Understanding Health Insurance
Health insurance is one of the most important investments we ever make. Illnesses, injuries, and other medical setbacks can be astronomically expensive if hospital visits, surgery, or other serious measures are required; maintaining health coverage is the only way to ensure we aren’t stuck covering these emergency medical costs out-of-pocket.
Still, according to the Kaiser Family Foundation, more than 47 million non-elderly Americans ― roughly 15% of the country’s population ― were uninsured in 2012. These individuals paid approximately one-third of their medical expenses out-of-pocket, and faced higher bills than those with health coverage. According to a 2013 article from CNBC, more than 2 million U.S. residents were affected by bankruptcies stemming from high medical bills that year. Becker Hospital CFO notes that hospital stays alone generated costs of $387.3 billion in 2011, which averaged to roughly $10,000 per visit.
In order to obtain the proper level of coverage, you must understand how health insurance works. This article explores some of the fundamental concepts that govern the health insurance industry, as well as some of the most common sources of health coverage. Our goal is to ease the burden as you learn more about health coverage options and research different insurance policies.
Before we get started, a brief disclaimer: This article is intended to inform readers about the basic terminology and standard provisions of health insurance plans in the United States. Please contact a licensed health insurance agent or health insurance company directly for detailed information about individual/family plans before obtaining an insurance policy.
Let’s begin with a few key definitions. Understanding important terminology pertaining to health insurance is the first step to obtaining a cost-effective coverage plan that serves all of your individual or family needs.
- Premium: The amount you pay your insurance company for health coverage each month or year.
- Deductible: The amount of money you must pay out-of-pocket before coverage kicks in. Deductibles are usually set at rounded amounts (such as $500 or $1,000). Typically, the lower the premium, the higher the deductible.
- Coinsurance: The amount of money you owe to a medical provider once the deductible has been paid. Coinsurance is usually a predetermined percentage of the total bill. If the policy’s co-insurance is set at 15% and the bill comes to $100, the policy-holder owes $15 in co-insurance.
- Co-pay: This type of insurance plan is similar to co-insurance, but with one key exception: rather than waiting until the deductible has been paid out, you must make their copayment at the time of service. Most often, copayments are standardized by your plan, meaning you’ll pay the same $30 each time you see a physician, or the same $50 each time you see a specialist.
- Out-of-pocket maximum: The amount of money you pay for deductibles and coinsurance charges within a given year before the insurance company starts paying for all covered expenses.
- In-network: This term refers to physicians and medical establishments that deliver patient services covered under the insurance plan. In-network providers are generally the cheapest option for policyholders. Insurance companies typically have negotiated lower rates with in-network providers.
- Out-of-network: This term refers to physicians and medical establishments not covered under your insurance plan. Services from out-of-network providers are usually more expensive than those rendered by in-network providers. This is because out-of-network providers have not negotiated lower rates with your insurer.
- Pre-existing condition: Any chronic disease, disability, or other condition you have at the time of application. In some cases, symptoms or ongoing treatments related to pre-existing conditions cause premiums to be higher than usual.
- Waiting period: Many employer-sponsored insurance plans mandate a period of 90 days before employees can enroll in their insurance plans.
- Enrollment period / open enrollment: The window of time during which you can apply for health insurance or modify a plan to include your spouse and/or children. Policy-holders are unable to adjust their plan until the next open enrollment unless they experience a qualifying life event. These include a marriage, divorce, birth of a child, changes to individual/household income, or interstate residence relocation.
- Dual coverage: The act of maintaining a health plan with more than one insurer. For example, many married people receive coverage from both their employers and their spouse’s employer. Others may opt to receive individual coverage from more than one insurer.
- Coordination of benefits: This process is applied by individuals who have two or more existing policies to ensure that their beneficiaries do not receive more than the combined maximum payout for the plans.
