If you’ve been putting off getting/renewing health insurance during open enrollment this year because you don’t know what you’re doing… well don’t worry, you’re not alone. I’m here to help! And just in time too, because if you happen to need health insurance through healthcare.gov, then tomorrow (Dec 15th 2021) is the last day to enroll if you want healthcare starting from Jan 1 2022 (though the deadline for the year is actually Jan 15 2022 if you’re ok with the plan starting a little later).

In this series on navigating the US healthcare system, we’ll talk about what all the confusing terms mean, where you can get insurance, and how to actually pick a plan that works for you!

Sometimes it seems like health insurance plans are designed to confuse you, just so that they can trick you into buying a terrible plan that costs you tons of money while actually not even covering the care you need. Don’t fall for it! Instead, learn the lingo so that you can wade through all the crap and get a health insurance plan that actually works for you!

Introduction: How does health insurance work?

At a high level, health insurance is basically like any other insurance, like car insurance, home insurance, or mega-yacht insurance. You pay the insurance company a certain amount of money every month, and in exchange, they hopefully give you a lump sum of money when you need it—like when your house burns down, or when you run your mega-yacht into an iceberg, Titanic-style.

The main difference with health insurance is that somehow, it’s even more confusing. Like many other types of insurance, there’s a deductible (more on this below), which basically means that the health insurance company doesn’t actually pay for any of your healthcare until you reach a certain amount of bills. But then even once you reach it, you still have to keep paying, at least a little bit. Oh yeah, and sometimes they decide that you actually don’t need healthcare at all, or that you got the wrong kind of healthcare, and so they don’t give you any money. Did I mention that when you get healthcare, you often don’t actually know how much it’s going to cost beforehand, or how much of it will be paid by your insurance company, or whether they’ll even pay for it at all?

Given all this complication and secrecy, it seems that the average person is at a disadvantage when dealing with the healthcare system. I’ll see what I can do to help by pumping some knowledge into you.

The Lingo

Luckily, most of these terms aren’t actually that bad, especially since I’m mostly just trying to focus on the most common ones. But if you don’t quite understand it at first, don’t fret, because we’ll have some real-life examples afterward to help out. And once you’ve read it through, you might want to go back and re-read some parts if you didn’t understand what I was referring to the first time.

Here we go!

Premium

This is just the fee you have to pay every month in order to keep the health insurance plan, regardless of whether you use it. Just like Netflix!

Obviously, you want as small of a premium as you can get away with. But be warned, because the smaller the premium is, the less the insurance will actually cover. And on the flip side, a plan with higher premiums will generally cover more services, both in terms of offering a wider range, and also paying for more of them (though not always—sometimes more expensive plans are just a ripoff).

Plans with lower premiums are generally a good idea if you have very low healthcare costs (i.e. you’re young and healthy)—this might end up being around $200-$400 per month. If you’re low-income, you can often get a insurance for even less than that through the Affordable Care Act marketplace. Or if you have to cover a family or need a plan that covers a lot of care, you could spend over $1000 per month.

Note that premiums do NOT count toward your deductible. Speaking of which…

Deductible

This is the sum of healthcare costs you need to incur within a calendar year before your insurance will actually pay for anything (at least in most cases; more on this in the copay section). That’s right, your insurance doesn’t actually pay for any of your care until you spend a bunch of money on your own first!

A deductible is commonly in the range of $1000 to $10000, so you can end up having to pay for quite a lot of care before your insurance company does anything. But then after you’ve paid $5000 or whatever, your insurance company picks up the bulk of the bills… sometimes. The exception: copays and coinsurance! More on them farther down the page.

Oh yeah, and just to make things more confusing, sometimes you can have different deductibles for different kinds of healthcare expenses. For example, you might have a $1000 deductible for procedures, but a $0 deductible for prescription medications.

And if you have a family plan, then there’s even more to consider, because sometimes plans will have both a family deductible as well as an individual deductible! For more info on that, see Embedded vs Aggregate Deductibles.

Out-of-pocket maximum

Out-of-pocket means that you’re paying for something yourself, i.e. directly from your own bank account (or with the cash in your pocket). So the out-of-pocket maximum is a limit to how much you have to pay for your own care (not including the cost of premiums, which you always have to pay, no matter what).

Similar to a deductible (but always higher than one), this is another cutoff point where once you reach a certain sum of medical bills for the year (e.g. $15000), the insurance company pays for everything! At least, everything that’s covered… more on what a “covered service” is below. But anyway, that means no more copays or coinsurance! And speaking of those…

Copay and Coinsurance

A copay is a flat fee (usually small, e.g. $5 to $50) that you have to pay when you get medical care, instead of the regular bill (which your insurance company will pay for you). Generally, you only pay a copay after you have met your deductible, but before you have met your out-of-pocket maximum. Before your deductible, you pay the whole bill. After the out-of-pocket maximum, you pay nothing. You only pay the copay for the period in between. More on this farther down the page.

