If you are wondering about the basics of health insurance you’ve come to the right place. Today I’m going to try an exhaust and consolidate all the knowledge I know about health insurance into one post. Yes, it’s going to be long, so if you don’t have time now you may want to bookmark it for later reading.
Of all the insurances out there, health insurance has become the most highly sought after type of insurance based on its direct application to something very important to us – our health. Nothing gives us more cause for attention than when our bodies are not working properly. The kind of health insurance policy we are able to secure can go a long way in determining what type of care we get and what drugs we are able to get our hands on. Those factors consequently then can have an impact on how healthy we are able to maintain our own bodies.
In recent years health insurance has also been hotly debated within society and government. It’s even found it’s way to the highest court in the land in a landmark decision handed down by the Supreme Court of the United States. The Affordable Care Act (more commonly known as Obamacare) has changed the very structure of the health insurance industry – some would say for good, others would say for bad.
This post is going to outline for you the basics of health insurance. I’ll explain what it is and why it’s a good idea for you to have some form of coverage. I’ll address some terms you need to know when researching plans, what types of plans are out there and how to decide which one is right for you.
For those who are looking for ways to save money on healthcare, good luck. Premiums have increased dramatically and health insurance isn’t as affordable as it used to be. However, there are ways you can reduce the overall cost of the plans and I’ll address some helpful tips in that regard.
This post will conclude with a look at health care reform, how it impacts you and what alternatives are available to traditional healthcare as we know it.
What Is Health Insurance?
Put simply, health insurance is a way to pay for healthcare. The description of it as “care” refers to all the medical services provided within the plan you choose such as illness visits, preventative care visits (for routine checkups, immunizations, cholesterol or blood pressure screenings, etc.) ER visits, or medications for prescription drugs. Participants in a health insurance plan save on the cost of these medical services and drugs based on the type of plan they choose.
A person with health insurance saves money when seeing the doctor because, as part of large group of people all signed up with the same insurance company, they can take advantage of the rates (savings) the health insurance company has negotiated with those professionals serving in the medical field.
In short, health insurance serves as protection against excessive medical costs incurred when you are sick or injured.
But Why Do I Really Need Health Insurance?
Lets dig a little deeper into the “Why?” question. After all that question explains our motivations for why we would be willing to pay tens of thousands of dollars over our life to maintain a quality health insurance plan.
Health insurance has value because it:
1. Serves as a fallback to the uncertainties of life. Life is uncertain. We don’t know what’s going to happen in the future. You may be healthy or appear healthy today and the next moment you are sitting across the desk from a doctor who is giving you some bad news.
Accidents can happen at any time. Health problems can happen at any time. Life can turn on a dime at any time.
We could worry about these events or we could simply choose to be prepared for them when they occur. Health insurance helps us be ready to deal with it.
2. Protects our assets against catastrophic events
Most of us will never have to deal with anything other than routine medical expenses. But what about someone facing a complex series of surgeries, diseases like cancer, physical disabilities or a long-term hospital or nursing home stay? I can see the dollars flying out of the budget simply writing that last sentence.
This is where health insurance really pays dividends – in the case of a catastrophic medical event. By catastrophic I mean an event that could eat up your entire life’s savings to care for.
In fact, this study conducted recently found that the majority of bankruptcies experienced were linked to a medical issue. That’s stunning and a major reason we need to use health insurance to protect our savings and investments for which we work so hard.
3. Brings savings through strength of numbers
“Couldn’t I just pay for medical expenses as they arise instead of paying for health insurance?”
The answer to that is “Yes…absolutely.” That’s called being self-insured and I’ll touch more on that later. It certainly is an option for those individuals who a) exhibit better than average health and b) have accumulated significant wealth. By paying for their own doctor’s visits and medical care they avoid paying a monthly premium to the insurance company.
However, the vast majority of people do not fit with criterion “B” mentioned in the last paragraph. They have not accumulated the wealth necessary to fund a major medical issue or even be able to budget for routine medical care. They can’t afford to go it alone. They good news is they don’t have too if they purchase a health insurance policy.
When I purchase a specific health insurance policy, I’m essentially buying into a plan with a group of other individuals. Because there are thousands of people who have purchased that plan, the insurance company can negotiate with doctors and hospitals for better rates on services. So instead of paying all the medical costs out-of-pocket, you pay a reduced rate depending on the plan you have chosen.
4. Prompts lifestyle changes
Health insurance is not simply for the sick. Used properly, it can help promote lifestyle changes and lead to a healthier lifestyle.
