How does health insurance work?

An insurance plan is like an agreement between an individual and the insurance carrier, also known as the insurance company. Because the insured individual pays a monthly premium/cost, the insurance company partially or fully covers the cost of the individual’s medical expenses, including doctor’s visits, prescriptions, surgeries, etc.

Insurance companies partner with certain medical providers so that insured individuals pay a lower price at those particular medical providers, which become known as in-network providers. Insured individuals are not covered the same with out-of-network providers. Insurance companies have the right to refuse to pay for any of the cost if the insured individual receives care out of their network.

In the United States, individuals and their families can obtain health insurance through their employers, the marketplace, or with the help of an insurance broker.

What is a Premium?

An insurance premium is the cost that an individual pays monthly in order to have an active insurance plan. If an individual has insurance through their employer, their employer may set up a recurring payment through their paycheck following their paycheck cycle (weekly, bi-weekly, semi-monthly, etc.) instead.

Insurance premiums must be paid every month regardless of usage, the same as any subscription or membership fee would be.

What is a Deductible?

A deductible is the amount that an individual must pay for medical expenses before their health insurance will contribute to their medical expenses. Typically, this amount resets each calendar year. Premiums do not count toward an individual’s deductible.

What is Coinsurance?

Coinsurance is the percentage of medical expenses that the insurance carrier will cover after the individual has met their deductible. An 80/20 policy means that the insurance carrier will pay 80% of remaining expenses and the individual will pay the 20%. This is true until the individual reaches the out-of-pocket maximum. More on that later.

What is a Copayment?

Some plans have copayments, better known as copays. This is the exact dollar amount that individuals must pay for specific medical expenses. Copays are usually lower for a standard doctor’s visit vs. a specialist visit. Copays typically do not count toward the deductible, but as of 2014, count toward the out-of-pocket maximum for new health plans.

What is an Out-of-Pocket Maximum?

An out-of-pocket maximum is the total amount that an insured individual will spend on medical expenses during the year. Once an individual hits their out-of-pocket maximum, the insurance company will pay the rest of all covered medical expenses. Again, premiums do not count toward out-of-pocket maximums.