Understanding the Basics of Health Insurance
Health Insurance Basics
Health insurance is a way to help pay for health care expenses. Having insurance helps in the event of an accident or illness by paying some of the medical costs when you're injured or sick. Like car insurance or home insurance, you can choose from a variety of plans.
How Insurance Works
When you have health insurance, the insurance company pays a portion of your medical expenses. The amount the insurance company will pay, and the services that are covered (coverage) varies by plan.
For example, you may have to pay a $20 co-payment for each doctor visit. Or, the plan may not cover anything until you've paid a certain amount (the deductibles). These deductibles and co-payments, along with any other expenses you may pay, are referred to as out-of-pocket expenses.
Some plans may also have co-insurance, which is the percentage of the bill that you're required to pay, in addition to your deductible and co-payment.
The term cost-sharing is often used to describe the share of costs covered by your insurance that you pay out of your own pocket. This generally includes deductibles, co-insurance, and co-payments, but it doesn't include premiums, balance billing amounts for non-network providers, or the cost of non-covered services.
The amount you pay each month for your coverage is the premium.
The Relationship between Premium and Deductible
No matter which health insurance plan you choose, you’ll pay a monthly payment (your premium) to keep your health insurance coverage. You may also pay a certain amount (co-payment or co-insurance) each time you receive medical care.
Generally, the higher your monthly premium, the lower your deductible will be.
The Benefits of Health Insurance
Even healthy people need health insurance. Having a health plan helps maintain – and may even improve – the health and wellness of you and your family. And it may help in the event of an accident or illness.
Protect your Health and Prepare for the Unexpected
You never know when an illness or accident might happen. That's why, under the health reform law, almost everyone needs to have health insurance, or pay a penalty.
When you have health insurance, your plan may pay some of your medical costs. Plus you're encouraged to seek routine preventive care which may help you avoid developing an illness or health condition, or find it at an earlier stage when it's often more treatable.
Health insurance costs money – but not having it could cost a lot more. Unforeseen medical needs, combined with high health care costs, could leave you with medical bills if you're not insured. Having health insurance coverage can help reduce unexpected medical costs.
It's hard to know how much you'll spend on health care each year. But having health insurance helps pay for sudden, expensive medical costs. It also helps you pay for common services like annual check-ups, recommended health screenings and preventive care services.
Under the health reform law, it may cost you money if you don’t have health insurance. In 2015, the penalty is 2% of your income or $325 per person in your family (maximum of $975), whichever is higher.
Many health insurance plans also offer benefits, resources and tools to help you and your family get and stay healthy. Be sure to review your plan materials and take advantage of all the tools and programs offered.
You'll likely be considering which plan is right for you during open enrollment, when you can shop for a plan on the government’s Health Insurance Marketplace.
When you’re choosing a health insurance plan, you’ll want to look at more than the premiums and deductibles to evaluate plan options. Take a look at the co-insurance amount, too, and then decide which deductible, premium and co-insurance mix is the best option for you.
Choose the Plan that is Right for You
There are many factors to consider when choosing a health plan. Think about both your medical and financial needs – from coverage options to monthly premiums, to co-payments and deductibles. Consider your family situation, your family’s anticipated health care needs and available plan options.
It's a good idea to assess your needs and identify your priorities so you know what to look for in a plan. Consider costs, coverage, benefits, doctor flexibility and plan limitations to help you decide which plan is right for you.
Once you know what plan options are available, you can evaluate plan options to determine which one is right for your situation. Talk to your agent and review your plan materials – such as brochures, benefit summaries and websites – to find the details that will help you decide.
Things to consider include:
- Affordability (total cost)
- Coverage and benefits
- Access to doctors and hospitals
- Exclusions and limitations
- Health and wellness resources
Financial Analysis of Health Plans
The following is a financial analysis of health plans and does not reflect the care you might receive. Understanding the difference between the type of health plans, such as HMO, PPO, and EPO will help you figure out which plan is best economically. If you want a refresher on the difference of these types plans, you can view the following video: https://www.youtube.com/watch?v=AUmuJIe86dk
You will hear several very specific terms like Premium, Deductible, Co-Pays, Co-Insurance and most importantly, "Maximum Out of Pocket". If you are not familiar with these terms, you may want to review the video "Terms and Definitions" so that the financial aspect of understanding plans will make the most sense.
