Health insurance is an integral part of the health care system; nearly all of us have some coverage. In fact, according to the Kaiser Foundation’s report, 91% of Americans had some insurance coverage either through private or public plans. Many of us find it hard to understand our medical bills and how health insurance works. Cue our medical insurance 101 guide.
Health insurance is more than just a doctor-patient relationship. After you receive information about your first individual insurance package, you will start to realize that. Complex insurance terminology can be confusing, and you might be anxious about purchasing a health insurance policy you do not fully understand. Choosing an insurance policy is a big decision that can have a significant, long-term impact on your quality of life for decades to come. It is one of the most important investments you will ever make.
This medical insurance 101 guide will explain medical insurance basics, benefits, and options so you can select the right health plan for you and your family.
Medical Insurance 101: What is Medical Insurance?
Medical insurance provides coverage that can help protect you from the high cost of health care. It is a legal agreement between you and a health insurance company. You pay premiums and, in return, the insurance company will cover a part of medical costs for illnesses or injuries, prescription drugs, and preventive care.
Insurance companies set an annual rate of premium after they calculate the likelihood and costs of the medical treatments they will cover. Most medical provider payments are based on the fee-for-service (FFS) model. The provider is reimbursed based on the number of services they provide or the number of procedures they order, rather than the outcomes or value of the services. The healthcare industry is trying to replace this model with value-based care, which uses results as the basis for payment, to lower costs and improve the overall quality of care.
How Does Medical Insurance Work?
When you select a health insurance policy, you become a member of that health plan. In each group plan, also called a risk pool, the cost of care is spread among people in the group. Insurance paid by one member helps pay for the care of others. In this pool are members who have an ongoing illness (high risk) as well as healthy people who do not use medical services that often (low risk). Spreading financial risk across the group is an essential part of insurance because even low-risk people will get sick or injured at some point. When they do, their out-of-pocket cost is much less than the actual price of services received.
Insurance companies combine the predicted medical costs of all members in the group to calculate premiums. The average predicted health care costs dictate the amount needed to cover everyone’s expenses. Simply put, you will pay a lower premium if you are in a pool with healthy individuals while sharing a pool with high-risk members might result in higher premiums.
There are various kinds of health insurance that provide coverage for medical expenses. The price varies based on how much coverage you want and how many family members you wish to insure.
Individual vs. Group Medical Insurance
Individual health insurance is a health plan you buy directly from an insurance company through the health insurance marketplace. A marketplace is a resource where you can learn about health coverage options, compare medical plans, and enroll in coverage. These policies can cover individuals and their eligible family members.
Group health insurance is available through your employer and comes in options called packages. This type of insurance comes with lower premiums because the financial risk is spread out over many mostly healthy people.
If you are not employed or you are self-employed, you can get individual health insurance or enroll in group insurance through professional associations and organizations.
Medical Insurance 101: Understanding Health Insurance Common Terms
When you think of health insurance costs, premiums may come to mind, but there are other costs to consider. Depending on the plan, you might have co-payments, deductibles, and coinsurance. Let’s go through some of the health insurance terms that everyone should know.
A premium is a fee that you pay to an insurance company to have coverage for the medical conditions described in the policy. The cost of insurance premiums is determined through a process that places policyholders into specific risk categories. Premiums are based on several factors, including:
- Medical history
- Geographic area
- Tobacco use
Depending on the terms of your health insurance policy, you might pay these fees annually or in smaller monthly or quarterly payments.
Here’s an example: Let’s say you purchase an annual individual health insurance policy with a total premium cost of $2,700. If you pay in monthly installments, your monthly premium will be $225.
However, it is important to note that you pay your portion of the insurance premium even if you do not benefit from medical care during that month. If you stop paying your premium, the insurance company will not honor any claims.
A deductible is a price you pay for health care services before the insurance company starts to contribute its share of the medical expense. For example, if your annual deductible is $2,000, your plan will not pay anything until you have met your $2,000 deductible. Only after you meet your deductible will your insurance company begin covering the cost of your care. Many plans include certain services regardless of whether deductibles are met, such as preventive care services.
Generally, plans with a lower monthly premium have a higher deductible and vice versa.
A copayment, or copay, is a set amount you give directly to the health care provider (doctor, hospital, etc.) for a covered health care service. You pay this set dollar amount each time you get the service. The amount of your co-payment is determined by the plan and varies according to the service provided.
For example, you pay a $20 copayment for the appointment, regardless of what the doctor charges or which service you receive. The service could cost $200 or $300, but in either case, you pay $20 out of pocket, and the plan covers the rest.
