By Graham McCaulley and Brenda Procter, Personal Financial Planning, University of Missouri Extension
Whether you get insurance through your work or buy it on your own, most people have some level of choice in the type of plan they have. Health insurance, which has a language all its own, is a contract that requires your health insurer to pay some or all of your health care costs in exchange for a premium. As you make health insurance choices for you and your family, understanding some basic terms will help you know what your costs will be for certain health care services. Understanding how health insurance works can also help you decide which type of plan is best for you and your family.
Basic health insurance terms and how they work together
Premium– The fee you must pay for you or your family to have a health insurance plan.
- Is usually paid once a month.
- Must be paid to keep your coverage, whether you use it or not.
- Can vary greatly in amount.
Out-of-pocket costs- The dollars you pay for health care services out of your own pocket.
- Does not include monthly premiums.
- Usually includes deductibles, copayments and coinsurance.
- Deductible: The amount you owe for covered health care services before your health insurer or plan begins to share expenses with you.
- Copayment: A fixed amount (e.g., $15) you pay for a covered health care service, usually paid at the time of service. The amount can vary by the type of covered health care service you receive and whether the service is in-network or out-of-network.
- Coinsurance: Your share of the costs of a covered health care service. The amount you pay is a percentage (e.g, 20%) of the charge for the service.
- Out-of-pocket maximum: A dollar limit on the amount you will pay each year toward your medical care.
- Your out-of-pocket costs (deductibles, copayments and coinsurance) count toward your out-of-pocket maximum, but monthly premiums do not.
In general, less expensive premiums mean more out-of-pocket costs, and more expensive premiums mean fewer out-of- pocket costs. Different health insurance companies will charge different premiums for different types of plans. You may pick the least-expensive premium to be able to save money each month, but that could cost you more in the long run depending on how you use your insurance. Also, you may have different in-network and out-of-network levels of coinsurance, which affect your out-of-pocket costs. Plan networks vary considerably, and it is critically important that you find out which facilities, health care providers and suppliers are in a plan’s network before making a final decision, especially in rural areas.
Choosing a plan
If you have an idea of what types of services are important to you or your family, you can anticipate how much a plan may cost you, which can help you compare different plans.
Is a higher premium better than a lower one? It depends on your situation.
- Think about how the health of you and any family members who will be on the plan may affect out-of-pocket costs. Some factors to consider:
- Do you take prescription medications? If so, you can check how the costs of this may be handled by the insurance company. If prescription drug benefits are important to you, you may want to choose a plan with a higher premium that covers more costs.
- How often do you go to the doctor? If frequently, a higher premium plan that has lower copays for doctor visits may make more sense. You can also check to see if any doctors or specialists you are likely to see are included in the network. If you travel frequently, a wider network may make it worth paying a little extra in premiums.
- Do you have a chronic condition that requires regular treatment or lab work? Different plans will pay for specialist visits, hospitalization, and lab work differently.
- Consider the possible financial implications of your decision. In general, if you are younger, in good health (no chronic conditions), and are not providing health insurance for children, you may not be using your insurance as often. If this is the case, a lower monthly premium and higher out-of-pocket costs may make sense for you- but only if you will reasonably be able to access the amount needed for the deductible in case of an unexpected major injury or illness.
- Decide what you can afford each month. If you’re buying insurance through the Health Insurance Marketplace, you may be able to get assistance in paying your premiums (and some out-of- pocket costs). Knowing what you can afford each month is important, but you’ll also want to make sure any potential out-of-pocket costs are affordable as well. Don’t choose a plan with a high deductible if you can’t afford to pay it in cases of a major medical event.
- Research your options, and ask for help if anything in the summary of benefits is unclear. The Marketplace has staff who can answer questions online, over-the-phone, or in-person. Agents, brokers, and employers also should be able to help you understand plan options. A good place to start is www.healthcare.gov or http://extension.missouri.edu/insure