Sometimes it feels like health insurance plans are designed to be terrifically confusing, requiring you to pay for certain expenses, fully covering others, all while navigating a wealth of jargon to understand your coverage (read: a premium, deduction, copayment, coinsurance, etc).
While it may be frustratingly complex, health insurance is so important that I believe it is worth taking the time to truly understand your coverage. Once you understand, you will know what you can expect from your plan, which can impact both your wellness and your wallet. Understanding health insurance basics will also help you determine how much to budget for things like deductibles and copays.
Let’s start with a common plan element, a deductible. What is a deductible, exactly?
A deductible is a specific amount that you must pay for health care before your insurance plan begins to contribute. Deductibles are typically set annually. For example, if your plan has a $1,500 annual deductible, you will have to pay the first $1,500 in costs yourself before your insurance begins to foot the bill.
Your deductible is separate from the amount that you pay for your health insurance coverage. Your health insurance bill (also called a “premium”) is usually a monthly bill. Some employers will cover a portion of the premium for you, as part of your benefits package. Paying your premium gives you access to health insurance - but does not pay for your healthcare-related expenses.
That’s where your deductible comes in. Each health care plan has a defined deductible, and deductibles can come in different forms. For example, you might have one of the following:
You’ll occasionally hear people talking about “hitting” their deductible for the year. This means that their out-of-pocket costs for the year have equaled their annual deductible. At this point, there typically are other costs for which they will be responsible. Once you've paid your deductible expense (the deductible has been met), most plans require copayments or coinsurance for covered health care services, but your insurance company will start covering most of the costs, which will vary on your insurance policy.
Coinsurance and copayments are additional ways that insurers share the cost of coverage with consumers, and they primarily differ in how they are calculated.
Coinsurance requires you to pay a percentage of the cost of the medical expense. For example, if you had a $5,000 test, and your plan included a 20 percent coinsurance payment for that service type (after you paid your deductible), you’d be responsible for 20 percent. In this example, you would pay for $1,000 and the health insurance provider would be responsible for the remaining 80 percent, or $4,000.
Copayments (occasionally referred to as “copays”), however, are flat fees for medical expenses. For example, you may have a $350 visit to your primary care physician and a $50 copay. You would be responsible for $50, and the health insurance provider would be responsible for the balance of $300.
Both coinsurance and copay rates may vary by type of service. For example, a visit to a primary care physician, emergency room, X-ray and lab work may all have different rates from something like long-term care.
It can be frustrating to understand that your responsibility for health care costs continues after you have met your annual deductible. However, insurance plans include an out-of-pocket maximum, which serves to limit the amount you will be responsible for covering in a given year. After you have reached your plan’s out-of-pocket maximum, the insurance company is responsible for all additional expenses. This is a very important element to an insurance plan, as it can be a critical barrier to a catastrophic financial situation.
To encourage behaviors that support long-term health, some services are covered by health insurers without any cost to you. Preventative services, which include things like flu shots, important screenings and tests will be listed in your plan, and typically vary by gender and age. I strongly encourage you to understand and take advantage of the preventative services included in your plan, especially because paying for preventative services are typically better than paying for long-term care down the line.
When evaluating health insurance plans, it is challenging to determine “typical” costs (deductibles, coinsurance or copayment rates, out-of-pocket maximums). Insurers evaluate many factors when pricing their plans. However, it is generally true that plans with higher premiums have lower deductibles. To get a good understanding of plan costs and structures in your state, you can explore your state’s plans, which will typically be tailored to your ZIP code.
If you are evaluating a job offer, the human resources team can give you detailed information on the plan provider, so you can speak to the insurer to make sure that you fully understand. If you are a freelancer, you may want to check out self-employed health insurance options that vary in how much your deductible expense and premiums will cost you — here's more information on that.
Whatever your healthy insurance policy is, you'll want to know what kind of deductible expense you're looking at. Having a total grasp of the plan elements will make you an informed and empowered consumer, and it will contribute to your overall health and well-being.
The Feminist Financier is on a mission to help women build wealth and own their financial independence, by improving financial literacy and taking the mystery out of money. Ms. Financier is also a shoe addict, travel fanatic, and wine enthusiast.