I have worked with individuals in the past who were very concerned about the medical bills that were showing up to their house. They were working through a major health concern and the charges from the hospital, doctor and prescriptions seemed too large to handle. I have often asked “but what is your maximum out-of-pocket?”. In some cases, people have not understood what that meant or why they should care – and that they will not be responsible for all those costs! This article discusses 5 key terms in a health insurance policy that will hopefully help provide insight for those who want to learn more.
First of all, it is important to understand that the primary role of health insurance is to help cover medical costs for individuals when catastrophe strikes. Health insurance is not typically intended to cover every visit to the doctor or every prescription. However, when major medical events happen in life, we should hopefully be able to rely on health insurance to manage the financial shock. There are 5 important terms related to health insurance that may help individuals understand when insurance begins to help and how much it will help.
- Premium – This is the amount an individual pays to have health insurance in the first place. It is not expected to be the end of medical costs for an individual; but is just the starting point to have the contract.
- Deductible – This is an amount of money an individual must pay BEFORE the insurance company begins to pay anything. For example, if a health insurance policy has a $500 deductible, then an individual will need to pay the first $500 of medical bills. After the first $500 is paid, then the insurance company will also begin paying.
- Co-insurance – This is the rate at which an insurance company will share medical costs with an individual after the deductible is paid. A common co-insurance rate is 80/20. This means that after an individual has paid their deductible, the insurance company will begin paying 80% of the bill – but the individual is still responsible for 20% of the bill. For example, if someone had a $2,000 medical expense and a $500 deductible they would pay the first $500 before the insurance steps in. That means there is $1,500 remaining to be paid. This amount would be split 80/20. The insurance company would pay $1,200 (which is 80%) and the individual would pay $300 (which is the remaining 20%).
- Out-of-Pocket Maximum – This is the most money an individual should have to pay for medical expenses in a calendar year. Even though most insurance policies have a co-insurance rate, where the company and individual are sharing the costs, the sharing of costs ends once an individual pays their maximum out of pocket. For example, an individual with a $2,600 out-of-pocket maximum would pay their deductible and then be splitting the remaining bill at their co-insurance rate until they have paid a total of $2,600. This $2,600 includes the deductible and all other payments made during the year (but not the premium).
- Co-pay – This is an amount that individuals pay as their individual portion for medical goods or services. For example, if an insurance policy says there is a $25 co-pay when seeing a primary care provider, then the individual must pay $25 when they go to see their personal doctor. The actual cost of that visit may be $100-$200, but the insurance company covers everything above $25. The co-pay can be higher when individuals see a medical specialist. Also, prescriptions often have their own co-pay. Lastly, it is important to know that most health insurance policies have no co-pay when an individual is receiving vaccines, preventative screening, or attending their annual physical. That means most of these services are at no cost to the individual.
There is no doubt that the cost of health insurance and health care is high. However, it is important to realize that these policies do provide protection for times in life when individuals may be the most vulnerable. Individuals are encouraged to review their own health insurance policies, identify these amounts that apply to them, and understand the coverage they have. It will also be important to know that not every health insurance policy is the same, so it will be important to know the specific rules and coverages that apply to you.