How Does Health Insurance Work?
How does health insurance work? You pay a monthly premium and your share of annual out-of-pocket costs, and your insurer pays it’s share of covered costs. The concept is simple, but getting that perfect health plan takes some brain power and elbow grease. By taking the time to master and internalize the content of this page, you’ll have the ammo you need to shop smart for health insurance and health care.
Let’s break down the health insurance jargon and help you to understand how to get the right health insurance plan. We will show you how to understand your options so you can get a plan that strikes the perfect balance between the care you get, and the costs you pay.Also see our pages on comparing health plans, health plan types, and buying a health plan.
How to Get the Right Health Plan
When buying a health insurance plan, you will always trade one cost or benefit for another. A plan with a high premium might have a great network and a ton of covered services, but have a high deductible. Another plan may have a relatively low premium and deductible, but have a really narrow network. There are lots of costs and benefits to mix and match and this creates lots of health plan choices. Choices are confusing, but they are the key to getting the best deal.
Insurers broker deals with healthcare providers to lock down prices, then they compare what plans will pay on average, then they create plans with costs that ensure the plan pays for itself and turns a profit. The house always wins on a larger scale, but by mastering the game you can win on an individual basis. When shopping for a plan we always want to be part of the reason plans cost more, and not part of the reason health insurance is one of America’s biggest industries.
The only way to get the best plan for you and your family will be understanding how these costs and coverages interplay and get a plan that exploits the insurer’s math and puts you in that sweet spot where you get the most bang for your buck. To find this health plan you’ll need to really understand all the health insurance jargon below.
TIP: Cost assistance, taxes, and health care needs are always based on what you are projected to need next year and next years income. Sure as a rule of thumb you’ll base everything on last year, but if you know you are quitting your job, are suddenly unable to work because of illness, or will be going in for expensive treatments you’ll need to shop with these factors in mind.
Health Insurance Jargon Explained
Below we define and explain the importance of common health insurance jargon.
To get the right plan for you and your family you’ll need to understand premiums, out-of-pocket costs like copays, coinsurance, deductibles, out-of-pocket maximums, and dollar limits. You’ll need to understand coverage terms like in-network vs out-of-network, drug formularies, covered benefits, health saving plans, and health plan types.
Other key pieces of the puzzle are you’re own medical needs for the upcoming year, your projected income, and family size for the upcoming year. You will need the time to compare qualifying health plans.
By learning the definitions on the page, learning how they connect together, and following a few tips for how to buy, we will show you how to avoid overbuying or under buying health insurance. Like anything else, the key to saving the maximum amount of money and making the system work for you, is understanding it. With health insurance you are always trading one benefit or cost for another, your insurance company has already calculated the odds and built prices into the plan. The only way for you to “win” is to understand what trade-offs benefit you and your family’s specific needs over the insurer.
Premium: This is the amount you pay each month. Paying your premium is sort of like paying into a pool of money with a bunch of other people. Some people will use a lot of care, others will use less. Higher premiums tend to mean lower out-of-pocket costs, specifically lower deductibles and better coinsurance. You pay more up front and your insurer picks up more of your health care tab. A low premium high deductible plan mean you’ll pay for most of your medical expenses with your premium paying into a pool to cover you if you get sick, but it may be the right health plan for an individual who is young and healthy with no dependents.
Copay: This is the fixed amount you will pay for covered services. Unlike coinsurance your copay isn’t subject to a deductible. You will simply pay your copay for a covered drug or service from day 1. Your copay generally doesn’t count towards your deductible, and you must continue to pay that copay amount even after your deductible is met until you reach your out-of-pocket maximum. It’s one of the simplest and smartest parts of your health insurance. You’ll want to find a plan that covers the drugs and services you know you need at a low copay. If you have chronic illness or a large family you will likely want a plan with lowest possible copays given the monthly premium price you can afford to pay.
