More than 9 in 10 Americans have some form of health insurance—but not everyone knows exactly how health insurance works.
This lack of understanding usually isn’t a problem—until it is. If you’re not aware of the specifics of your plan, there’s a chance you could receive an unexpected bill that you might have trouble paying.
Before you can understand the specifics of your health insurance plan, you need to understand how health insurance works in general. This page goes over key terminology and questions to keep in mind when enrolling in a health insurance plan to ensure you get the best value for your dollar and there are no unwanted surprises down the line.
In the future, be sure to work with a transparent and trustworthy health insurance company that emphasizes self-management of your plan. With an agile approach to offering health insurance, you can get the lowest rates possible while still retaining the exemplary quality of healthcare services that you’ve come to expect.
Find in this article:
- How Do Deductibles, Coinsurance, Copays, and Premiums Work?
- How Do Out-of-Pocket Maximums Work?
- What’s the Difference Between In-Network and Out-of-Network Benefits?
- How Does My Deductible Impact My Premium?
- How Do Tiered Copays Work?
- What Are Essential Health Benefits?
- How Do Insurance Networks Work for Each Type of Plan?
- How to Get the Most Value From Your Health Insurance Coverage?
How Do Deductibles, Coinsurance, Copays, and Premiums Work?
When you enroll in a new healthcare plan, there are four main components of your plan to understand: deductibles, coinsurance, copays, and premiums. Together, these four components dictate how much you’ll pay for healthcare services.
What Is Deductible?
A deductible is a fixed dollar amount that you must pay out of pocket before your health insurance plan starts helping out with costs.
How does a deductible work for health insurance? For example, if your deductible is $1,000 and you receive a medical bill for $2,500, you will have to pay $1,000 all by yourself. Once you pay the $1,000, your deductible has been met, and your health insurance company will help out with the remaining $1,500.
What Is Coinsurance?
Coinsurance refers to a percentage split between you and your insurance company. Coinsurance rates come into effect after your deductible has been met.
Continuing with the above example, coinsurance rates would apply to the $1,500 you owe beyond your deductible.
Many healthcare plans make use of an 80/20 coinsurance split, meaning your health insurance company pays for 80% of the bill and you are responsible for 20%.
Continuing with the same example, under an 80/20 coinsurance structure, you would be responsible for $300 of the $1,500 payment.
What Is a Copay?
Certain healthcare services are routine and expected, such as physical examinations. Most healthcare plans allow for one to two physical examinations per year.
These physical examinations are not billed like most healthcare services are, where you first need to meet your deductible and then split the bill with your insurance company. Instead, you are responsible only for a copay: a flat fee that you pay every time you access a basic healthcare service (such as a physical examination).
In this example, your copay for your physical examination is usually a flat fee of between $20 and $100. Psychiatry is another healthcare service that usually bills on a copay basis.
Copay rates are variable depending on the specifics of your plan, but the concept of a one-time flat-fee payment for certain routine healthcare services holds true no matter what the exact dollar amount is.
What Is a Monthly Premium?
A monthly premium is a fixed dollar amount you pay every month to keep your health insurance plan active. If you miss a payment, you may become ineligible to receive coverage.
Monthly premium costs vary depending on how robust your plan is. In general, the more robust a plan is, the higher the monthly premiums are. Likewise, a plan with low monthly premiums will generally offer less coverage than one with higher premiums.
How Do Out-of-Pocket Maximums Work?
Certain unexpected healthcare services, particularly ambulance rides and urgent care, can get expensive quickly. Even if you’ve paid your deductible in full and the entire payment is eligible for coinsurance rates, 20% of a five- or six-figure bill may be unfeasible for many people.
That’s why many plans make use of out-of-pocket maximums. An out-of-pocket maximum is just what it sounds like: the maximum amount you’ll pay out of pocket in a calendar year.
Once your out-of-pocket maximum is reached, insurance covers 100% of your healthcare expenses, even if you had a coinsurance agreement for everything before the out-of-pocket maximum.
Your particular out-of-pocket maximum will vary depending on the specifics of your plan. In general, the higher your monthly premium, the lower your out-of-pocket maximum will be.
If you enroll in a plan via the Marketplace on healthcare.gov, your out-of-pocket maximum can’t be more than $8,700 for an individual and $17,400 for a family, but it could be less. The Marketplace is a health insurance shopping and enrollment service run by the federal government.
What’s the Difference Between In-Network and Out-of-Network Benefits?
One of the most important aspects of any health insurance plan is the network of approved healthcare providers and facilities.
If you want to receive coverage, many types of healthcare plans require you to stay within this approved network. If you venture outside of the network without meeting your plan’s criteria for out-of-network coverage, you may receive reduced or no coverage.
Although dealing with restrictions on your healthcare services is often less than ideal, they’re put into place to make some types of plans more affordable. When health insurance companies make agreements with certain facilities and offices to get specific services at fixed rates, they can in theory charge less to the customer because there are fewer unknown variables.
Depending on how much you want to pay for health insurance, you may decide to enroll in a type of plan that puts minimal restrictions on where you can go to access healthcare services.
If you shop around, it may also be possible to find a restricted plan where all of your preferred medical providers are in-network. That way, you get the best of both worlds: you can go where you want to go and see who you want to see, but you pay the least amount possible for that privilege.
