Introduction Overview of How Health Insurance Works and Its Terms

Health insurance plans in the United States are filled with terms such as deductible, coinsurance, out-of-pocket limit, co-payment, and lifetime maximum. What do all these terms mean and how does health insurance work? This article will also explain the difference between the two most common types of health plans: HMO and PPO.

Perhaps you never had to think about these things before. Perhaps you have always been covered under your parent's plan and whenever you got sick, your parents took you to the doctor and took care of the bills as well.

Perhaps you went straight from school to the corporate world. And you were lucky enough to have a company that automatically provides health insurance and so you simply took the plan they had to offer. Whenever you got sick, you have this card that you take to your doctors.The doctors took care of you and you thought nothing more about it.

Unfortunately, many people lost their jobs due to the 2008 recession. Often COBRA will continue their health coverage after their job lost provided the they pay for the premiums themselves. Nevertheless, this recession is a long one and the COBRA coverage will only last 18 months. And with the lost of the job, they lost their health insurance too.

Or perhaps you came from a country where the government provided the health care for you -- which is the case for majority of the countries in the world. You didn't have to ever pay anything for any health related service. So it would be no surprise that when you came to the United States that you found the terms coinsurance and co-pay completely foreign.

Or you may decide to start your own business and be self-employed, now without a employer providing the health insurance for you. You now need to shop around for an individual health plan.

Regardless of the situation, it is best to learn all the various health plan terms so that you can understand how health plan works and how to compare between them.

If you ever had to pay for health services yourself, you might be shocked with how high the cost are. If fact, most people will not be able to afford to pay for major health services themselves. That is where health insurance comes in. Health insurance will help pay in part for your health services. That is why in the United States, everyone should have some form of health insurance regardless of their age or health. You may be healthy, but accidents do happen and you may find that you require major health services. You don't want to be stuck paying for the entire bill.

How does the insurance company get the money to help pay for these services? When you sign up for or buy health insurance, you pay a monthly premium each month to the health insurance company. You are then known as the "insured". Because you are now insured against the high cost of medical care in the event that you need it. In the event that you need medical care, the insurance company may help pay for part of the cost under the provisions of the health insurance plan. The provisions of the plans varies immensely and there are a lot of conditions in the fine print. That is why I say they "may" cover "part" of the cost. They rarely cover all the cost, as you will find out later in the article. You still have to pay the deductible, co-pay, and co-insurance part. The plan only covers certain medical services specified in the plan. These are known as "covered services" and are usually the procedures that are considered "medically necessary".

They may not cover cosmetic or orthodontic procedures for example. The list of medical services that are not covered varies by plan and are known as "exclusions". If you choose to do the medical procedure that is not covered by the plan, you can still do so. It just means that you would be paying for it fully yourself.

Since everyone pays the premium each month regardless of whether they are healthy or sick, the insurance company collects this pool of money. This pool of money is then used to pay for the health services when one of its insured gets sick.

The amount of the monthly premium varies depending on where you live, your age, your gender, and you physical condition -- and of course by the health insurance company and plans. Generally, when you have a plan with a low premium, it would have a high deductible.

What is a deductible? Just because you have health insurance doesn't mean that you do not have to pay for health care services. In fact, you must start paying first before the health plan does. The deductible is the amount that you must pay on your own each calendar year, before the health insurance plan kicks in.

If your plan says that you have a $1500 deductible. That means that you have to pay the first $1500 yourself for the services that you use for the calendar year. If you do not use any medical service for the year, then you don't have to pay any deductible. This deductible is paid on the services that you use. If you have minor medical bills for the year amounting to less than the deductible amount, you will end up paying that full amount -- since the health plan has not kick in yet.

The co-payment:

Every time you go to an doctor's office, the receptionist will usually ask for your insurance card and will then ask for your payment of the co-payment. This is true even after you have paid past your deductible. This co-payment amount (also known as co-pay for short) varies. It is typically a small fixed fee like $10 or $25 per office visit. And the co-pay may be more if you see a specialist or a doctor out of your provider's network.

When you go to the pharmacy to purchase prescription drugs, there may also be a co-pay. Again the co-pay can vary. For example, it may be more for specialty medicine and less for generic drugs. Some insurers waive co-pay for certain preventive care (such as regular physical checkups); but that is up to the particular plans.

It is called a co-pay because both you and your insurance company is paying. You are paying the co-pay amount and the insurance company pays the rest to the doctor or to the pharmacy.

Co-Insurance:
A similar concept is co-insurance. Whereas co-pay is a fixed dollar amount, co-insurance is a percentage.This is when you pay a certain percentage of the cost and the insurance company pays a certain percentage of the cost -- after your deductible is met, that is.

Note that this is after your deductible has been paid. Your deductible amount is what you pay fully yourself. Your insurance company pays nothing until after you have paid your deductible. After that amount, you and your insurance company shares the rest of the cost. You paying the co-insurance percentage and your insurance company paying the remaining percentage. This ratio varies from plan to plan and is one of the things to compare when shopping. It could be for example that you pay 30% and the insurance company pays 70%. It is generally never more than 50% that you have to pay.

