Jun 02, 2020

Don’t Let Health Insurance Jargon Win: A Glossary

Let’s be honest – selecting your health benefits can be stressful. You begrudgingly open the open enrollment email from HR detailing your various insurance options, and your heart rate starts to increase as terms such as premium, annual deductible, copayment, co-insurance, out-of-pocket limit, prior authorization, drug formulary, explanation of benefits and non-network benefits fill your screen. While the most common response to this onslaught of insurance jargon is to shrug your shoulders and select the cheapest option, depending on your particular health situation, that could be a costly mistake.

In my experience, clients tend to underestimate the impact healthcare costs can have on successfully transitioning into retirement. Too many employees rush through the selection process and end up with a plan that has gaps and redundancies. Truth be told, if your healthcare plan isn’t in alignment with both your financial and medical needs, you could face tens of thousands of dollars in out-of-pocket expenses should the unexpected happen. It pays to be an informed healthcare consumer.

To help you navigate your company’s health insurance options, we created a simple resource that defines the terms you need to be familiar with and provides helpful tips for selecting a plan.

Annual Deductible

What It Is

The amount you pay for healthcare services each plan year before insurance coverage begins. For example, if you have an annual deductible of $2,000 and incur $2,500 of covered healthcare expenses in a year, you must first satisfy your deductible ($2,000) before your insurance company pays its share ($500). Generally speaking, the higher the annual deductible, the lower the monthly premium, which we’ll address below. (This amount does not apply toward free preventative care services.)

 What You Should Know

First, before selecting a plan, take a look at how much you’ve spent on healthcare in the past few years and if those expenses are likely to recur. If you consistently experience high medical expenses, you might be better served by a plan with a lower annual deductible. However you decide to approach your healthcare costs, you and your Financial Advisor should account for that guaranteed annual cost.

Also, if your family is covered by your employer’s health insurance, pay attention to the difference between an individual deductible and a family deductible. The individual deductible is an amount that applies to each person separately. The family deductible applies to the total costs incurred by all members covered under the policy. The good news is that most insurance policies do not require you to meet all the individual deductibles in addition to the family deductible: If one member of the family incurs healthcare costs that exceed the family deductible, the other family members typically do not need to meet their individual deductibles before the insurance company begins to pay its share.

Along those lines, as much as possible try to bunch your non-emergency medical services into one plan year. For example, let’s say you’re reaching the end of the year, have not spent any of the deductible amount and require non-emergency medical services. If you undergo that procedure, you will pay your annual deductible – only to see the plan renew one month later and the deductible start over at $0. If you can wait until the next plan year, you can meet next year’s deductible and not have to worry about for the rest of that year. (The converse is also true: If you’re reaching the end of a plan year and have already met your deductible, try to move up any healthcare services into the current year.)

Co-Insurance

What It Is

Co-insurance is your share of the costs of a covered health care service, typically calculated as a percentage of the total amount.

What You Should Know

Just because you have met your deductible does not mean that your health insurance kicks in at 100% – you still have to pay the co-insurance amount until you’ve reached your out-of-pocket limit. For example, if your health insurance plan has 20% co-insurance, you will be responsible for paying 20% of the medical bill until you reach your out-of-pocket maximum. Unlike the deductible, where you pay 100% of the costs outright, co-insurance means that you will now share the cost of healthcare with your insurance provider until you hit your out-of-pocket limit.

Copayment (Copay)

What It Is

Copays are a fixed, upfront amount you pay each time you receive care. The copay amount can vary for different services even within the same plan. Expect to be charged a copay for doctor visits or when purchasing prescriptions. Whether or not a copayment applies toward the annual deductible varies from plan to plan.

Network

What It Is

Your healthcare network includes the doctors, facilities and pharmacies your health insurer has contracted with to provide healthcare services. You will pay substantially more to see a provider who is “out-of-network” because they have not agreed to a discounted rate for services provided.

What You Should Know

As much as possible, get to know your network. Call your health insurance company and determine what hospitals or emergency care facilities are in-network close to your place of residence. Also, when undergoing a planned medical procedure, such as an MRI or outpatient surgery, call the facility and make sure all providers are in-network. (Here it can pay to be thorough: While the facility where you receive an MRI may be in-network, the radiologist who reads the MRI may be an out-of-network contractor. This can result in you receiving a surprise medical bill for the difference between what the provider charges and what your plan will pay for.)

Out-of-Pocket Maximum

What It Is

Frequently referred to as the “out-of-pocket limit,” this is the maximum amount you pay during a policy period (typically one year) before your plan will pay 100% of your healthcare costs.

 

What You Should Know

The out-of-pocket maximum only applies to healthcare costs covered by your plan – once you hit the out-of-pocket limit for the year, you will still have to pay for costs that are not considered “eligible expenses.” This is why it is important to make sure the providers you visit are in-network.

Think of the out-of-pocket maximum as the deductible + copayments + coinsurance up to the dollar amount allowed under your plan.

Premium

What It Is

The premium refers to the fixed amount you pay every month to be a part of the healthcare plan. Your monthly premium is not affected by how frequently you require healthcare services.

What You Should Know

Generally, the more expensive the premium, the better the benefits (such as a lower deductible or increased coverage). If you are young and relatively healthy, you might want to consider choosing the cheapest monthly option. If you consistently spend money on healthcare due to a chronic illness or anticipate an increase in healthcare costs, you might want to consider paying a higher monthly premium and reduce the annual deductible, copayments and out-of-pocket amounts.

Putting It All Together

Every month you pay a premium to be part of a healthcare plan, even if you don’t require any services. Should you require healthcare services, you first need to satisfy your deductible – a certain payment amount you are 100% responsible for – before your insurance company starts to covers its share of the expense. You then will share costs with your insurance provider until you reach the total out-of-pocket limit for the year.

As an example: Imagine your health insurance plan has a $600 monthly premium, $3,000 deductible, 20% coinsurance and $8,000 out-of-pocket limit. In that instance, you can expect to pay a total of $15,200 for in-network services received. Remember, your deductible counts toward your out-of-pocket limit, while copayments or additional charges for services from out-of-network providers do not.

Healthcare is complicated. When experiencing a medical emergency or suffering from a chronic illness, the added stress of unexpected medical bills can be harmful to both your mental and financial well-being. Any of the Financial Advisors within Baird Retirement Management would be happy to review your health benefits with you, determine how best to integrate them within your larger financial plans and help alleviate some of the stress associated with navigating the healthcare industry.  And don’t forget, you can always contact your HR Department or insurance provider for specific details regarding your health insurance benefits.




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