Some policies may have coinsurance, which requires you to pay a percentage share of the costs of a covered health care service. Coinsurance is similar to copayments, except that you pay a percentage of costs rather than a fixed dollar amount. Coinsurance may count toward your deductible. An insurance company usually covers about 60-90% of the service fee, depending on the plan, and you pay the rest.
A Quick Example
For example, your surgery costs a total of $3,200. After you pay the $40 copay, the insurance company pays 80% of the remaining $3,160, or $2,528. Then, you pay the remaining 20% of the amount after the copay, or $632. Your total out-of-pocket cost would be $672, provided you have met your deductible.
Now, let’s say you have not met your deductible. If you have only paid $800 toward your $1,000 annual deductible, you have to pay the first $200 on your surgery. After that, the insurance company will cover 80%, and you pay 20%. Your cost would be $200 for the deductible plus $632 for your share of the percentage, for a total cost of $832.
An out-of-pocket maximum is the most money you must pay out of your pocket for your health care coverage throughout the year, excluding the monthly premium. After you reach the yearly out-of-pocket maximum, your health insurance starts to pay 100% for all covered expenses.
A network is a group of doctors, healthcare centers, hospitals, and other health care professionals that are in contract with health insurers. They provide health care services to covered plan members at a pre-negotiated rate. They are often called in-network providers. You will generally pay less for using an in-network provider.
On the other hand, out-of-network health care providers do not have a contract with health insurers and do not have a pre-negotiated rate with your health insurance plan. If you use an out-of-network provider, health care services could cost more or, depending on your health plan, may not be covered at all.
Health Care Reform: Affordable Care Act (ACA)
Congress passed the Affordable Care Act (ACA), a notable health care improvement law in March 2010. It is commonly known as Obamacare. The purpose of the ACA is to extend affordable health insurance coverage to uninsured Americans. The reform affects consumers, insurance companies, and health care providers.
According to the Individual Mandate, most individuals are required to obtain Qualifying Health Coverage, or they must pay the penalty at tax time. In addition to the penalty, individuals without health insurance will be responsible for all expenses of their medical care.
The Affordable Care Act designed a health insurance Marketplace, also known as the Affordable Health Insurance Exchange, in 2014. People and small businesses can shop for health insurance on the Marketplace. They can also compare private health insurance options and find out if they are eligible for premium tax credits and other affordability programs. States can use the Federal Health Insurance Marketplace (Heathcare.gov) or develop their own marketplace. Individuals who purchase a health insurance plan from their state or the Federal Health Insurance Marketplace can apply for tax credits or subsidies.
Health insurance plans must meet a specific list of ten basic healthcare services to comply with the Affordable Care Act, including preventive care services at no cost. The list includes:
- Ambulatory patient services
- Prescription drugs
- Emergency care
- Mental health care
- Rehabilitative services
- Preventative care and wellness services
- Lab tests and other services
- Pediatric care
- Maternity and newborn care
Moreover, the ACA ensures that individuals with pre-existing medical conditions cannot be denied health insurance. Insurance companies cannot turn you down or bill you more on account of a previous condition (either an illness or an injury).
Where to Purchase Coverage?
As we mentioned earlier, there are two main categories of health coverage for residents of the United States: individual health insurance (available to all individuals) and group insurance (for eligible employees). Now, let’s break down these two categories and explain where you can find coverage that complies with the Affordable Care Act.
Before the Affordable Care Act, not everyone was eligible for individual coverage and costs were variable. After the ACA implementation, personal health insurance plans are required to offer coverage to policyholders no matter their preexisting conditions or health complications. You can get individual coverage through insurers inside or outside the Affordable Health Insurance Exchange, or through policies that provide short-term health insurance.
Four Levels of Coverage
Individual health coverage shoppers who want to use the Exchange have several coverage options. Plans in the Exchange are presented in four levels: bronze, silver, gold, and platinum. Some people qualify for catastrophic plans as well.
- Bronze: You pay 40%; the insurance company pays 60%
- Silver: You pay 30%, the insurance company pays 70%
- Gold: You pay 20%; the insurance company pays 80%
- Platinum: You pay 10%; the insurance company pays 90%
- Catastrophic: You pay 40% or more, the plan pays 60% or less.
Silver and bronze plans are suitable for individuals who want to pay a lower monthly premium and do not require many visits to the doctor. Gold and Platinum plans are ideal for high-risk users who need to visit their physicians more often for prescriptions.
