It’s open enrollment season, and my head is spinning. While I’m at least moderately intelligent, every year I look at my health insurance plan options with a sense of bewilderment. As a result, I did a lot of research this year, and I thought I would share that research with you. Here I present some plain english definitions to some very confusing health insurance terms.
Types of Health Insurance
Okay, let’s start with types of healthcare insurance:
HMO (Health Maintenance Organization): An HMO provides healthcare services using a team of in house healthcare providers. How I like to think of this is you typically have health insurance and a healthcare provider. With an HMO, your health insurance company and your healthcare provider are the same organization. Kaiser Permanente is the largest of this breed.
PPO (Preferred Provider Organization): These are currently the most common health insurance plans currently. With this plan you have a health insurance company that has some buddies they refer to as “preferred providers”. You pay the insurance company for access to better rates from these preferred providers, and the health insurance company basically acts like a payment middle man between you and provider as well. Since the health insurance has buddies, they make you pay more if you get care from any provider that isn’t their buddy (out of network).
Narrow Network: You might not have heard of this term before, but my guess is that you will start to hear it more and more. Narrow networks are like a PPO except you can only get healthcare from your health insurance company’s buddies. They will pay nothing for care you receive from anyone else. So, here the insurance company is acting like an HMO, but the providers are not employed by the insurance company.
HSA (Health Savings Account): You will definitely hear more and more about HSA’s in the near future too. They dub themselves as “consumer driven” insurance plans, which is marketing speak for “we want for you to make more conscious healthcare cost choices so we are giving you more payment responsibilities”. At first these plans look scary because, except preventative care, you must pay your deductible before any of your insurance kicks in. Then, after you do that, the insurance company typically pays 80% of your healthcare bill while you pay the remaining 20%. Once you reach the “out of pocket maximum”, the health insurance company pays 100% of your bill. The two major upsides to HSA is that the monthly premium is cheaper and you get to invest pre-tax money in a “health savings” account that can accrue interest like an investment and has some tax advantages.
Indemnity Plans: These are plans where you would pay out of pocket for your healthcare and then submit a claim to the insurance company to get a portion of that cost reimbursed.
Other Health Insurance Terms
Okay, now that the insurance plans are out of the way, let’s demystify some of the terms you are hearing a lot during open enrollment period:
Premium: This is the amount of money you pay out of every paycheck regardless of whether or not you use healthcare services.
Deductible: This is the amount you need to pay every year before your insurance company will begin to cover your expenses. You do not need to pay your deductible for preventative wellness visits. Many times it doesn’t even factor in with primary care and specialist doctor’s visits. It typically only comes into play for certain “inpatient and outpatient services”, and the definition for what services this includes can vary by insurance company and plan. For example, some health insurance plans require that the deductible be paid before they will cover mental health services while others consider those a specialist visit where the deductible does not apply.
Coinsurance: These are shared costs between you and the health insurance company. They are most common with HSA plans where, after the deductible is paid, the insurance company will pay 80% of your care while you pay 20%. Some plans don’t have coinsurance at all.
Copay: This a fixed amount you pay for your visits to the doctor, and they are the most common in HMO and PPO plans. Not all plans have copays, and usually these copays do not count as payment towards your deductible.
Out of Pocket Maximum: This is the amount of money you would pay within a year for your insurance to pay 100% of your healthcare costs. High deductible plans have a lower out of pocket maximum than low deductible plans.
Check out our post “One Simple Equation to Calculate Your Yearly Healthcare Costs” to see how we pulled all of these terms together to learn how much we spend for healthcare.