Health insurance plans provide preventative services such as routine physical exams or checkups and immunizations. By regularly seeing your doctor it may be possible to avoid more complex medical problems in the future.
In addition, many health insurance plans offer education on various wellness programs and provide discounts on products and services to those who maintain a healthy lifestyle.
Some Basic Health Insurance Terms to Know
Before I go any further into explaining how health insurance works and what types of plans to consider there are some basic terms you need to become familiar with. You will see these in all the literature as you research plans so it’s important to have a working understanding of what they mean.
1. Premium – the amount of money that you will pay for the health care plan. This may be paid monthly, quarterly or yearly by you directly or through your employer.
2. Deductible – this is the amount you will pay out-of-pocket for the services your health insurance plan covers before the health insurance plan begins to cover the costs. For example, if your plan deductible is $1,500, you will pay the first $1,500 of expenses. The insurance will then kick in and pay for expenses above $1,500 according to the terms of the plan.
3. Out-of-pocket – your expenses for care that are not covered or reimbursed by insurance
4. Copayment (or “copay”) – a predetermined, fixed amount you pay to receive a covered health care service
5. Maximum – the maximum amount of money you will spend out-of-pocket in a given time period, usually consisting of 12-month intervals
6. Limit – the maximum amount the insurance company agrees to pay (usually seen as a yearly total or over a lifetime)
7. Coinsurance – what you pay for a covered health care service calculated as a percentage of the amount of that service. For example, if your health care plan allows $100 for an office visit and you’ve already met your deductible, your coinsurance payment would be 15% of $100 or $15. The insurance company would pay the rest.
8. Benefit – the items or services you receive under a specific health care plan
9. Pre-existing condition – any health problem you have before the date health coverage starts
10. Claim – any request for payment that you or your health care provider makes to your insurance company based on services you think are covered
11. In/Out-of-network – a network consists of the services, suppliers, physicians and facilities contracted with by your health insurance company. “In” means those found within the network whereas “Out-of” means those not covered in your network.
(For a more comprehensive list of terms to know click here.)
An Example of How Health Insurance Saves You Money
With those terms in mind here’s how health insurance works:
If you go to the doctor or have a hospital stay those bills will amount up to a certain cost. Upon the initial visit you will only be responsible for the co-pay amount the day of the visit (if applicable – some plans/visits do not require a co-pay).
Once the medical service is rendered the doctor’s office will send the description of treatment offered in addition to the costs incurred for treatment to the insurance company.
The insurance company will look at that information and decide how much of the amount it will choose to cover based on the terms of your particular plan. They will pay the doctor their portion of the bill.
Once receiving the terms of payment from the insurance company, the doctor’s office will then issue you a bill for the remainder of the payment.
So, for example, lets say you need surgery that is going to require a hospital stay. Your total bill comes to $70,000. If you did not have health insurance you would be responsible to pay that entire amount. You don’t have that kind of money but you did choose to get on your employer’s health insurance plan last year. Good thing too because you are going to save a lot of money. Here’s how…
Your particular health insurance plan contains these terms:
Your deductible is $6,000.
Your coinsurance is 20%
Your maximum out-of pocket expense is $8,000
In the scenario I mentioned above, you’d be responsible for the first $6,000 in expenses because that is your deductible. Subtract $6,000 from $70,000 and you have $64,000 worth of expenses that still need to be paid.
Another term of your plan is that you have coinsurance of 20%. So you will be responsible for 20% of the remaining amount – in this case $12,800 ($64,000 multiplied by .20). Still a lot of money for sure. But this amount, coupled with your deductible, exceeds your maximum out-of-pocket expense of $8,000 for the year.
So in the end you will pay $6,000 towards your deductible plus another $2,000 of coinsurance (or whatever is required to reach your max out-of-pocket). The insurance company pays the rest of the covered expenses.
Plus since you’ve reached your maximum out-of-pocket for the year you will not be responsible for any more covered medical expenses.
Total savings on this single event = $67,000 ($75,000 bill minus $6,000 deductible minus $2,000 coinsurance)
In this instance, that’s a hefty savings. All that in exchanged for a monthly premium paid to your insurance company for the type of plan you choose.
The Basic Types of Health Insurance Plans
A person can choose to go varying routes when securing health insurance. The first question to probably ask is “Do I want to get (or am I offered) health insurance through my employer?” If that’s not an option or you don’t like/can’t afford the plan that’s offered, you will want to look at purchasing a plan as an individual.
