Having the right health insurance coverage is extremely important. The right coverage can help keep your care costs affordable while ensuring you're able to get the medical help you need.
Unfortunately, shopping for insurance and picking the right policy can be very complicated -- especially because there are lots of unfamiliar terms to know. And a recent study from United Healthcare found a majority of Americans don't know some of the key vocabulary necessary to understand coverage options and pick a policy that's a good fit. In fact, just 9% of survey respondents knew these four key terms.
Just over 4 in 10 Americans don't know what health premiums are, according to United Healthcare. "Premium" is one of the most basic terms to know because it's the monthly amount you pay for coverage.
Premiums vary based on what insurance policy you select and how much coverage that policy provides you. Insurers are allowed to consider your age when setting insurance premiums, as well as the geographic area in which you live and whether you smoke. Because of Obamacare, insurers can't consider your health status or gender when setting premiums.
In many cases, your employer will pay some of your health insurance premiums if you get a policy through work. For example, your employer may cover 50% of your premiums. That would mean an insurance policy with $600 monthly premiums would cost you $300, and your employer would pay $300. If you buy insurance individually on the open market, Obamacare may entitle you to subsidies to help pay premiums. These subsidies are determined by your household income.
As with premiums, just over 4 in 10 Americans don't fully understand what a deductible is. A deductible is the amount of money you have to personally pay before your insurance company begins to pay for your medical care. If you have a $1,000 deductible, you have to incur $1,000 in covered out-of-pocket expenses before your insurer starts paying for treatments you get.
Most insurance policies provide certain kinds of coverage before your deductible kicks in. For example, you may get preventative health screenings and one annual checkup paid for before you've spent your deductible. But if you get a cancer screening and your doctor finds signs of cancer, you'd have to cover the $1,000 deductible by paying for the first $1,000 worth of treatment before your insurer starts helping out with costs.
You work toward covering your deductible only by incurring covered expenses. If you spend $2,000 on plastic surgery but plastic surgery isn't covered by your insurance policy, this spending won't count toward your $1,000 deductible. But if cancer treatment is covered and you spend $1,000 on cancer treatment, your insurer will start paying toward additional care costs.
Different insurance policies have different deductibles, and your premium and deductible are generally linked. Policies with lower deductibles charge higher premiums, while policies with higher deductibles charge lower premiums. So you can pay more in fixed monthly costs to incur less expense later on if you need care. Or, if you're generally healthy, you can opt for a policy with lower monthly premiums, but you may face higher costs if you end up needing to go to the doctor.
Coinsurance is less well understood than either premiums or deductibles. Around 7 in 10 Americans don't know what coinsurance is -- even though coinsurance is very important in determining what you end up paying for care.
Once you've met your deductible, your insurance doesn't cover every dollar of care you need. You usually have to pay a copay, which is a flat amount for each appointment or type of care from a medical professional. Depending on your policy, you may have coinsurance costs as well.
Coinsurance means you have to pay a percentage of the costs of care covered by your insurance. For example, childbirth in the hospital may be covered by your policy at 50% coinsurance. This would mean you have to pay 50% of the costs associated with having a baby in the hospital, and your insurance would pay 50% of the cost of having a baby in the hospital.
One common example of when you incur coinsurance costs is in using Medicare Part B, which covers most types of outpatient or routine care for seniors. Medicare Part B has a 20% coinsurance cost, so seniors would pay for 20% of most outpatient care. Because this can become very expensive, seniors often get supplementary Medigap policies to cover more of their costs.
Finally, "out-of-pocket maximum" is another important insurance term you need to know when shopping for health insurance -- but around 6 in 10 Americans don't know what it means.
Out-of-pocket maximum is the maximum amount you have to pay per year for covered services before your insurer pays for all the rest of your care. For example, if you have a $7,900 out-of-pocket maximum on your insurance, you don't have to incur any more costs for covered services once you've spent $7,900 on care your insurer covers.
Many different costs you pay count toward your out-of-pocket maximum, including the money you pay to cover your deductible, copays, and coinsurance costs. But the money you pay for premiums doesn't count, nor does any money you pay for services that aren't covered.
A policy with a lower out-of-pocket maximum protects you from incurring big expenses because it caps your costs. Your insurer pays for 100% of covered care once you've hit this limit. But you'll likely pay higher premiums for a policy with a lower maximum spending limit. Like with your deductible, you have a choice of paying higher premiums to limit costs incurred later on.
Make an informed choice
Now that you know what "premium," "deductible," "coinsurance," and "out-of-pocket maximum" mean, you can make a more informed choice about which insurance policy is right for you. You can change your coverage during open enrollment, which occurs annually, or when you have a qualifying life event, such as losing coverage because of job loss or divorce. Next time you shop for coverage, review your policy options carefully -- with all these terms in mind -- and pick the policy that's perfect for your needs.