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Can you define the four basic health insurance concepts?

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Consumer education will be key in 2017

A UnitedHealthcare survey found that only 7 percent of consumers were able to successfully define all four basic health insurance concepts—plan premium, deductible, co-insurance and out-of-pocket maximum.

This means the vast majority of health insurance consumers do not understand how their coverage works. Many people are very frustrated when they attempt to use their health insurance and discover their plan doesn’t cover what they thought it did. The reality is that most insurance plans contain a lot of “cost-sharing,” meaning out-of-pocket costs, often up to thousands of dollars.

This is a huge issue, and will only become more relevant as employers and insurers continue to push more healthcare expenses onto consumers. Regardless of what happens to the Affordable Care Act next year, cost-sharing is not going away. Consumers should expect to bear more of their own healthcare costs in 2017 and beyond. (Click here for more on that.)

Let’s define the four health insurance concepts and look at an example of how coverage is used.

Plan premium

This is the amount you pay per month for coverage in a health plan.
If you have employer coverage, your employer may pay all, some, or none of your premium. Individual health insurance consumers pay their own premiums, though the Affordable Care Act created subsidies for certain consumers based on income. Republican replacement proposals keep the subsidy model, but base the credits on age.

Deductible

This is the amount you must pay in full before your health plan kicks in to cover a portion of your medical expenses. If your deductible is $2,000, you will pay all of your medical bills until you hit $2,000. But it’s important to note—that doesn’t mean you stop paying for healthcare after your deductible is met.

Coinsurance

After you meet your deductible, you will pay a percentage of additional bills. For example, let’s say you meet your deductible, but then receive another $1,000 medical bill. If your coinsurance is 20 percent, you will pay 20 percent of that $1,000, which comes to $200.

Out-of-pocket maximum

This is the maximum amount you will spend on covered services. After you meet your deductible, you will pay your coinsurance until you hit this amount. However—your insurer may cover little or none of non-covered services, even if you have already hit your out-of-pocket maximum. That’s why it’s important to familiarize yourself with what is covered under your plan by calling the company or reading your Explanation of Benefits document.

Here’s an example demonstrating how the four concepts work:

Joe has a HealthyInsurance plan.
His premiums are $250 per month.
His deductible is $2,000.
His coinsurance is 20 percent.
His out-of-pocket maximum is $4,000.

He also has copays—which are the amount you pay upfront for doctor’s visits or prescriptions. Joe’s copays are $20 for primary care, $50 for specialists, $10 for generic drugs and $50 for specialty drugs. Copays typically do not count toward your deductible, but do count toward your out-of-pocket maximum.

Joe experiences shortness of breath and visits his primary care physician ($20) who recommends he visits a pulmonary specialist ($50). That specialist conducts a chest X-Ray, and Joe receives a bill for $100. He hasn’t met his deductible, so he pays it.

The specialist sees something on the X-Ray, so he recommends a lung biopsy. Joe receives a hefty bill for this—$900. Remember, he still hasn’t met his deductible, so he’s on the hook for this bill, too.

Fortunately, the biopsy comes back benign, and Joe is fine. He gets an inhaler for his shortness of breath ($50) and goes on his way.

Later that year, Joe has a very bad car accident and is admitted to the hospital for several days. He receives a $20,000 bill after his treatment.

Let’s recap his current situation: He has currently paid $1,000 toward his deductible. (Remember, the copay amounts in parentheses don’t count toward the deductible.) He has $1,000 remaining, so he will pay this amount toward his hospital bill.

That leaves $19,000 remaining of his bill. Joe will now pay his 20 percent coinsurance until he meets his out-of-pocket maximum. His coinsurance is 20 percent of $19,000, or $3,800.

But his out-of-pocket maximum is $4,000, and he’s already paid $2,120 through his deductible and copays. That leaves $1,880 before he hits $4,000. That is how much he will pay in coinsurance.

Now that Joe has met his out-of-pocket maximum, his insurer will pay for all covered services this year.

Confusing? It definitely can be. But spending a little time researching and understanding these insurance terms is key to saving money. Some consumers purchase health plans that are very expensive, and cover far more than they need. Others pick cheaper plans that don’t cover very much at all, and they wind up with large out-of-pocket bills. The only way to best match your plan to your needs is to understand these concepts.

When considering a health plan, you might want to do a “worst-case scenario” calculation. What if you have to pay your full out-of-pocket maximum, like Joe? Add that to your annual premium cost and see if it seems doable. Joe’s, for example, is $3,000 in premiums, plus $4,000 in out-of-pocket costs.

Bernard Health’s mission is to be the world’s most trusted advisor when it comes to helping people plan for their healthcare. If you would like to meet with a noncommissioned advisor to evaluate your insurance needs and options, give us a call.

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