Health insurance is complex and often expensive. Here's how to understand your plan, and make sure you're not paying too much.

Is anybody else totally confused by health insurance benefits?

Even when insurers break down plan benefits in neat grids, you need to know the difference between deductibles, premiums, out-of-pocket maximums, co-pays, and co-insurance to know what you’re actually paying.

It’s especially important to understand this stuff if you are shopping for health insurance.

If you are looking for health insurance in your particular location, here a good way to jump-start your search:

There are several health insurance terms to understand:

  • Premium: The monthly fee for your insurance.
  • Deductible: How much you must kick in for care initially before your insurer pays anything.
  • Co-pay: Your cost for routine services to which your deductible does not apply.
  • Co-insurance: 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.

Before I do that, though, let’s talk high-level about what exactly health insurance is.

What’s Health Insurance? And do I Really Need it?

Understanding Your Health Insurance - What's health insurance? And do I really need it?

Health insurance should help people pay for health care 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. 

How Does Health Insurance Work?

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 physicians are within the plan’s system before you make a coverage decision.

Common Healthcare Terms You Need to Know

Armed with information about healthcare, my hope is that you’ll be able to compare plans through your state healthcare marketplace or online with Policygenius to compare and buy health insurance plans in most states.

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.

Deductible

Your health insurance deductible is the amount that you will have to pay annually for your healthcare (such as surgical procedures, blood tests, or hospitalizations) before the health insurance 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 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 co-pay instead.

Embedded vs. Aggregate 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 co-insurance 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.

Co-Pay

Your co-pay is the fixed amount you pay for using routine services defined by your plan. For example, some plans charge you a co-pay 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 co-pays 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 co-pay for certain services, this means you’ll pay much less for these services right away (and long before you hit your deductible).

Co-Insurance

Co-insurance is similar to a co-pay, although co-insurance 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% co-insurance 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 co-insurance requirements, some with 20/80 or 50/50 coinsurance, or other combinations.

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 healthcare including co-pays, deductibles, and co-insurance.

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 co-pays and co-insurance.

For example, if you hit your deductible of $2,500 but continue to go for office visits with a $25 co-pay, you’ll still have to pay that co-pay 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 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, which is $8,200 for 2020 (and $16,400 for a family plan).

For instance, even if the overall aggregate deductible was $10,000, a single person in that family plan could not incur more than $8,200 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 could be devastating if you ever 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.

Payment Accounts

Understanding Your Health Insurance - Payment accounts

HSA (Health Savings Account)

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

Money 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).

FSA (Flexible Spending Account)

An FSA can be implemented via a company plan. It permits you to set aside extra cash for everyday health care 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 co-pays, immunizations, dental work, and physical rehab.

HRA (Health Reimbursement Account)

Health reimbursement accounts (HRAs) are financed by the company and may be used by an employee as pre-tax dollars. These accounts may be established independently of any particular health program or benefit design, and the money may cover health care expenses.

HRA funds may also be carried over from year to year. The contribution amounts toward an HRA fluctuates and depends on the company. The company owns the fund where the money is held, and any unused amounts might be moved if you’re terminated, based on the specific fund and company.

Types of Individual Health Insurance

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 insurance carrier 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 co-payment. 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 Insurance Plan)

High-deductible health insurance 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 to 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 an 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.

Other Health Insurance Questions

What if my Plan Does Not Cover Something?

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

You can still receive the treatment that’s recommended; however, you must pay for yourself. Some businesses pay a percentage, and the individual is liable for the rest, along with your co-pay. One wild thing to note is that if more than one problem is covered in one trip (i.e., a broken finger and gastrointestinal issues), individual co-pays could apply, based upon the insurance program.

How Can I Know what Medications Will be Expensive?

A formulary is a listing of drugs your insurance carrier can allow you to cover. It places medications in a couple of categories (tiers) according to co-pay. The first tier is generally generic drugs, the next are more expensive drugs, and the third are the most costly medications. 

This listing is reviewed and altered by the insurer every month or two. This means that your price may go down or up. Know about the formulary before beginning any drugs, particularly one that is going to last long term. 

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

Summary

To say health care is confusing is an understatement. But taking the time to understand is important – after all, you don’t want to overspend by having the wrong plan.

If you’re looking to make sense of health insurance, start by looking for insurance with Policygenius so you can compare your options and explain the details of each plan.

Or another option is to look for a health insurance provider where you live to get you on the fast track to being insured.

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About the author

Chris Muller picture
Total Articles: 203
Chris has an MBA with a focus in advanced investments and has been writing about all things personal finance since 2015. He’s also built and run a digital marketing agency, focusing on content marketing, copywriting, and SEO, since 2016. You can connect with Chris on Twitter.