurance plans function in the same way (for the most part). The insurance provider collects premiums and pays benefits while the participants pay premiums and receive benefits. Payments vary depending on the member’s coverage and the specific policy.

Some programs provide comprehensive coverage, which means they cover lots of distinct services, while other programs should fill a particular gap in policy. Before picking a plan, it’s imperative to evaluate your medical needs.

You also need to confirm that your preferred physicians are within the plan’s system before you make a coverage decision.

There are five basic health insurance payment terms to familiarize yourself with:

• Premium: The recurring (likely monthly) fee for your insurance
• Deductible: How much you must kick in for care initially before your insurer pays anything
• Copay: Your cost for routine services to which your deductible does not apply
• Coinsurance: The percentage you must pay for care after you’ve met your deductible
• Out-of-pocket maximum: The absolute max you’ll pay annually

Still confused? I’ll explain these terms in more detail below.

What is a premium?

Your premium is the amount you pay into the insurance plan on a regular basis.

If you belong to an employer-sponsored plan, the premium is likely deducted from each paycheck as pre-tax dollars.

If you purchase your own health insurance plan, you may have the option to pay your premium annually, quarterly, or monthly.

Health insurance premiums vary greatly depending on what medical expenses the plan covers, which doctors you can see, and how much you’ll have to pay in other ways when you use services.

Read more: How much insurance should you have?

What is a deductible?

Your health insurance deductible is the amount that you will have to pay annually for your health care (such as surgical procedures, blood tests, or hospitalizations) before the health insurance company pays anything.

For example, if you have a $2,500 deductible and undergo three $1,000 procedures in a year, you will have to pay the full bill for the first two procedures and $500 of the third. Your insurance will cover half of the third procedure.

Increasing your deductible is the easiest way to lower your premiums and, if you’re mostly healthy, might be a good idea. Just understand, however, that if you have a $10,000 deductible and get really sick, you could end up with $10,000 in medical bills in a year.

Typically, your deductible does not apply for preventative health checkups and many routine health services. You’ll just pay a copay instead.

Aggregate vs. embedded deductible

If you’re on a family plan, then you’ll want to know whether you have an aggregate or an embedded deductible.

Aggregate deductible

An aggregate deductible means that’s the amount that has to be paid out of pocket on any (or all) of the people covered by the plan before insurance starts paying for anything.

If that overall deductible is $10,000 then it doesn’t really matter how the family gets to $10,000 in spending, whether from one person or from several different people’s medical care.

Embedded deductible

An embedded deductible, on the other hand, means there’s the overall deductible for the entire group (the family deductible), but then there’s also an embedded deductible for each individual.

Let’s say the overall deductible is $10,000, but the deductible for each individual is $5,000.

If Person A has a major emergency and gets at least $5,000 in care, then any further care for Person A will be covered by insurance (and won’t apply to the family deductible, though any coinsurance will apply to out-of-pocket max). If Person B then gets a $1,000 bill for something else, the family will still have to pay that $1,000 out of pocket, and will still have $4,000 left on the overall deductible.

With an embedded deductible, insurance kicks in sooner for individuals who rack up large bills. However, under such a plan, it may take longer for the family to meet its overall deductible.

Plans with an aggregate deductible tend to have lower premiums than those with embedded deductibles.

What is a copay?

Your copay is the fixed amount you pay for using routine services defined by your plan. For example, some plans charge you a copay for visiting your primary care physician, or an emergency room, or purchasing a prescription drug.

In most cases, the payment is the same regardless of the extent of the visit or the cost of the drug. For example, a plan may require copays of $20 for office visits, $100 for emergency room visits, $15 for generic prescriptions, or $30 for name-brand drugs.

If your plan charges a copay for certain services, this means you’ll pay much less for these services right away (and long before you hit your deductible).

What is coinsurance?

Coinsurance is similar to a copay, although coinsurance generally applies to less routine expenses, and is expressed as a percentage rather than a fixed dollar amount.

Your coinsurance kicks in after you hit your deductible.

If your plan has a $100 deductible and 30% coinsurance and you use $1,000 in services, you’ll pay the $100 plus 30% of the remaining $900, up to your out-of-pocket maximum.

You may find plans with no coinsurance requirements, some with 20/80 or 50/50 coinsurance, or other combinations.

What is an out-of-pocket maximum?

Your out-of-pocket maximum is an important feature of your health plan because it limits the total amount you pay each calendar year for health care, including copays, deductibles, and coinsurance.

If your policy carries a $2,500 out-of-pocket maximum and you get sick and require a lot of healthcare services, the most you will pay in a year is $2,500. After that, insurance picks up the rest of the tab, presuming you stay in-network.

Deductible vs. out-of-pocket maximum

The difference between your deductible and an out-of-pocket maximum is subtle but important.

The out-of-pocket maximum is typically higher than your deductible to account for things like copays and coinsurance.

For example, if you hit your deductible of $2,500 but continue to go for office visits with a $25 copay, you’ll still have to pay that copay until you’ve spent your out-of-pocket maximum, at which time your insurance would take over and cover everything.

Embedded out-of-pocket maximums

One change that happened in 2016 with Marketplace plans is that, even with an aggregate deductible, one person cannot pay more than the individual out-of-pocket maximum within a family plan, even if the aggregate deductible is more than the individual out-of-pocket maximum ($9,450 for 2024).