People under 30 can use Catastrophic plans, as can individuals of any age who experience difficulties and cannot afford medical aid.
Other Places to Buy Insurance
In addition to purchasing health plans through the Exchange, you can buy individual coverage from insurance companies, agents, brokers, and online health insurance providers not listed on the Exchange site. These plans meet all ACA requirements, including covering pre-existing conditions and providing free preventive care.
Your annual income is a crucial factor to consider when it comes to purchasing a health plan through the Exchange. If you earn $46,000 per year (400% of the federal poverty level) or less, you might be eligible for a subsidy that helps pay for your insurance. On the other hand, if you earn more than $46,000 per year, you may find a cheaper health plan outside the Exchange. However, it is essential to note that if you buy a plan outside the Exchange, you cannot get premium tax credits or other subsidies based on your income.
Open enrollment is a designated period when you can sign up for health insurance. You need to sign up for health insurance during the open enrollment, or you will be forced to wait until the next open enrollment period. If you experience a qualifying life event, you can enroll outside of open enrollment, called a special enrollment period. Qualifying life events include sudden loss of a job, moving, getting married, having a baby, or adopting a child.
The 2020 Open Enrollment Period starts on Friday, November 1, 2019, and ends Sunday, December 15, 2019.
Group coverage refers to an insurance policy issued to a group of people, generally by an employer or university. Employer-sponsored coverage is how most Americans get insurance. An employer pays more than 50% of the monthly premium and may offer coverage to employee dependents. An employer who provides group coverage might be eligible for tax benefits.
In comparison to individual coverage, group plans are usually cheaper because the risk to the issuer is balanced over the entire group. Generally, group coverage is the most affordable option.
What is COBRA?
The Consolidated Omnibus Budget Reconciliation Act (COBRA) is a health insurance program that lets workers who are no longer eligible for group coverage acquire continued coverage for a specified period. That period can be up to 18 months, depending on the state. An employee who is transitioning between jobs or experiencing a reduction of work hours, or who loses their job, is eligible for this program. These individuals retain the same health insurance coverage, but they must pay the full premium. While they will pay more for coverage than they would have as an employee, COBRA coverage is typically cheaper than an individual health insurance plan would be.
Short-Term Health Insurance
Short-term health insurance, or temporary insurance, is a plan designed for individuals who are uninsured and waiting for an open enrollment period to begin. It is a transition plan that is available from 30 to 90 days up to 12 months. Short-term plans provide coverage that does not comply with the requirements of the ACA in most cases. That means that health insurers can reject your application because of pre-existing medical conditions.
Medical Insurance 101: Types of Health Insurance Plans
You have plenty of options when it comes to choosing a suitable health insurance plan. Each plan has its own benefits, rules, and other features designed with different needs in mind. Some people need a particular type of plan that covers more services than another plan. While terminology can be confusing, it is vital to understand the key differences between managed health care plans. You can avoid additional costs by searching for medical care beyond the regulations of a particular plan.
Health Maintenance Organizations (HMO)
A health maintenance organization (HMO) is an organization that provides coverage for a monthly or annual fee. HMO plans can include vision and dental insurance. In addition to the monthly premium, you need to cover a copayment for every visit.
This type of health insurance plan may limit health insurance coverage to care from doctors under the contract of the HMO. Otherwise, you pay all expenses out of your pocket because an HMO does not cover out-of-network care.
HMO plans insist that you pick up a primary care physician (PCP) who is responsible for providing and organizing all your health care services. They also require that you receive care within the established provider network.
An HMO plan is suitable for individuals who do not have pre-existing medical conditions that merit a specialist other than the designated primary care physician. Your PCP must give a referral for you to see a specialist.
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Preferred Provider Organization (PPO)
A preferred provider organization is an agreement in which a network of participating health care providers offer services to clients at reduced fees. With PPO plans, you do not have to choose a primary care physician, and you can manage your care without referrals. If you select in-network doctors, hospitals, or other providers, your deductibles and copayments will be lower (a 90/10 ratio). You can choose to see an out-of-network provider for an additional cost (a 70/30 ratio).
Exclusive Provider Organization (EPO)
A unique provider organization is a health plan that only covers services provided by doctors, specialists, and hospitals within the plan’s network. You are not able to use outside care providers, as there are no out-of-network benefits. The only exception is an emergency.
With an EPO, you will receive a much lower negotiated rate than you would with an HMO or PPO plan.