- Continuation of coverage: This is essentially an extension of insurance coverage offered to individuals no longer covered under a particular plan; it most often applies to former employees and retirees of companies that offer employee coverage. COBRA benefits (see Group Coverage section below) qualify as continuation coverage.
- Referral: An official notice from a qualified physician to an insurer that recommends specialist treatment for a current policy-holder.
Where Can You Get Coverage?
In the United States, all health coverage options fall into one of two general categories. You can obtain individual coverage for yourself and/or your families by reaching out to insurers directly, or receive group coverage as an eligible employee or student. With the arrival of the Affordable Care Act, the parameters and regulations pertaining to both types of coverage have been altered significantly.
Individual Coverage: Historically, the costs and availability of individual coverage were highly variable. Thanks to the ACA, individual health insurance plans must now cover you regardless of preexisting conditions or health problems. Under this type of coverage, policyholders are allowed to choose their own physicians (regardless of ‘network’). You can choose three coverage pathways:
- Providers within the ACA healthcare exchange
- Providers outside the ACA healthcare exchange
- Policies that provide short-term coverage
Insurers INSIDE the ACA Healthcare Exchange: The Obama Administration has created the ACA Healthcare Exchange to serve as an online marketplace for individual health coverage shoppers. The Exchange lists different coverage options that fall into one of the following five categories (all percentages listed below represent averages):
- Bronze: Policyholders pay 40% co-insurance, plans pay 60%
- Silver: Policyholders pay 30% co-insurance, plans pay 70%
- Gold: Policyholders pay 20% co-insurance, plans pay 80%
- Platinum: Policyholders pay 10% co-insurance, plans pay 90%
- Catastrophic: Policy-holders pay 40% or more co-insurance, plans pay 60% or less. This option is generally only available to men and women under the age of 30 or those who qualify for a hardship exemption. Exemptions may be granted to individuals who receive insurance coverage for nine months or more of the year (but not the entire year), U.S. citizens who live abroad, and other people who meet the criteria.
Generally speaking, Gold and Platinum plans are the most cost-effective option for individuals who require frequent physician visits or regular prescriptions. Silver, Bronze, and Catastrophic plans are more suitable for individuals who may be lower risk and do not require frequent visits to the doctor.
Please note that the initial open enrollment period for ACA Healthcare Exchange plans ended on March 31, 2014, after which time individuals can only purchase coverage if they experience a qualifying life event. Subscribers can also enroll during the next open enrollment period. For 2015 coverage, open enrollment is November 15 – February 15.
Insurers OUTSIDE the ACA Healthcare Exchange: Under the ACA, individuals who do not receive group coverage must apply for an individual plan; otherwise they receive a penalty that increases incrementally for each year they remain uninsured. However, individuals seeking coverage are not required to use the ACA Healthcare Exchange and may choose to purchase a plan from insurance companies who are not listed on the site. The Exchange is designed to simplify the process of choosing an insurance plan.
Whether an individual chooses to shop for a health plan within or outside the Exchange should ultimately depend on his or her annual income. Individuals who earn 400% of the federal poverty level (roughly $46,000 per year for individuals or $94,000 per year for four-member households) or less may be entitled to a tax subsidy that helps them pay for their insurance. This option is only available through plans listed on the Exchange; off-marketplace plans award no such tax benefit. On the other hand, individuals who earn more than $46,000 per year (making them ineligible for the subsidy) may find a less expensive health plan outside the marketplace.
Those who choose to browse plans outside the marketplace are encouraged to do so with the assistance of an insurance broker. Brokers will help you locate a health plan that meets your criteria, their services are free of charge because they earn commissions directly from the insurance companies on plans sold.
- Short-term coverage: This option (also known as a ‘gap policy’) is designed for individuals who are uninsured and/or waiting for their individual/group coverage to kick in. This is a cost-effective route for individuals: the eHealthInsurance marketplace lists short-term coverage rates starting at 85 cents per day. However, short-term coverage does not satisfy the requirements of the ACA in most cases, and policy-holders who do not obtain more robust coverage will be penalized for failure to enroll.
