12 Vital Things to Know About Health Insurance

Health insurance can be full of bewildering terms, but knowing their meaning can have a big impact on how effectively you manage your health care benefits and costs.

If you’re choosing a health plan, knowing basic terms can also help you select the plan that best fits your needs.

Here are explanations of some basic health insurance terms. If you’re not familiar with them, you’re not alone. Most people don’t know a lot about health insurance and the claims process.

Here are some definitions of basic health insurance terms from HealthCare.gov:

Benefits

The health care services or items that your health insurance plan covers. The plan coverage documents explain what’s covered and what’s not covered. Don’t assume all services are covered. Check with your plan administrator if you have questions about your plan benefits.

Coinsurance

The percentage of the costs of a covered health care service you pay (20%, for example) after you've paid your deductible.

Let's say your health insurance plan's allowed amount* for an office visit is $100 and your coinsurance is 20%.

If you haven't met (or paid) your deductible — You pay the full allowed amount – $100.

If you've met your entire deductible — You pay 20% of $100 – or $20. The insurance company pays the rest.

Here’s an example of coinsurance where the insured has had a serious condition. The allowed amounts for treatment covered by the plan are $12,000. The plan coverage:

  • Deductible: $3,000
  • Coinsurance: 20%

In this example, you'd pay all of the first $3,000 (your deductible).

Of the remaining $9,000, you'll pay 20% – or $1,800 (this is your coinsurance).

In this example your total out-of-pocket costs would be $4,800 — your $3,000 deductible plus your $1,800 coinsurance.

Typically, plans with low monthly premiums have higher coinsurance. Plans with higher monthly premiums have lower coinsurance.

* Allowed Amount — The maximum amount a plan will pay for a covered health care service. May also be called “eligible expense,” “payment allowance” or “negotiated rate.” If your provider charges more than the plan’s allowed amount, you may have to pay the difference.

Copayment

The copayment, often called copay, is a set amount ($35, for example) you pay for a covered health care service after you've paid your deductible. Copayments can vary for different services within the same plan. Drugs, lab tests and specialist visits may have different copays.

In this example the health insurance plan's allowable amount for a doctor's office visit is $100. The copayment for a doctor visit is $35.

  • If you haven't paid your deductible, you’d pay $100 — the full allowable amount for the visit.
  • If you've paid all your deductible, you’d pay $35, usually at the time of the visit.

Plans with lower monthly premiums usually have higher copayments. Plans with higher monthly premiums usually have lower copays.

Cost Sharing

The portion of health care costs covered by your insurance that you pay out of your own pocket. Cost sharing usually refers to deductibles, coinsurance and copayments, or similar charges. Cost sharing doesn't include costs such as premiums and the costs of non-covered services.

Deductible

The amount you owe for covered health care services before your health insurance or plan begins to pay. For example, if your deductible is $5,000, your plan won’t pay anything until you’ve met (paid) your $5,000 deductible for covered health care services that are subject to the deductible. The deductible may not apply to all services. Paying the deductible is sometimes referred to as meeting or satisfying the deductible.

Formulary

This is also called a drug list. It’s a list of prescription drugs covered by your health insurance plan. Drugs, even prescription drugs, that are not on the formulary may not be covered.

High Deductible Health Plan (HDHP)

A plan with a higher deductible than a traditional insurance plan. The monthly premium for a HDHP is usually lower. In exchange for a lower premium, your deductible will usually be higher. A high deductible health plan can be combined with a health savings account (HSA).

The IRS defines a high deductible health plan as a plan with a deductible at least $1,300 for an individual or $2,600 for a family.

Health Savings Account (HSA)

A savings account that allows you to set aside money on a pre-tax basis to pay for qualified medical expenses. This means you don’t have to pay income tax on money you deposit in your health savings account. An HSA can be used only if you have a high deductible health plan.

You own the HSA, so if you change jobs or retire, the HSA goes with you. HSA funds roll over year to year if you don't spend them. An HSA may earn interest. You can open an HSA through your bank or other financial institution.

Lifetime Limit

A cap on the total amount of benefits you may receive from your insurance company over your lifetime. The limit may be an overall cap or separate caps on specific high-cost services. If you reach your lifetime limit, the insurance plan won’t pay for additional covered services. Most plans have sizable lifetime limits (for example, $1 million).

Network or Non-Network Providers (Preferred or Non-Preferred Providers)

Network providers are facilities, providers and suppliers your health insurer or plan has contracted with to provide health care services. Network providers are sometimes called preferred providers. Out-of-network providers are also known as non-preferred providers.

Your out-of-pocket costs may be lower if you visit network providers rather than out-of-network providers.

Out-of-Pocket Costs

Expenses for medical care that aren't covered or reimbursed by insurance. Out-of-pocket costs include your deductibles, coinsurance and copayments for covered services. Out-of-pocket costs include costs for services that aren't covered by insurance.

Out-of-Pocket Maximum/Limit

The most you pay during a policy period (usually one year) before your health insurance plan starts to pay 100% for covered health benefits. This amount includes the annual deductible, coinsurance and copays you pay for covered medical expenses during the year.

The out-of-pocket maximum does not include premiums, additional charges for out-of-network providers or spending for non-covered health benefits.

For example, if your out-of-pocket maximum is $7,000, that’s the most you’ll have to pay for the year.

Questions?

See a larger glossary on HealthCare.gov.

If you have employer-sponsored health insurance, your plan administrator can answer health insurance questions. For individual health insurance, check with your agent. For insurance marketplace plans, connect with a navigator, agent or broker.

Before seeking health care, it’s a good idea to call your health care provider’s office to verify that the provider is in your health insurance plan’s provider network. Network/provider agreements change from time to time. A provider who was in-network on your last visit may not be in-network this time.

If you have a bill for outstanding out-of-pocket expenses, most providers will work with you to set up a payment plan. Keep your lines of communication open.

Meet the Author

Cheryl C. Miller is Director of Financial Clearance for Aurora Patient Services. 

Read more posts from this author

The information presented in this site is intended for general information and educational purposes. It is not intended to replace the advice of your own physician. Contact your physician if you believe you have a health problem.

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