Out-of-pocket limit:
Even with insurance, you can still be paying a lot for medical care especially if you have major work done. For a large operation, 30% for example is still a lot to pay. But fortunately, most plans have a "out-of-pocket limit" or "maximum out-of-pocket". This is the maximum amount that you would have to pay in a year in terms of the co-insurance. This out-of-pocket limit is sometimes thought of as a "co-insurance cap" or "stop-loss". So out-of-pocket limit is in addition to the deductible and your premiums. The out-of-pocket limit does not apply to co-pays for doctor visits and prescription drugs. Think of the out-of-pocket limit as the maximum that you have to pay a year in addition to the deductible, premiums, and co-pays.

After you have paid up to the out-of-pocket limit for the year, the insurance company will pay the rest for the covered services for the remainder of that year (excluding co-pays). Except when the lifetime maximum is reached.

What is Lifetime Maximum:
When your medical cost are so much that insurance companies have paid out an amount that has reached the lifetime maximum amount for the plan, then the insurance company will stop paying. You would then be no longer covered. Lifetime maximum is the maximum that insurance company will ever pay for your care over the course of your lifetime. The lifetime maximum is usually a large amount (like for example $5 million) and hopefully that limit would never be reached.

Pre-existing conditions:
The word "condition" refers not to conditions in the plans. But it refers to medical conditions that you have. Pre-existing conditions are medical conditions you have prior to the start of your new health insurance plan.  When you apply for a health plan, they will ask if you have any pre-existing conditions.  Some plans will increase your rate or not cover you at all depending on your pre-existing condition.  When the health care reform act goes into effect (expected in 2014), health plans will no longer be allowed to exclude you due to pre-existing conditions.

Coordination of Benefits:
Sometime an insured can be covered under two health insurance policies. For example, you may be self-employed and have your own individual insurance. And your spouse may work for a company that has an health insurance that covers you as well. If you have medical costs, you would not get double benefits from both plans. The policy of determining which of the two insurance plans pays and how much is known as "coordination of benefits".

In or Out of Network:
Most plans have approved doctors chosen by your health plan. These doctors are considered "in-network". Doctors that are not in-network, are "out-of-network". Some plans stipulates that you must go see an in-network doctor.  Other plans let you see whomever you choose, but you may pay more for out-of-network doctors.

There are many different types of health plans. The two most common ones are HMO and PPO. HMO is "Health Maintenance Organization" is generally less expensive in term of the premium that you have to pay. But HMO is more restrictive.

PPO is "Preferred Provider Organization" is more expensive. But what you get is greater flexibility.

HMO uses a network of doctors. These are the in-network doctors approved by the plan. Whenever you see these doctors, the plan will pay for it except for the co-pay which you must pay. That is not to say that you can not see a doctor that is not listed. It just means that if you see "out-of-network" doctors, you have to pay for them yourself.

In addition, HMO requires you to select a "primary care physician" (also known as PCP). This doctor must be from the in-network list. This doctor is usually a generalist that provides basic and regular services such as regular physical checkups, colds/flu, etc.

Sometimes you may need to see a specialist. In those case, the HMO will pay for the specialist only if your primary care physician approves it first. This is known as a "referral" where the primary care physician refers you to a specialist.

A PPO also has a list of in-network providers, but the in-network list is typically larger than in a HMO. Furthermore, you can see doctors outside of network and the plan will cover a certain percentage. Another difference is that you do not need to have a referral in order to see a specialist.

Therefore PPO is worth considering if you see specialists on a regular basis or if you have a primary care physician that you like to continue working with that is not on HMO's in-network list.

As you read the health care plan literature, you may see more terms like "non-maternity plans". Some plans covers pregnancy and some do not. You have to look carefully since that would make a big difference. If you are a single male for example, you may be suited to "non-maternity plans" -- these are plans that do not cover pregnancy. But if you are a female planning on having children, then definitely make sure that the plan covers pregnancy.

In the literature, you may also come across the following acronyms:

HDHP (High Deductible Health Plan):
As its name implies, these are plan with high deductibles and larger upfront costs when seeking medical treatment. But the upside is that they have lower monthly premiums. They are used to protect the insured against large payments due to catastrophic medical conditions. They are good for young and healthy people who do not need to go see doctors on a regular basis.

HSA (Health Savings Accounts):
HSA is a account (like a bank account) where you can put money aside for future medical expenses. Contributions to these accounts have some tax benefits. HSA are often found attached to HDHP plans for people to put money aside for when they need to pay for high deductibles.

FSA (Flexible Spending Account):
Similar to HSA, you can put pre-tax dollars into a FSA fund for medical expenses. Unlike HSA which are often used with HDHP, FSA are often used with other plans as well. Money in a FSA expires at the end of the year. Whereas HSA, the money can be carried over to the next year.

HRA (Health Reimbursement Account):
A plan where employee pays for their own medical care upfront themselves. But then they get reimbursed from their employer.

All these pieces are a part of a consumer driven health plan, known as CDHP.

This article was written in September 2010.  This article speaks in general terms.  Every single health plan is different and its policy may differ from what is described.  Especially with the passing of the health care reform act, the terms of health plans are always changing.  By the time you read this article, the information may have changed.  So it is best to read the literature provided by your health plan for the most accurate and up-to-date information.