Health Insurance 101

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When you think of health insurance, you may think “safety net.” Or you may think “complex,” “confusing” or “expensive.” (We understand if you have a love-hate relationship with it.)

But without health insurance, a routine check-up would cost twice as much (or more) and a trip to the hospital could put a huge dent in your bank account.

A 2009 study published in The American Journal of Medicine found that illness or medical bills contributed to 62% of all bankruptcies in 2007. But people weren’t going bankrupt because they lacked health insurance. Most of them had insurance, but it was inadequate to cover their medical costs. So, as important as it is to have health insurance, it’s equally important to have the kind that matches your health care needs and your wallet.

The Patient Protection and Affordable Care Act (“ACA” or, as some call it, “Obamacare”) requires all Americans to carry health insurance by 2014. For that reason, you should understand health insurance and how to shop for it.

Health Insurance in a Nutshell

Health insurance is a type of insurance policy in which you agree to pay the insurer every month, and the company then agrees to pays for a portion of your medical expenses either when you become ill or to prevent you from becoming ill. By paying this monthly fee, you guard yourself against the risk of racking up debilitating medical costs with one big accident.

Health insurance works by spreading the cost of care among groups of people. Every month, the health insurance company collects the monthly fees paid by its subscribers and pools them to pay for the medical costs of any subscribers who get sick in that time period (or for medical prevention costs such as immunizations and flu shots). The company’s bet is that it can take in enough in monthly fees to not only cover the medical costs, but profit from the difference. So, it’s in the insurance company’s best interest to have healthy consumers who pay their premiums and rarely get sick.

Why Health Insurance is Important

Health insurance helps your wallet and your health. Having health insurance assures doctors and hospitals that when you show up on their doorstep, you will pay for their services, and it also gets you discounted rates. The results all around? Better prices, better treatment, better health outcomes. Just consider:

  • An uninsured patient with appendicitis might pay nearly $40,000, while an insured one with the same condition could pay as little as $1,500.
  • Uninsured patients in car crashes stay in hospitals an average of six and a half days, while insured patients stay in the hospital for more than nine days.
  • Insured patients are less likely to die from a car crash–they have a 3.7% mortality rate vs. a 4.5% rate among the uninsured.
  • Studies have also shown that uninsured women with breast cancer have worse survival rates and significantly more advanced cases of the disease.

Also, with health insurance, you’ll probably be more likely to get a check-up, since you know it won’t wipe out your entire month’s pay.  That means you’ll be more likely to catch symptoms early—and nip any illnesses in the bud.

Term Sheet

Health insurance
n. An insurance policy that pays a portion of medical expenses, provides lower medical rates and improves access to health care.

Premium
n. The amount paid regularly (usually on a monthly or quarterly basis) to maintain health insurance coverage. 

Co-payment / Co-pay
n. The fixed dollar amount paid for a specific service. Typically, office visits, prescriptions or hospitalizations require co-payment.

Deductible
n. The portion of medical expenses that the insured must pay before insurance starts covering costs.

Coinsurance
n. The percentage of the cost of treatment that must be paid after the deductible is met. e.g. 80/20 plan, where you pay 20% of the expenses and the insurance company covers the remaining 80%.

Out-of-Pocket Maximum
n. The limit that can be paid for health services in a year; often a combination of co-payment, coinsurance and deductible costs. After the limit is met, the insurance company usually pays for 100% of covered services for the rest of the year.

How Health Insurance Works

We gave you a sneak preview of how insurance works. You pay a monthly fee and in exchange you get a portion of your health care costs covered. But that is a very simplified version of the bargain you strike with your health insurance company, and you’ll need to learn a few more of the terms in order to understand how this agreement works out for everyone:

When you sign up, you agree to pay a premium every month. This monthly fee could be low, like $50, or high, like $500. We’ll explain in a second what determines the price.

When you go to the doctor’s office, you pay a certain fee for the visit. This fee is called your co-pay, and it is charged whenever you use routine services like going to see the doctor, buying prescription medication, etc. It is the insurer’s way of gently reminding you that this medical service costs money so that you think twice before using it. Insurers don’t make them too high, however, because if they are too expensive, then people won’t go in for routine services that could save the insurer from paying more to treat a full-blown disease later on.

However, you may find at first that you have to pay for the lab tests during this doctor’s visit, and all other medical fees until you’ve met an obligation called the deductible. This is an amount you have to pay toward your health care before your health insurer starts covering your medical costs. Often, the amount of your deductible is in inverse to the amount of your premium. If you have a high premium, your deductible may be as low as a few hundred in medical expenses for the year. And once you reach that limit, you won’t have to pay any more. On the other hand, if you have a low premium, your deductible could be high, such as $10,000.

After you’ve met your deductible, at every doctor’s visit, you’ll pay an amount determined by your plan’s co-insurance, which is the percentage you pay for your medical care after you’ve already paid your deductible but usually up to a limit. A co-insurance shares the costs between you and the insurer, so maybe you pay 20% of your care after the deductible, and the insurer pays 80%.

Your plan may also have an out-of-pocket maximum that determines the absolute amount you’ll pay for health care in a given year. So, once you’ve paid that amount in co-pays, co-insurance and deductible fees, your plan will cover 100% of the costs of services included in your coverage for the rest of the year.