There are three basic types of plans offered in the United States: PPOs (preferred provider organizations), HMOs (health maintenance organizations) and HSAs (health savings accounts). To give us a better understand of each I’ve tapped Humana.com to outline the differences in each type of these plans. Here’s how they are described per their website…
PPO (preferred provider organization)
Usually includes an annual deductible and coverage begins after it has been fully paid. Coverage is sometimes available prior to meeting that deductible for services such as doctor visits (which require a low Co-pay).
Includes a network of physicians, hospitals, and specialists that have agreed to offer services at a reduced fee.
No referral from a primary care physician is required to see a specialist.
Allows the flexibility to visit providers outside the network for a slightly higher fee and a separate deductible.
Often requires a claim to be filed before your benefit reimbursement can be made.
Co-pays and monthly premiums are typically higher than that of an HMO plan (see below) due to the flexibility.
HMO (health maintenance organization)
HMO plans usually have co-pays and monthly premiums that are lower than those of a PPO plan.
There is a network of physicians, hospitals, and other specialists offering services at a reduced fee.
The patient chooses a primary care physician who helps coordinate the patient’s care. This physician must provide a referral for the patient to see an in-network specialist.
No coverage for providers outside of the HMO network of physicians, hospitals, and specialists, meaning you’re charged the full fee if you choose to visit them, with the exception of medical emergencies.
Few or no claims to be filed, since the insurance company pays the provider directly.
HSA (health savings account)
Tax-favored savings account that can be used with an HSA-eligible health insurance plan to help make healthcare more affordable.
To contribute to an HSA, you first have to enroll in a High Deductible Health Plan – an IRS name for a certain type of health insurance plan. With these types of plans, premiums are lower than standard health insurance policies, but the deductible is higher.
Once you purchase the eligible health plan, you go to a banking institution to open this account.
Intended for individuals to put away savings that will be used for qualifying health-related expenses, such as co-pays and deductibles.
Funds are in an interest-earning, tax-free account with no use-it-or-lose-it limits; that means if you don’t spend all of your contributions in a year, the balance rolls over to the next year and continues to build interest, while maintaining its tax-free status.
Money is meant to be withdrawn for medical expenses. It can be withdrawn to be spent on non-medical expenses, but will be taxed as normal income and may be subject to withdrawal penalties.
2014 HSA Contribution Limits, Deductibles, and Out-of-Pocket Expenses:
HSA holders can choose to save up to $3,300 for an individual and $6,550 for a family (HSA holders 55 and older get to save an extra $1,000 which means $4,300 for an individual and $7,550 for a family). These contributions are 100% tax deductible from gross income.
Minimum annual deductibles are $1,250 for self-only coverage or $2,400 for family coverage.
Annual out-of-pocket expenses (deductibles, co-pays and other amounts, but not premiums) cannot exceed $5,950 for self-only coverage and $11,900 for family coverage.
(Information on PPOs, HMOs and HSAs current as of Jan. 2015. Plan descriptions courtesy of Humana.com)
A fourth option might be what’s known as a POS (point of service) plan. These plans combine elements of an HMO and a PPO and allow the holder some out-of-network coverage. With a POS plan the insured is able have access to a wider range of services and specialists if the need should arise. For that privilege of greater access you will likely pay more in monthly premiums and out-of-pocket expenses than with an HMO or PPO.
What Plan is Best For Me?
Your eyes may have glazed over a bit reading those descriptions from Humana. It is important though to understand the differences between the plans and know the options. No health insurance plan is going to cover all medical expenses so it’s imperative to know which one might best help your family manage.
In order to figure out what type of plan is best for you, consider these issues:
1. Do you currently have healthcare issues?
Your current health can have an impact on the type of plan you are eligible for, what type of coverage you receive and how much it costs you. In addition, you will want to consider what the future may hold as far as health services you may need. Things like family medical history, smoking, drinking, or ability to exercise may have an impact on your future medical needs.
2. What will the plan cost me?
Know exactly how much the plan may cost you. Not only calculate the monthly cost of the premiums but consider what the maximum amount of money you will have to pay for health services. Would you be able to cover those expenses under the plan?
3. What will it cover?
Also pay specific attention to what the plan covers. If you have noticed I’ve used the phrase “covered medical expenses” multiple times in this article. There is nothing worse on your pocketbook than thinking a medical service is going to be covered and then, after services have been rendered, realize it’s not.