Finally, there are specific type of health plans that may also be very useful to understand like Health Savings Account Health Plans (H.S.A), Health Reimbursement Accounts (HRA) and Supplemental Plans like Hospital Plans (GAP Products). When understanding the financial aspects of health plans, these terms are very important to know. Please see the Video "Understanding HSA, HRA, And FSA Plans“:
There are two terms that would be really useful to understand when understanding any form of insurance especially health insurance: Severity and Frequency.
Severity refers to the amount of economic loss when an event occurs, for example huge operations like a multiple fracture from a bad car accident. Severe losses would amount to thousands of dollars to pay for the treatment. We call this kind of severity, catastrophic, whereas treatment for a sprained ankle would be minor or hardly severe!
Now, how often a loss occurs would be referred to as frequency. Another term you may often hear regarding frequency is probability of a loss. These are describing how often an event like a major fire occurs in a given area or time frame. So we could say for most people having a doctor's office visit once or twice a year would have a relatively high frequency and quite probable, it happens for most everyone every year. Another frequent health care loss might be a chest x-ray or an antibiotic prescription. But the most impactful reoccurring or most frequent losses are a result from a chronic disease like diabetes or life threatening heart disease. These are not only frequent but oftentimes, severe. Insurance companies use a deductible to eliminate coverage for smaller frequent losses because they are expensive to pay and usually are not what a client wants to insure against.
This brings up one more important point to remember when buying any insurance or warranty product. You insure only when you cannot afford the loss yourself. So let's put this into an example we all have experienced. You buy an electronic gizmo or an appliance and before you pay for the product, the salesperson will ask "would you like an extended warranty or insurance?" Now if this product is not very expensive most of the time the best answer is "no" -- why? Because it is very expensive insurance and the company selling it makes more money than the product they are actually selling you.
Now if a health plan were like a homeowners or auto policy with a single deductible, understanding the finance difference is very simple. It would look something like this:
If I have a severe loss which is as we said before are usually very rare and have my house burn or have a major theft what Deductible should I carry?
To answer that question you want to know or have a pretty good guess of how often or how frequent would this happen. Since we know that as the deductible increase it lowers your yearly premium. The premium saving between the difference deductible plans would be one of the numbers that helps us figure out what the deductible is for you.
Let's look at the numbers and see what may be a good choice. Say we were given two quotes for the same house and everything else equal. One had a $250 deductible and the other $1000. Remembering that a deductible is used by the insurance company to avoid paying small frequent losses which are very expensive to process and knowing that you have plenty of coverage on a catastrophic loss then seeing the difference of the premium between these two choices may look like this:
You save $250 a year for a higher deductible (see chart above) and the difference in the deductible would be easy to calculate ($1000 and $250 or $750) and then seeing how much we would pay extra to lower our deductible is fairly easy. So the question would be "is it better financially to pay less and be exposed to the higher deductible or the extra $750?”
Another way to ask that question: "Can I afford to pay out of pocket for that extra $750 or would I be better off to pay $250 more in premium each year?" Well most people would not want to pay $250 for an extra $500 return -- $250 more so you already prepaid the $250 of the $750 so your net return is only $500. Now if you knew you were going to have a fire you may say, “Well of course I will pay the extra $250 instead of $750. I am paying fewer funds out of pocket.” However, because fire or other losses are relatively infrequent (in fact, only about one loss every 10 years), prepaying that claim each year will be very expensive. At that rate, in 3 years, you would be breaking even and then each year thereafter you are paying $250 more with no return, so most people would take the savings by increase their deductible.
Now health insurance works somewhat the same way, the deductible reduces coverage for smaller losses but does not affect the catastrophic loss.
Having a health insurance agent will always help you simplify the complex world of health insurance, and as a result, make smart choices for you, your family, and/or your employees.