Coinsurance: This is the share of costs of a covered service that is subject to coinsurance. Coinsurance doesn’t kick in until you have met your deductible. On a high deductible plan coinsurance can be next to meaningless because all marketplace plans have a maximum out-of-pocket cost of no more than $6,600 for an individual and $13,200 for a family during 2015. In other words, you could meet your deductible and out-of-pocket maximum around the same time on a high deductible plan. On a low deductible plan coinsurance is king! If you have a family who needs coverage or you are sick, you’ll want low copays, great coinsurance coverage, and lowest deductible possible, more than you want low premiums. Of course, the premium should still be within your monthly budget. If you are young and healthy, better coinsurance and low deductibles are a worthwhile trade for low premiums. This is because you will not likely pay as much for your health care out-of-pocket as you would pay in premium costs for lower deductibles and better coinsurance.
Deductible: This is the amount of covered out-of-pocket costs you will have to pay each year before your coinsurance kicks in. That is it. Most plans don’t pay 100% after you reach your deductible. It pays it’s set coinsurance costs at that point. It only pays 100% when you reach your out-of-pocket maximum, but your deductible does count towards your out-of-pocket maximum. Your deductible can’t be higher than your out-of-pocket maximum. NOTE: Premiums are not applied toward the deductible. Deductibles are different for individuals and families. Deductibles are much lower if you see in-network versus out-of-network (outside the network) doctors; if you go out-of-network, you will have an out-of-network deductible which is separate from the in-network deductible.
Out-of-pocket maximum: This is the most you will pay for covered services in a policy period (usually a year) before your insurer pays 100% of covered costs. All plans have a maximum out-of-pocket cost that changes each year. For, example, for 2020, your out-of-pocket maximum can be no more than $8,150 for an individual plan and $16,300 for a family plan before marketplace subsidies. In an emergency ANY plan will cover 100% of the costs past the maximum, however, more expensive plans may have lower out-of-pocket maximums. The out-of-pocket maximum takes into account your share of covered costs: copays, coinsurance, and deductibles, but they don’t take into account premiums or care that isn’t covered by the plan. When you shop out-of-network, those expenses may not count toward your Out-of-pocket maximum either.
Actuarial Value (AV): This is a calculation of the average amount a plan will pay to everyone on the plan. It’s meant as a way to rank plans and has no real life impact on exactly what you will pay. You’ll only take AV into account when looking at what plans qualify for cost assistance on the marketplace. It’s not a real life applicable cost. Essentially, it is the expected or projected amount of shared costs for the average use of a given health plan.
Dollar Limits: Dollar limits are the maximum amount your insurer will pay for your care. Luckily, under the ACA there are no dollar limits on essential health benefits (all the things you NEED to get and stay healthy)! Aside from getting the wrong health plan or being uninsured, dollar limits were one of the driving forces behind medical bankruptcy. Be glad we don’t have to factor this in for covered services.
Networks: If something is “in-network,” it means your plan covers it at the full-cost sharing cost. It is a “covered service”. If something is “out-of-network” that means your plan either doesn’t cover it or covers it at a lower amount. If you plan to go out-of-network, then you need to look at other plans (unless you are purposefully getting a lower cost plan and planning to save money for those services by trading a low premium for crummy out-of-pocket costs and networks). Never ever go out-of-network without first checking with your insurance. If you discover you have to go out of network between enrollment periods, check with your insurer, in certain extreme situations insurers may allow you to seek out-of-network services and still agree to pay. Example: If you get diagnosed with less common disease and the type of medical treatment or provider you require is not found within your network.
Drug Formulary: This is essentially the network of drugs your plan covers and includes copay amounts for those drugs. Usually this is grouped into categories of covered generics and brand-names. It will often cover some drugs at higher amounts, others at lower amounts, and some not at all. There are all sorts of fun rules for what they must cover and, depending on your plan, you’ll need to go specific pharmacies to get those drugs. The more drugs you take regularly, the more important your plans formulary is.
Ten Essential Benefits: Every plan sold on the marketplace must include services from each of the ten essential health benefit categories. These are the basics you need to get healthy and stay healthy. Cancer treatment, mental health, maternity, vaccinations, check-ups. These are all essential heath benefits, some are free right off-the-bat. Most essential benefits are subject to copay or coinsurance.
MAGI: Your modified Adjusted Gross Income. Calculate this for you or your family to understand if you qualify for cost assistance or exemptions from the requirement to have coverage.