Note though that some plans may offer a copay for certain services even before you have hit your deductible. For example, they might offer a $10 copay for prescription drug refills, but still make you pay for all other care until your hit your deductible.

Coinsurance is the same thing as a copay, except a percentage (e.g. 20%) instead of a flat fee.

Note that an insurance plan may specify a copay for certain services, and coinsurance for others. Some services may also specify both, or even neither (common for preventative care). And each service can have a different copay/coinsurance; for example, some types of common prescription drugs might have a $5 copay, while less common ones might have a $50 copay.

The Stages of Grief Payment

Just to make sure you understand how all of the terms above relate, let’s take a look at some examples real quick before we continue with more lingo.

For the purposes of this section, we will assume the following numbers (don’t worry, the math won’t be too hard—it’s mostly just to help illustrate what’s going on).

• Deductible: $1000
• Out-of-pocket-maximum: $5000

Now here’s how those numbers actually affect how your healthcare is paid for throughout the year:

Stage 1: You pay for everything until you meet the deductible.

When you start out at the beginning of the year, everything is a clean, fresh slate. And that means that, for a while, ALL healthcare expenses are paid for by YOU. That generally includes medications, checkups, surgeries, you name it. You pay for it all… until you hit $1000 worth of bills (or whatever your deductible is). That’s when your insurance actually kicks in!

Stage 2: You and your insurance share the bills until you meet the out-of-pocket maximum.

During this next phase, your insurance company starts paying for your care. Not entirely though—if your plan specifies a copay or coinsurance, you’ll still have to pay that. For example, if your plan says it has a $50 copay, then that means that you pay $50 every time you get medical care, and insurance gets the rest—even if the rest is thousands of dollars. So even though you’re still paying, it’s usually a better deal. And likewise, if your plan says you have, say, a 20% coinsurance, then you just pay for 20% of it, and the insurance company pays the other 80%. That is, at least, until we finally hit $5000 (the out-of-pocket maximum)!

Stage 3: Your insurance pays for the rest, until the end of the year.

In the final phase, you no longer have to deal with copays or coinsurance—your health insurance company pays for everything! Finally! …At least, until the end of the year. Then it resets back to stage 1, and you have to start paying for everything again.

Note that you may never actually hit your out-of-pocket maximum for the year, or sometimes even your deductible. Not hitting your deductible is common for people who have little or no medical expenses (i.e. if you’re lucky), but it can also happen if you just happen to have a very high deductible.

Examples

Again, let’s assume that all examples have a $1000 deductible and a $5000 out-of-pocket-maximum. Let’s also assume that everyone pays a total of $1000 per year on their premiums.

Example 1: Alice

Alice is young and healthy. She has no healthcare needs except a yearly checkup, for which she pays $50. So she spends $1000 (premiums) + $50 (checkup) for a total of $1050 spent out-of-pocket that year.

Example 2: Bob

Bob sprained his ankle and ended up needing pain meds and some physical therapy. The pain meds cost $200 and the 2 physical therapy sessions were $800 each. He has to pay for his meds and the first session, but then he meets his deductible and only has to pay 25% coinsurance on the second session, or $200. So he spends $1000 (premiums) + $200 (meds) + $800 (first session) + $200 (second session coinsurance) for a total of $2200 spent out-of-pocket that year.

Example 3: Charlie

Charlie’s health plan has a $1000 deductible for most services, but no deductible (i.e. $0) for prescription medication—just a $5 copay. Charlie spent $500 on an MRI and had to pay for all of it because he didn’t yet meet his deductible for outpatient services. Charlie also needs to refill his prescription every month, and the medication is very expensive. But because his deductible for medication is $0, he only ends up paying a $5 copay for it. So he spends $1000 (premiums) + $500 (MRI) + $60 ($5 x 12 for meds) for a total of $1560 spent out-of-pocket that year.

Example 4: Dee

Dee fell off her roof while cleaning the gutters and spent 3 weeks in the hospital. Her stay costs tens of thousands of dollars, so she instantly hit both her deductible and out-of-pocket maximum. She has to pay for the first $1000 (because of the deductible), and she also has 10% coinsurance, which means she has to pay for 10% of her care between the deductible and the out-of-pocket maximum. $5000 – $1000 = $4000, and she pays 10% of that, or $400. So she spends $1000 (premiums) + $1000 (deductible) + $400 (coinsurance) for a total of $2400 spent out-of-pocket that year.