4. How much can I afford?
For most this is the big question…Can I afford it? This will require a clear evaluation of your monthly budget to see how health insurance premiums fit in with your other monthly expenditures. The temptation will be to find a bare bones policy to keep costs low. While understandable, that might not be the best route to take. A more expensive plan may give better access to important services you’ll need.
If you feel plans are too expensive for your monthly budget at least begin a savings account specifically designed for medical expenses.
Bottom line is that you cannot afford to skimp on having a health insurance plan (or at the minimum be saving money on the side for when you’ll have a need.)
How to Reduce Health Insurance Costs
If you’ve begun to research health insurance plans you may find yourself asking, “Why are these plans so expensive?” That’s actually not too difficult a question to answer. There are many reasons that have lead to the high cost of healthcare.
For starters, our lifestyle as a society is contributing to the high cost of healthcare. Some of our medical issues can be related to genetics but a majority can be traced to lifestyle choices. Excessive consumption of alcohol, smoking cigarettes, poor diet and lack of exercise all can lead to chronic conditions that must be treated withing the healthcare system.
We are also living longer thanks to advances in medical technology and drug development. However, the research necessary to test and manufacture new technology and bring drugs to market is extremely expensive. It’s helping us live longer which is positive. The drawback is that we simply need more treatment as we age.
Furthermore, there is a large portion of the population that is uninsured. In other words, they don’t have a healthcare plan. However, hospitals and doctors are still required to treat the patients when they arrive at their facility – no one is ever denied health treatment. So those with insurance end up footing the bill for those without.
Of course we will always have issues like fraud, malpractice suits, and cost of inflation increases that are driving up prices. Bottom line is that health insurance is expensive.
So what can we do as it relates to our personal monthly budget? How can we reduce the costs of our own healthcare? Here’s a great list of places to start:
- Stay healthy. More than anything this will help you reduce costs. Maintain a healthy, well-balanced diet and avoid excessive consumption of fats, sugars and salts. Exercise regularly (even walking 20/day is great) and avoid the destructive lifestyle habits I mentioned above.
- Regular checkups. Get those regular, yearly checkups especially if you are over 40. By doing this you can head potential medical issues off before the issue progresses.
- Analyze your deductible. Generally speaking the higher a plans deductible the less the monthly premiums will be. This is so because by raising your deductible (from $5,000 to $7,000 for example) you will be taking on more financial risk. The insurance company “rewards” this risk taking by giving you a lower monthly premium. Whatever deductible you choose make sure it’s in your ability to pay.
- Stay In-network. Always look to stay in your network of doctors when seeking medical care. Going out-of-network will cost you more.
- Ditch the brand name prescriptions. There really is no reason to go with expensive brand names for medications unless that is the only option. Most drugs have a generic that will cost much less.
- Save the emergency room for emergencies only. The emergency room at your local hospital should only be used for emergencies. Almost all medical needs can be taken care of at your doctor or an urgent care facility.
- Review all medical bills for mistakes.
- Find the best rate on procedures. There is competition for your business in the healthcare industry just like all other industries. So call around to different service providers to find the best rate on the procedure or treatment you need.
- Choose the minimum coverage necessary. Going this route at least you will have a basic plan to cover large medical expenses.
Healthcare Reform and You
Healthcare reform has become a hot topic in recent years when in 2010 the U.S. government passed the Affordable Care Act expanding healthcare coverage to many more Americans. Many debated the legality of this law, so much so that the piece of legislation was challenged all the way to the Supreme Court. In the end the executive branch of the government won their case and ushered in a new era of healthcare and medical services.
This section will not be devoted to the legality or the controversies surrounding the law or the difficulty many are having finding healthcare plans they can afford. Rather, I’ll simply take a look at the major changes that have come about as they relate to the healthcare industry.
The Individual Mandate
Perhaps the most controversial part of the new law is seen in the individual mandate component. By 2014, most people were required to have a health insurance plan or pay a penalty/fine. Fines began at 1% of income (or $95 per adult, whichever is greater) for the 2014 tax year, and go up to 2.5% of income (or $695 per adult, whichever is greater) by 2016. (Source: Healthcare.gov)
In order to facilitate the purchase of health insurance plans the law established the formation of marketplaces (also called exchanges). The marketplace functions as an online portal that is run by either the state or federal government. Individuals can sign into the marketplace and shop for coverage from health insurance companies.