- Group Coverage: Unlike an individual coverage plan, which requires the policy-holder to pay for the entire premium, group coverage plan premiums are divided between beneficiaries and the institution that facilitates the group coverage (i.e., a company or university). Group coverage plan-holders are bound to a physician network, but they cannot be denied coverage for pre-existing conditions.
- Employer-sponsored coverage: Employers usually pay more than 50% of the monthly premium, and may also support premiums for employee dependents (such as spouses and children). Just as there are subsidies available to individuals who obtain insurance through the ACA Exchange, business owners may be entitled to tax benefits for providing group coverage.
Compared to individual coverage, group coverage plans tend to be much cheaper for policyholders because employers bear most of the premium. Employees may choose to shop for health coverage within or outside the ACA Exchange, rather than obtain an employer-sponsored plan, but, generally, group coverage is the most cost-effective option. One notable exception might be for individuals who pay regular visits to a specialist classified as out-of-network, or those who require prescription medication not covered under the employer plan.
- COBRA: Under the Consolidated Omnibus Budget Reconciliation Act (COBRA), employees who lose their group coverage under certain circumstances are allowed to obtain continuation coverage for a certain period of time. These plans may be more expensive than short-term or individual plans as subscribers must pay the full premium. Qualifying circumstances might include:
- Individuals who are fired/laid off or who voluntarily quit their jobs (employees may not qualify if they have been terminated for ‘gross misconduct’)
- Individuals whose hours are reduced to the point of impacting coverage availability
- Individuals who are transitioning between jobs
- Death, divorce, and other life events
Understanding Your Plan Options
Once you’ve determined the type of coverage that meets your individual or family needs, you need to choose a suitable plan structure. This process can be confusing, as there is significant overlap between different plans, as well as a considerable amount of ‘fine print’ pertaining to each option. The following section discusses some of the most common health plan structures available to U.S. residents.
- HMO (Health Maintenance Organization):
- An HMO is an organization that requires policyholders to select a primary-care physician (PCP) and then only receive treatment and care from physicians and specialists within the established provider network.
- The PCP is responsible for coordinating the plan-holder’s treatment and care services. Plan-holders must receive a referral for most specialist care services.
- Visiting a physician or specialist not designated by the PCP may result in paying all expenses out-of-pocket.
- An HMO plan is generally recommended for those who do not have preexisting conditions that require a physician or specialist other than the appointed PCP.
- EPO (Exclusive Provider Organizations):
- An EPO is similar to an HMO, but with one key difference: a PCP does not need to be appointed.
- Instead, plan-holders are bound to a network of physicians and specialists.
- Going outside the network results in higher out-of-pocket costs, but the plan-holder is not bound by the recommendations of a PCP.
- PPO (Preferred Provider Organization):
- The PPO is nearly identical to the EPO. The only major difference pertains to out-of-pocket expenses that stem from visiting out-of-network providers.
- PPOs cover these visits at a higher rate than visits to in-network providers, whereas EPOs do not cover visits to out-of-network providers at all.
- If you require regular visits to physicians or specialists outside your plan’s network benefit the most from a PPO.
- POS (Point of Service Plans):
- A PCP must be appointed under a POS plan, and means you may only visit other physicians or specialists after receiving a referral from your physicians.
- You may also receive a referral from your PCP to visit doctors outside the established network.
- Out-of-pocket expenses are usually higher, but those who require regular visits to out-of-network physicians and specialists still receive some coverage.
- HSA (Health Savings Account):
- If you’re insured under a plan with a high-deductible you may be able to open an HSA, an account used solely to save money that is used for future medical expenses.
- Monies distributed from an HSA used for medical expenses of the account-holder or his/her dependents are non-taxable
- Disbursed monies not used for medical expenses must be included as part of your gross income on your tax return and may be subject to an additional tax penalty of 20%.