For instance, even if the overall aggregate deductible was $10,000, a single person in that family plan could not incur more than $9,450 in out-of-pocket expenses. After they hit that number, insurance covers everything for that person, even as the rest of the family is still subject to the deductible.

A note about lifetime maximums

Insurance plans used to frequently have lifetime maximums, often of $1,000,000 or more. The Affordable Care Act made these illegal.

These lifetime maximums were devastating if someone required intensive surgery or cancer treatments, which often can cost up to $500,000 apiece. If you need more than one, you could basically run out of health insurance when you needed it most.

HSA (Health Savings Account)

An HSA is an account that allows you to save for future health expenses. Money deposited into an HSA isn’t subject to income taxes.

Money deposited into an HSA can grow and be utilized year over year — it need not be spent in one calendar year. HSAs have to be paired with specific high-deductible medical insurance plans (HDHPs).

Read more: How to pick a Health Savings Account

FSA (Flexible Spending Account)

An FSA can be implemented via a company plan. It permits you to set aside extra cash for everyday healthcare expenses and dependent care.

FSA funds should be used by the conclusion of the term-year. Otherwise, it’ll be sent back to the company if you don’t utilize it. Check with your company’s Human Resources team if you’re unsure about the specific FSA rules with your company.

A few regular FSA-qualified purchases include doctor copays, immunizations, dental work, and physical rehab.

Read more: When to bump up your FSA contributions

HRA (Health Reimbursement Arrangement)

Health reimbursement arrangements (HRAs) are financed by your employer, rather than your own contributions.

You can use your employer’s HRA funds to be reimbursed for a limited amount of your eligible medical expenses, and these reimbursements are typically untaxed.

The contribution amounts toward an HRA vary from one company to the next, and for one class of employees to the next. HRA funds may be carried over from year to year, but they cannot be used by an employee after the employee has been terminated or transfers to another employer.

Now that you know some of the key terms, there are a handful of health insurance types you should know.

PPO (Preferred Provider Organization)

Using a PPO plan, you’re encouraged to utilize a network of physicians and hospitals. These services are contracted to give support to plan members at a negotiated or discounted rate.

You usually aren’t required to designate a primary care doctor but may have the option to find any doctors or experts within the program network.

With a PPO, you typically have a yearly deductible that you’d be asked to pay before the insurer starts covering your medical bills.

HMO (Health Maintenance Organization)

With an HMO plan, you usually have a lesser out-of-pocket cost compared to other programs. But, you’ll have less flexibility in the selection of hospitals or physicians.

An HMO may ask that you select a primary care physician (PCP). Having a PCP will take care of most of your healthcare requirements. But generally, to find a specialist, you must get a referral from the PCP.

With an HMO, you typically have coverage for a broader range of services, but you might be asked to pay a deductible before your policy begins. Generally, you’ll have a minimum copayment. There are no claim forms to document in an HMO.

There’s one primary thing you need to remember with HMOs, though: Most HMOs give no coverage when going outside the system. You’ll need authorization from your PCP. This can even apply to specific emergency circumstances.

HDHP (high-deductible health plan)

High-deductible health plans (HDHP) are often PPO plans with high deductibles, designed primarily to be used with Health Savings Accounts (HSAs). An HSA-compatible plan might help you save money.

Typically the monthly premium is more affordable than the monthly premium to get a lower-deductible plan. The contributions to an HSA may be made pre-tax to certain limits determined by the IRS. Unused funds in HSA accounts roll over annually to the next year and accrue interest, tax-free.

Money could also be used for other life events, too, but may incur interest and penalties. I have a high-deductible health insurance plan, and while the deductible is higher, I love the ability to put money into an HSA that I can roll over if I don’t use it.

EPO (Exclusive Provider Organization)

EPO programs are a mixture of HMO plans and PPO plans. EPO plans provide you with the choice of visiting a specialist without a referral. But, EPO plans don’t cover out-of-network doctors. EPO plans generally have more costly premiums compared to HMOs, but considerably less expensive premiums compared to PPOs.

What if my plan doesn’t cover something?

Your plan will probably cover the majority of the items your insurance provider recommends, but a few might not. Whenever you get an uninsured treatment or test, or you receive a prescription filled for an uninsured medication, your insurance provider won’t cover the invoice.

You can still receive the treatment that’s recommended; however, you must pay for yourself.

How do I know what medications will be expensive?

A formulary is a list of drugs your insurance company covers. It places medications in a couple of categories (tiers) according to copay. The first tier is generally generic drugs, the next are more expensive drugs, and the third are the most costly medications.

This list is reviewed and altered by the insurer every month or two, so the price you pay for medications might fluctuate. Know about the formulary before filling any prescription, particularly recurring prescriptions.

Also know that insurance firms, not the drugstore, choose the price of the copay. They may contract with specific pharmacies, and your cost will be reduced at these pharmacies.

To say healthcare is confusing is an understatement. But familiarity with basic healthcare terms like deductible, copay, and coinsurance is the first step toward intelligently selecting the right health insurance plan for you.

If you’re in the market for health insurance in your particular location, here’s a good way to jump-start your search: