Health insurance is a critical aspect of your financial planning, but it's also extremely difficult to understand. Health-insurance policies extend for dozens, or even hundreds, of pages in some cases, and there's a lot of confusion about what various terms, phrases, and contract provisions really mean. Below, we'll look at several often-misunderstood aspects of health insurance that can cost you a lot of money if you don't grasp them correctly. By knowing more about your insurance, you can make the most of your health coverage and make smart choices about exactly which coverage options to pick.
1. In-network and out-of-network distinctions are important for many health-insurance policies.
Managed care organizations have done a lot to cut the cost of healthcare for patients, but they also impose restrictions on the medical professionals and services you can use. Some policies still allow you to see any doctor of your choosing, but most health-maintenance organizations and preferred-provider organizations offer additional savings if you use doctors and other professionals that are within the policy's covered network.
It's essential to look at exactly how your policy distinguishes between in-network and out-of-network services, because some policies have extremely draconian provisions in this regard. You can count on getting less coverage and having to pay more in out-of-pocket costs for out-of-network providers in nearly every situation, but some policies provide almost no coverage for providers who aren't in their networks, except in emergencies. Before you casually visit an out-of-network provider, it's worth contacting your health insurer to find out exactly what will and won't be covered.
2. Mixing up deductibles and out-of-pocket maximums.
Many health-insurance policies come with deductibles and out-of-pocket maximums, but people routinely get confused about the two terms. A deductible is an amount that you have to pay out of your own pocket before your insurance coverage kicks in. After you pay the deductible, then your insurance will start paying its portion of your healthcare expenses, with typical arrangements involving a split between what the insurer pays and what you're responsible for covering yourself.
Out-of-pocket maximums come into play after you've fulfilled any deductible you have and have incurred additional healthcare expenses. Once the total of your deductible and your proportional share of costs after your insurance starts paying out benefits reaches the out-of-pocket maximum, you'll stop paying anything toward further costs.
For instance, say you have a $1,000 deductible, and after that, your insurance pays 80% of costs, with you having to cover 20% until you hit an out-of-pocket maximum of $5,000. You'd be responsible for the first $1,000 in expenses each year. After that, you'd have to pay 20% of the next $20,000 in costs, with insurance paying the other 80%. Once you hit $21,000 in expenses, you would reach your $5,000 out-of-pocket maximum, and any further healthcare needs would be paid entirely by insurance.
The two concepts are quite different, but some people still get confused. It's especially important to know the deductible amount, because that represents money out of your pocket before your insurance does anything at all. Knowing the difference can help you avoid a costly mistake in selecting coverage.
3. Getting too focused on premiums.
Finally, the biggest mistake that many people make in choosing health insurance is to focus too much on the monthly premium amount. Remember, the true value of health-insurance coverage depends on two things: what it costs and what it covers. Costs include not only the premiums you pay upfront, but also the copayments, coinsurance amounts, and deductibles that you're responsible for paying. Often, low-premium policies have weaker coverage that require you to pay a higher share of any expenses you incur. That can work out well for healthy people, but if you frequently need medical services, then low-cost premiums can be deceptively attractive.
The best way to determine the value of a policy for you is to figure out how much each policy would cover in a typical year based on your past medical experience. Be sure to include not only the premium payments, but also what your insurance won't cover, and then find the policy that produces the minimum total cost.
You might also want to build in a margin of safety, understanding that health can deteriorate unexpectedly. With many policies, however, you can switch to a more comprehensive plan at your next open enrollment period if your health worsens. That makes the long-term consequences of an incorrect choice less dire, although you should still prefer to get things right the first time.
Health insurance is tricky, and misunderstandings can cost you. Pay close attention to your health-insurance policy, and ask questions if you don't grasp something. That way, you'll avoid costly mistakes down the road.
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