Cost Assistance: The amount of assistance you can get through HealthCare.Gov. There are three types of cost assistance: Advanced Premium Tax Credits to lower your premiums (100%-400% FPL), Cost Sharing Reduction (CSR) subsidies for lower out-of-pocket costs (100%-250% FPL), and Medicaid and CHIP (138% FPL if your state expanded Medicaid).
Federal Poverty Level (FPL): The guidelines for getting cost assistance through the marketplace. These are also used for a number of other assistance programs. This is calculated as a percentage, 400% FPL is 4 times the federal poverty level.
TIP: Medicare has unique cost sharing amounts in some instances, for example Part D has a number of different thresholds that act as deductibles of sorts.
Calculating Your Medical Needs For Health Insurance
Understanding how to compare plans and what the jargon means is all fine and dandy, but if you don’t know how much money you’ll make next year or what medical needs you’ll have over the course of the next year, then it’s not going to do you a lot of good. Given that here is some information you’ll need to gather and calculate.
Income: How much money are you going to make next year. You’ll need to estimate your Modified Adjusted Gross Income (MAGI) for your household. You can base this on last years tax returns if, if you are expecting to make roughly the same amount, or, use this page to calculate MAGI. Your MAGI will tell you if you qualify for exemptions based on income and how much cost assistance you are eligible for. You’ll also be able to better estimate the affordability of health plan costs for any given plan.
What is the most you are willing or able to pay: If you are young and healthy and live a low risk lifestyle buying a plan boils down to shopping for ultra low premiums and then finding a deductible and out-of-pocket maximum you can afford to pay in an emergency. So, you’ll have to figure out a number that won’t bankrupt you in the worse case scenario. If that number is $5,000 then shop for plans with at least a $5,000 deductible and out-of-pocket maximum (remember that your what you pay towards your deductible counts towards your out-of-pocket maximum). In other words, once you pay $5,000 in the course of a year, your insurance will cover you at 100%. If you can’t afford paying the full out-of-pocket maximum on a plan, but still want a low premium high deductible plan, look for one that has a deductible price you can afford in an emergency with good coinsurance and low copays once you reach that point.
If you know you’ll need a lot of services or regularly require expensive treatments, you’ll instead look at plans with premium payments within your budget, then calculate premiums, expected copays and coinsurance to see how much you’ll estimate to spend over a year on a given plan. You will want to find a plan that covers the services you need, with a low deductible, good coinsurance, and low copays. This is because you need your insurance to pay a higher percentage of your health care needs regularly. In an emergency, you will still owe the remaining out-of-pocket maximum, but what you have already paid towards your deductible, copays, and coinsurance counts towards this amount.
The medical services you need: If you know you’ll need certain drugs covered or you’ll need to see certain specialists, check that plans you are considering cover these things in-network. Any medical services or treatments that will mean big costs over the year you’ll want great coinsurance. If possible, you also want to make sure you have lower copays for these services. If you have a lot of medical needs and have to choose between a lower copay or higher coinsurance coverage, than take higher coinsurance coverage. The amount you pay in copays will count towards your deductible and, once your deductible is met, your coinsurance will kick in. These types of plans usually have a higher premium, but extra $200 a month towards your premiums is nothing when you are saving $100 a month on prescriptions and $500 on doc visits.
Access to networks: Your plan will cover some health care providers and pharmacies at higher rates than others. Make sure your local pharmacy, doctor, and hospitals are all covered in-network at the max amount. If you don’t, than in an emergency you could end up getting out-of-network treatment. That is one of the number one things you want to avoid!
Leveraging Health Insurance Costs and Benefits
We have covered a lot. Let’s go over a few practical situations and we will suggest basic health plan types to focus on. Everything below is rule of thumb. To get the best plan in a category you’ll need to apply all the tools we’ve showed you on this page.
If you are:
Low Income: Medicaid covers all low income residents (making less than 138% FPL) in state’s that expanded Medicaid. If you qualify for Medicaid it’s a one-size-fits-all solution so you won’t have to shop around for insurance. If you make between 100%-250% FPL you may also want to consider a Silver plan on HealthCare.Gov since you can apply all subsidies to it.