Hopefully that clears things up a little bit. Anyway, back to the lingo!

The Lingo, part 2

These terms are less important than the earlier ones, but still ones that you’ll probably want to learn about at some point. You might wish to just reference this section like a dictionary whenever you see one of these terms and can’t quite remember what it is.

Preventive/Preventative care

Preventive care is any sort of care that you get in order to catch medical problems early, or even prevent problems altogether. This often includes things such as regular checkups and cancer screenings. It’s a great idea to get this, because it can save you a whole lot of pain (and money) later!

Many insurance companies realize this too—it’s a lot cheaper to get a colonoscopy than to treat colon cancer. So it’s generally in their best interest to make sure you get that preventative care. Plus, the ACA helps out here too, since ACA-compliant plans also generally need to cover certain types of preventive care. And for these reasons, a lot of preventive care is free, even if you haven’t hit your deductible yet!

Healthcare provider

A healthcare provider is just any person or organization that provides you with healthcare, such as doctors, hospitals, clinics, ambulance companies, etc.

Primary care provider (PCP)

This is just your “main” doctor or nurse who you talk to first when you have general healthcare needs. For more information, see here: What is a Primary Care Provider?

Sometimes, before you can receive any sort of specialized service (e.g. seeing a dermatologist about your weird rash), you’ll need to see your PCP first and have them refer you.

Covered service

A service is just some particular type of healthcare, such as a checkup, a prescription, a CAT scan, etc. If a service is covered, then just that means that your health insurance is willing to help pay for it (or if you haven’t met your deductible yet, then the cost at least counts toward meeting it).

For example, many healthcare plans do not cover cosmetic surgery or mental health services—you can still make use of non-covered services if you want, but you have to pay for it all yourself, as if you had no insurance at all. And none of it counts toward your deductible or out-of-pocket maximum either.

When reviewing the documents for a particular health insurance plan, it will give an overview of which services are generally covered, and which are not. So when choosing a plan, you’ll want to make sure that any services you know you’ll need are definitely covered.

Unfortunately, many of the details are hard to figure out, because even though a service may generally be covered, the specific instance may not be covered. For example:

• Prescription medication is often covered, but certain medications (e.g. new, expensive, or obscure ones) often are not.
• Seeing specialist doctors (e.g. a dermatologist) may be covered, but only if your primary care provider referred you to one first.
• Certain procedures may be covered, but only in certain situations, e.g. if a treatment or medication can be used to treat multiple illnesses, the insurance may only cover the treatment if you have one illness but not the other. Or they may only approve the treatment if you have already tried a cheaper one first and it didn’t work. Or they may only approve it if a specialist specifically requests it.

Pre-certification

Remember when we said earlier that you don’t always know in advance whether your insurance company will cover certain medical care? Well, that’s not always true. Precertification is the process by which you can figure out whether you will be covered before you actually go through with something, such as a surgery, scan, or test. Basically, if you’re not sure about something, you can call up your insurance company and just ask. And hopefully they give you a straight answer. 🙂

In-network vs out-of-network

The “network” for an insurance plan is basically the list of healthcare providers (e.g. doctors, hospitals, etc.) that the insurance company has specifically negotiated payment rates with. This means that the insurance company usually gets to pay a cheaper rate for healthcare than you would on your own (e.g. a CAT scan might only cost them $300 even though it would cost you $2000). This is why health insurance companies generally want you to get care “in-network”—it means they don’t have to pay out as much money. In fact, some insurance plans refuse to pay for any care that happens outside their network—it’s just too expensive for them. Others might still cover out-of-network care, but have a higher copay or coinsurance (meaning that you have to pay extra for it). For example, you might have to pay a 70% coinsurance rate for out-of-network care, but only 10% coinsurance for in-network care.

For these reasons, you’ll generally want to make sure that any health insurance plan you get includes your favorite doctors/hospitals/clinics in your network. And vice versa—any time you need to visit a new healthcare provider, you’ll want to make sure to choose one that’s already in your network. All you have to do is look it up: most health insurance companies will provide a website (or phone service) where you can search for nearby healthcare providers that are in your network (and you can sometimes even search this website before you actually buy a plan, so you can compare plans by what’s in their networks). If there’s no website, you can also contact the healthcare provider and ask them if they’re in your insurance provider’s network—there’s a good chance they will be able to help you.

If you’re not sure which healthcare providers you want in your network (e.g. because you haven’t gotten any healthcare recently), you may wish to do a little research and at least make sure that your closest hospital or clinic is in your network. And if you want additional flexibility for which doctors and clinics you can go to, try to choose a plan with a larger network. It might end up costing more in premiums, though.