How Does My Deductible Impact My Premium?
Two components of any health insurance plan are closely related: your deductible and your monthly premium.
How does a health insurance deductible work in relation to a monthly premium? In general, the two have an inverse relationship. As your deductible goes up, your premium goes down, and vice versa.
One of the most extreme versions of this relationship is found in high-deductible health plans (HDHPs), frequently offered by small businesses. As the name suggests, HDHPs have very high deductibles, which is a downside. But they usually have very low monthly premiums, which is an upside.
In general, plans with higher deductibles and lower monthly premiums are ideal for individuals who do not plan to make frequent use of healthcare services.
For example, if you visit the doctor just twice per year for your physical examinations, you may choose a plan with a high deductible. You still have some coverage in worst-case situations, but if everything goes according to plan and you make minimal use of healthcare services, you don’t needlessly pay a high dollar amount in the form of a monthly premium to keep your insurance plan active.
This approach doesn’t work as well if you’re an individual who makes frequent use of healthcare services. If you end up needing to pay a high deductible every single year, the savings you receive on lower monthly premiums just aren’t worth it. Instead, it would make more sense to pay higher premiums, but significantly less out of pocket in the form of your lower deductible.
How Do Tiered Copays Work?
As covered above, a copay is a flat fee that you pay to access certain healthcare services.
In terms of cost, not all healthcare services are created equal. For example, a trip to a primary care physician is generally on the low end of costs. On the other hand, a trip to a specialist, who may make use of unique tools and tests, is often more expensive.
If you just need to take care of the copay, you pay a flat fee, but the insurance company still pays the full price. As such, insurance companies will often attempt to make copays align with the true cost of healthcare services in the form of tiered copays.
Tiered copays vary by plan, but in general, the more specialized a healthcare service is, the more you’ll pay in the form of a copay. Many plans will also split prescription drugs into different tiers of copays, with each tier having a different price point.
What Are Essential Health Benefits?
The Affordable Care Act (ACA) requires all health insurance plans to cover 10 essential health benefits.
Note that many plans will offer coverage beyond essential health benefits; essential health benefits serve only as the minimum.
If you need coverage beyond the 10 essential health benefits, be sure to pick a plan that covers them. If you know what you’re covered for, there won’t be any unexpected surprises throughout the year.
How Do Insurance Networks Work for Each Type of Plan?
Going beyond the components of a specific plan, the type of plan you enroll in matters with regards to how you are billed and what hoops you must jump through to receive coverage for out-of-network healthcare services.
Two common types of health insurance plans are Health Maintenance Organizations (HMOs) and Preferred Provider Organizations (PPOs).
What’s the Difference Between HMO and PPO Plans?
HMOs are generally the most restrictive type of health insurance plan:
- To see a specialist, you must first get a referral from your primary care physician. This requirement helps insurance companies potentially save money by reducing the number of unnecessary visits to specialists, but if you do need to see a specialist, you’ll need to first wait for an opening with your primary care physician, and often pay a separate copay for the visit to your primary care physician, too.
- Any specialists you see must be in-network. The only exception to this rule is that you are able to receive out-of-network coverage under certain emergency circumstances.
PPOs are still restrictive, but less restrictive than HMOs:
- You don’t need to get a referral before you see a specialist.
- You do need to stay in-network when seeing a specialist.
- Under certain circumstances, you may be able to receive partial coverage for out-of-network healthcare services.
Exclusive provider organizations (EPOs) are another popular alternative to the two plans described above. EPOs are identical to PPOs, except you won’t receive partial coverage for out-of-network healthcare services, resulting in slightly less flexibility but also slightly lower costs.
How to Get the Most Value From Your Health Insurance Coverage?
Want the most bang for your buck? Follow these four guidelines below before you decide to enroll in a new health insurance plan during the next Open Enrollment Period.
- Seek out plans with coverage for services you expect to need. Rather than rushing the process and trying to find a one-size-fits-all plan, be sure you’re specifically covered for your health needs in particular.
- Figure out approved providers before you enroll. Choosing from low-quality healthcare providers isn’t ideal, so before you enroll, make sure your preferred healthcare facilities and offices are supported by your plan.
- Pick a plan that balances premiums and deductibles. If you make frequent use of healthcare services, a low-deductible plan is likely ideal. If you make infrequent use of healthcare services, a high-deductible plan is a riskier, but potentially more affordable option.
- Look at plans from different sources. The Marketplace, your workplace, and any membership organizations you are a part of may offer health insurance plans at varying price points. If your spouse is enrolled in a workplace-sponsored plan, you may be able to enroll in that plan, too.
Health insurance isn’t terribly complicated, but there are a few components of every plan you should be aware of—your deductible, coinsurance rates, copays (tiered or not), and monthly premiums.
Beyond those components, be sure to also understand how your specific type of plan handles provider networks. Some are restrictive and less expensive, whereas others allow for more flexibility and convenience, but at a cost.
No matter which type of plan you pick or how robust it is, be sure to work with a trustworthy and modern health insurance company that emphasizes convenient digital-first practices. When you can manage and access your health insurance plan with just a few clicks, you can quickly and easily get the care you need from professionals you trust.