The marketplace simply serves as another means by which individuals can shop for coverage. Coverage can still be purchased through a private agent, your employer or directly from the insurance company.
Tiers of Coverage
Within the marketplace tiers of coverage have been established that correspond to different metals: Bronze, Silver, Gold and Platinum. The difference in each level is based on the amount of covered healthcare expenses each plan covers. In general those percentages look like this:
Bronze – 60%
Silver – 70%
Gold – 80%
Platinum – 90%
So the higher the percentage the more expenses the plan covers and the more costly the plan becomes. Regardless of which plan is chosen in the marketplace, a person will be covered by the same set of essential benefits starting in 2014.
Formerly insurance companies could choose what type of health benefits they covered for each type of plan. With the passage of the ACA, companies in and out of the marketplace are now required to include 10 essential health benefits in all their plans.
These benefits include:
Ambulatory patient services (outpatient care you get without being admitted to a hospital)
Hospitalization (such as surgery)
Pregnancy, maternity, and newborn care (care before and after your baby is born)
Mental health and substance use disorder services, including behavioral health treatment (this includes counseling and psychotherapy)
Rehabilitative services and devices (services and devices to help people with injuries, disabilities, or chronic conditions gain or recover mental and physical skills)
Preventive and wellness services and chronic disease management
Those are the minimal requirement for health insurance plans. However, companies may offer additional options including birth control benefits, breastfeeding benefits or dental benefits.
Other New Rules
In addition to the essential benefits component of the new law these features were also added:
- Children up to age 26 can stay on their parent’s health insurance plan.
- An individual cannot be turned down for insurance coverage because of a pre-existing condition (i.e. a medical issue you had before purchasing insurance).
- Annual and lifetime limits on coverage have been phased out. (In other words the insured has unlimited coverage.)
- Preventative medical screenings (like annual physicals, blood pressure tests, gynecological visits) are covered at no cost provided you see a doctor within your network.
Government Credits and Subsidies
In order to help families with the cost of healthcare, the ACA implemented government subsidies based on a family’s size and income. (A subsidy is a sum of money granted by a government, business or other agency to help offset the price of a commodity or service.)
You may be eligible for a subsidy if your family meets the following requirements:
Family of 1 making less than $46,680 per year
Family of 2 making less than $62,920 per year
Family of 3 making less than $79,160 per year
Family of 4 making less than $95,400 per year
Family of 5 making less than $111,640 per year
Family of 6 making less than $127,880 per year
Family of 7 making less than $144,120 per year
Family of 8 making less than $160,360 per year
(Add +$4,060 for each additional family member)
Are There Alternatives to Purchasing a Health Insurance Policy?
As you could probably gather from the last section on healthcare reform, the industry has gone through some dramatic changes, some of which people are not happy about. According to the individual mandate written within the ACA law everyone must purchase a health insurance plan.
But are their alternatives?
Well one alternative that you might consider is to self-insure. That means you fund and pay for all medical expenses from your own income. The benefit is that you don’t have to pay a monthly premium to an insurance company.
Of course, choosing this route means you will not be in compliance with the law and will face a fine as outlined above.
A further downside of self-insuring is that you have no coverage in case of a catastrophic medical event. Should a lengthy hospital or nursing home stay cost you one million dollars you will be responsible for that amount.
(An argument against this issue is that, according to the ACA, you would not be denied coverage based on a preexisting condition. So even if you went into the hospital without coverage you would be able to apply for and receive coverage after the fact.)
Another alternative some are seeking is what’s known as a health-sharing plan. These plans do not function like traditional insurance where your medical expenses are covered by one of the major health insurance companies.
Rather, it’s a plan where members pay a monthly premium into a group fund (or pool) and share one another’s medical expenses from that fund. Money can be drawn on when medical needs arise. Companies like My Christian Care Medi-Share and Samaritan Ministries have been providing services like this for years. They are gaining in popularity now because they are exempt from the conditions written within the ACA. Thus the costs are considerably lower.
(Click here for one reviewer’s take on his health-sharing plan.)
From a laymen’s perspective like my own, the health insurance industry has only become more complicated in recent years. That’s why it’s important to do your research beyond what I have written here in determining what plan will be best for you.
Cost will be a huge factor for sure. But in the end you want the best type of coverage that will provide for the present and future needs of your family.
Questions: How are you funding your healthcare – by traditional or alternative means? What other ways can we save on health insurance? Have you experienced changes due to the ACA?What’s your experience been like with the Marketplace? Should the government be mandating health insurance for all?