Point of Service Plan (POS)
A point of service plan is another kind of health plan that combines parts of HMO and PPO plans. Similar to an HMO, you may be asked to choose a primary care physician who will refer you to specialists. Like a PPO, you can choose out-of-network providers, but your expenses are lessened if you use doctors and hospitals within the plan’s network.
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High-Deductible Health Plan (HDHP)
HDHPs are health plans with a high deductible, meaning you pay more medical bills yourself before the insurer begins to contribute. You will pay 100% of the cost of prescription drugs, doctor visits, and emergency room visits until you reach your annual deductible. After that, you are 100% covered for the rest of the calendar year. Preventive care is typically covered before the deductible is met.
A high-deductible health plan is a more affordable type of health insurance because it has lower premiums.
Know that you can combine HDHPs with a health savings account (HSA), which allows you to pay for qualified out-of-pocket expenses before you meet the annual deductible. A health savings account is a tax-exempt savings account and is only open to those who opt for an HDHP. Funds are added to the account before taxes and must be used to pay for qualified medical, dental, and mental health services. Otherwise, you will pay a substantial tax penalty. HSA contributions, which can be made by anyone who wants to add to your account, do not expire at the end of the year; any leftover money rolls over to the next year.
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Public Health Coverage
Public health insurance plans are plans run by U.S. federal, state, or local governments. In these plans, people have some or all of their healthcare costs paid for by the government. These plans are created for low-income individuals or families, the elderly, and other people who meet specific qualifications. These programs include Medicaid, Medicare, Children’s Health Insurance Program (CHIP), Veterans Affairs, Tricare, and more.
Also, public health insurance is overall more affordable than private health insurance. While these plans require no copayments or deductibles, many providers do not accept insurance plans sponsored by the government.
Medicaid is a health plan offered by federal, state, and local governments for low-income people, pregnant women, the elderly, people with certain disabilities, and other qualified individuals. Some Medicaid programs use private insurance companies to provide Medicaid coverage, while others pay your costs directly. Medicaid benefits vary between states.
You can apply for Medicaid at any time throughout the year, as it does not have an open enrollment period. You can apply through:
- The Health Insurance Marketplace
- Your state Medicaid agency
Medicare is a federal health insurance policy for people 65 and older and some people with disabilities. If you receive Social Security benefits when you turn 65, you will be automatically registered for Medicare Parts A and Part B. People who do not receive Social Security benefits may apply for Medicare via the Social Security Administration website.
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Facts to Know
The program includes Original Medicare (Parts A and B), Medicare Advantage (Part C), Part D prescription drug coverage, and Medigap.
- Medicare Part A is called hospital insurance. It covers inpatient hospital stays, home health care, skilled nursing facility stays, and hospice care.
- Medicare Part B covers medical insurance (outpatient expenses).
- Medicare Part C (Medicare Advantage) is a type of health plan offered by private insurance companies. It provides benefits of Parts A and Part B, as well as prescription drug coverage, vision, hearing, and dental insurance.
- Medicare Part D is a plan that provides prescription drug coverage, offered by private insurance companies. This plan requires an average monthly premium of $33.
- Medicare supplement (Medigap) is supplemental insurance you can purchase from a private health insurance company. It helps you pay some of the costs not covered by Medicare Part A and Part B. There are ten types of supplemental health insurance plans available in most states.
Children’s Health Insurance Program (CHIP)
Children’s Health Insurance Program (CHIP) is a U.S. federal insurance program that provides low-cost health coverage. The plan is available to children whose parents have income too high to qualify for Medicaid but too low to afford private coverage. In some states, CHIP also covers pregnant women. You can apply for CHIP at any time of the year, as there is no limited enrollment period.
Additionally, CHIP covers inpatient and outpatient hospital care, prescriptions, dental and vision care, routine check-ups, and other services. Many medical services are free, but others may require a copayment.
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Why Do I Need Medical Insurance?
Medical insurance is not cheap, and people who never get sick might be tempted to go without coverage. Why worry about monthly premiums, copayments, and other costs when you can pay for medical expenses as you go? Well, things get complicated if you have an ongoing health issue or an accident because costs can get very high very quickly.
The truth is, medical emergencies are costly. If you do not have insurance, you might find yourself with a high amount of medical debt. Oftentimes, people who do not have insurance avoid getting treated for a minor issue which later develops into a severe medical condition.
Those with insurance do not have to worry about preventative care or ongoing issues. That is why it is vital to have some form of health insurance. A health insurance policy will protect your financial status and your most valuable asset – your health.
What has your experience been with medical insurance? Do you have any tips or useful advice? Leave a comment below!