Young, healthy, live a low risk lifestyle, and don’t take medications: Calculate your expected income for next year. Go to HealthCare.Gov. Get the cheapest plan after subsidies (Bronze if you qualify for subsidies or catastrophic if you don’t). Then realize that if you do need care you’ll essentially be paying out of pocket due to cheaper plans having higher deductibles. All marketplace plans have a maximum out-of-pocket cost no more than $6,600 for an individual and $13,200 for a family and must cover essential health benefits. This means in an emergency you won’t end up with a bill that exceeds that amount.
Alternatively, you could go with a Silver plan with a lower deductible. If you make below 250% of the federal poverty level (FPL). Silver plans are the only plans that will qualify for out-of-pocket assistance subsidies. Silver plans will generally mean more cost sharing by the insurer in an emergency, but a higher premium. The less you make the more this becomes the best buy.
If you are under 26 you may want to simply stay on your parents plan.
Don’t qualify for subsidies due to unaffordable employer coverage, are under 30 and/or have a “hardship exemption”, healthy, live a low risk lifestyle, don’t take medications, and can save the deductible: If you have applied to the marketplace and are not satisfied with your coverage affordability (it costs more than 8% of your household taxable income), or you are not eligible the marketplace because your employer offers coverage and it costs more than 8% of your household taxable income, or if you are under 30 and you earn enough money to pay your typical out of pocket costs up-front up, you may want to consider a catastrophic plan or high deductible health plan.
Bronze plans can be found on the marketplace and are eligible for subsidies, catastrophic plans are not. Catastrophic plans require you to be under 30 or obtain a hardship exemption. Catastrophic plans are only offered outside the market place and require you to shop around to truly find the best deal. Catastrophic plans have a maximum out-of-pocket cost no more than $6,600 for an individual and $13,200 for a family and must cover essential health benefits.
- Pros of High Deductible plans– These types of insurances usually offer lower premiums (though if you qualify for the marketplace, the Bronze plans are similar and they tend to offer a better deal for only a fraction more). They will cover the minimal essential benefits. These plans are only offered outside the marketplace, so you can shop around for the best premiums and coverage. You qualify for a Health Savings Account. Money you put into a health savings account is tax free (unless you use it for non health care expenses) and is capped at certain maximums. This deduction can be a benefit when it comes to taxable income level on your federal incomes taxes.
- Cons of High Deductible plans– These types of plans have high initial out-of-pocket expenses and sometimes are packaged with less than adequate cost sharing once you reach your deductible. It is so important to take into consideration what you can afford out-of-pocket in an emergency. These plans are only sold outside of the marketplace. So getting the best bargain for the lowest premium requires you to do the leg work. Shop around for the best coverage and price for catastrophic plans and compare it to the Bronze plan or Silver plan (if you qualify for marketplace subsidies).
Young and healthy, but high-risk and/or take medications: Calculate your expected income for next year. Find out how much your medications would cost if you paid out-of-pocket for a year. Go to HealthCare.Gov. Get a Silver plan if you make less than 250% FPL. If you make more, look at plans that have low copays the things you are definitely going to need and the best coinsurance coverage for medications and services you might need, as well as, a deductible you can afford to pay out right in an emergency.
Individual With Moderate to high medical needs: If you make less than 250% FPL, first look at Silver plans, so you can get your cost sharing reduction subsidies. These may make a Silver plan a better value than Gold or Platinum. If you make more than 250% FPL or don’t qualify for cost assistance, look for good cost sharing (great coinsurance coverage and lower copays) and a low deductible. You may pay more in premiums during the year, but regular medical care for chronic illnesses can be much more expensive, so you would be gaining better coverage earlier on.
Families: Especially with younger children, you should assume you’ll have moderate health needs or more. These may make a Silver plan a better value than Gold or Platinum. If you make more than 250% FPL or don’t qualify for cost assistance look for good cost sharing and a low deductible.
Over 65: You’ll need enroll in Original Medicare and will most likely want to shop for supplemental Medicare insurance. Learn more about ObamaCare and Medicare.
Shopping For a Health Plan
Now that you have the basics down you’ll actually need to shop for a plan. The best advice we can give you is to always check out your state’s Health Insurance Marketplace first. If you don’t qualify for subsidies and just want to see your options do yourself a favor and shop around for quotes outside the marketplace too. Don’t be afraid to get help licensed agent or marketplace navigator. They are there to help you find the right plan.