It’s worth noting that even if a plan generally doesn’t cover out-of-network care, they will often still cover emergency care that is out-of-network. This makes sense! After all, if you’re dying of a heart attack, you don’t really have control over which hospital the ambulance brings you to—you just need to get to the closest one. In some cases, you may also be able to get approval to use an out-of-network healthcare provider in non-emergency circumstances; you’ll have to talk with your insurance company first to get pre-certified though (see earlier definition on precertification).

HMO vs EPO vs PPO

These are just fancy designations for health insurance companies that mostly just indicate how they work with respect to networks. There’s some good info on the differences here, but if you just want a quick summary here, I’m happy to provide.

EPOs (Exclusive Provider Organizations) and HMOs (Health Maintenance Organizations) are very similar and generally do NOT cover out-of-network care (again, except for emergencies). HMOs are often a bit cheaper, while EPOs often have a larger network.

PPOs (Preferred Provider Organizations), on the other hand, still have networks, but also cover out-of-network care—just usually with a higher copay/coinsurance. The extra flexibility can come with a higher premium, too.

Platinum vs Gold vs Silver vs Bronze vs Catastrophic 

These terms are basically just indicators for how expensive a plan is and how much it covers. Generally, the more that a plan covers, the more it costs in premiums (every month). But the larger the premiums, the less you pay when you actually get care. In other words, a more expensive plan usually gets you:

• More covered services
• A larger network
• A lower copay, coinsurance, deductible, and out-of-pocket maximum.

Platinum plans are generally expensive. The premiums are high, but if you need a lot of healthcare, it might be worth it. On the other end of the spectrum, we have bronze. Bronze plans generally have lower premiums, but if you end up needing a lot of care, then you’ll need to pay for a lot of it yourself. So bronze plans are generally better if you don’t think you will need much healthcare. Gold and silver are in the middle.

But this isn’t always true. For example, sometimes a silver plan will be straight up better than a gold or bronze plan in every way. I have seen this be the case when on the health insurance marketplace on Healthcare.gov; the silver plans were cheaper and had lower copays/coinsurance/deductibles/out-of-pocket-maximums than all of the other plans. I was baffled for a while, until I realized that the results of the healthcare application said that choosing a silver plan would have special benefits for the applicant. Why silver plans? No idea. It’s different for each person who applies. So that’s why it’s important to always compare the numbers between plans.

What about catastrophic plans though? Well these are essentially an extreme version of bronze plans. They are generally pretty cheap (in terms of premium), but usually have an extremely high deductible, so you will basically only get any coverage in the event of a catastrophe (like if you fell off a roof and broke 20 bones). The insurance company won’t pay for anything less. So if you’re healthy and tight on cash, a catastrophic plan might be your best bet.

FSA vs HSA

These are like bank accounts that you can put money into, except you can only take the money out to use it for healthcare. Why would you do this? Because you get a tax benefit! If your employer offers an FSA or HSA, they will often allow you to divert some of your paycheck each month to the account, and none of that money is ever taxed. Sometimes, an employer will even put some extra money in there for you as a perk!

But what’s the difference between them? Well, an FSA (Flexible Spending Account) is generally only available through employers, and if you ever switch jobs, you lose all the money in the account. You also lose it all at the end of the year too, and you can’t roll it over to next year. Seems pretty bad, right? But if you know how much you’ll spend on healthcare, and then put in only the amount you need, you can still come out on top. It’s just… not very flexible. Ironic, huh?

HSAs (Health Savings Accounts), on the other hand, are owned by you (not your employer), and you never lose the money in them. In fact, they can help you gain money—you can invest the HSA funds into things like stocks and bonds, just like a retirement account! I like these ones a lot better.

You can even get an HSA if you’re unemployed or self-employed. The main problem is that you’re only allowed to open one and contribute money if you have a certain type of health insurance plan called a high-deductible health plan (HDHP). It’s basically like it sounds; it’s just any health insurance with a high deductible—for 2021 and 2022, the cutoff is currently $1400 for individuals, and $2800 for plans that cover an entire family.

If you happen to have an HDHP, then I generally recommend getting an HSA too. I’ll have more on the benefits of HSAs in another blog post, but for now, check out this great post from the Mad Fientist on HSAs! And if you want to learn more about the differences between HSAs and FSAs, check out Investopedia.

Conclusion

I hope this article has helped to give you an overview of some of the most common terms you’ll come across when shopping for health insurance (or making use of it). It’s ok if you don’t remember it all; most of the time, you can just look up a term if you aren’t sure what it means. But hopefully you should at least have a better idea of how health insurance generally tends to work!

Next time, we’ll talk about where to even get health insurance, and how to pick a plan:

Healthcare 102: Health Insurance Options in the US

Healthcare 103: How to Pick a Health Insurance Plan