- After the age of 65, account-holders may withdraw all funds in the account with no tax penalty.
- HRA (Health Reimbursement Arrangements):
- The HRA is a savings account used exclusively to generate funds for medical expenses.
- Unlike the HSA, an HRA must be purchased and maintained by an employer on your behalf.
- If and when HRA funds are disbursed, you are required to declare the amount on your tax return as long as the money is used for medical expenses.
- The availability of an HRA is entirely up to the discretion of your employer, who is also responsible for establishing the fund’s contribution limit.
- Employers cannot reduce your salary in order to contribute to the HRA, and self-employed workers cannot obtain an HRA.
- FSA (Flexible-Spending Account):
- An FSA is similar to an HRA in that both are tax-advantaged savings accounts established by your employer.
- However, with an FSA, you ― not your employer ― technically owns the account and makes regular contributions via paycheck deductions.
- Like an HSA, contributions to an FSA are not taxable; annual contributions cannot exceed $2,500.
- FSA monies can generally be used to cover a wider range of medical expenses and medications than HSA or HRA funds.
- FSAs are typically a “use it or lose it” type of account. Account holders must make use of the fund while it is active. However, recent amendments allow employers to change their plans to allow employees to roll over up to $500 of an unused fund into the next plan year without losing the maximum FSA contribution.
- Catastrophic Health Insurance:
- Under this type of plan, you are allotted three covered primary medical care visits per year.
- The premium is generally lower than other plans that award more benefits, but catastrophic plan deductibles and coinsurance also tend to be relatively high.
- Catastrophic plans (as a rule) do not fulfill standard requirements for health plans imposed by the ACA.
- Only adults under the age of 30, and those who obtain a ‘hardship exemption’ from marketplace individual and employer-sponsored health plans, are eligible for catastrophic coverage.
Final Considerations Before Choosing a Plan
Ultimately, the health coverage plan you choose should be the option that best suits your individual and family needs. Here are a couple of factors to consider:
Ideally, your plan enables you to receive medical treatment whenever it is needed. Some insurers cap your annual number of primary care visits, while others are more lenient and allow you to schedule as many appointments as you deem necessary. Before enrolling in a new plan, it’s important to establish if there are any restrictions regarding primary care visits and, if so, exactly how many physician visits you are allowed.
Are you a generally healthy individual who is content to visit the doctor for a yearly check-up? Then a high-deductible plan with a low premium might be your most cost-effective option.
Do you have a pre-existing condition that requires a large amount of treatment, therapy, and/or prescribed medication? If so, you probably want a low-deductible plan; you’ll pay higher monthly premiums, but save more money on out-of-pocket expenses in the long run.
Physicians and Specialists
If retaining your current physician or specialist is crucial to your healthcare, then you need to investigate prospective coverage with regard to the physician’s network, as well as the costs of visiting a physician outside the network. Another consideration is whether or not the plan requires a PCP, and if you are allowed to appoint your trusted physician as your PCP if this sort of mandate is in place.
We hope this guide to health insurance has been informative. To learn more about individual and group coverage options, please visit the following resources.
- HealthCare.gov: The federal government’s official site for healthcare coverage allows visitors to research and apply for different plans and learn about how the ACA pertains to different individuals and organizations (i.e., small business owners).
- Getting Coverage Outside the Marketplace – PlanFinder: This tool allows users to browse coverage plans not included in the ACA Healthcare Exchange.
- Obamacare Metal Plans: These descriptions of all four ‘metal’ plans available through the ACA feature data tables for deductibles, premiums, coinsurance, and other financial factors that health coverage shoppers should consider.
- eHealthInsurance: A national marketplace listing prices for various coverage plans, as well as definitions of important terms and explanations of different health insurance options.
- NCS Glossary of Employee Benefit Terms: Compiled in July 2012, this alphabetized glossary from the Bureau of Labor Statistics features many key health insurance terms (p. 11-15).