Health Insurance Basics

This is part of the Ultimate Guide to New Employee Benefits. Click here to visit the other posts!

Health Insurance Basics

Health Insurance Basics

Health insurance is one of the most important benefits given by an employer for a few reasons. In general, the cost of health care is extremely expensive. One incident could run up medical bills in the thousands or even tens of thousands of dollars. Without insurance, this could immediately turn your financial situation upside down. Insurance companies need to make money to stay in business, so insurance must be priced at a rate to cover the risk and add a bit for a profit. This means higher prices to the consumer.

The big advantages for employer health care programs are 1) the employer typically pays a portion of your cost and 2) the employer is offered a group rate, which is cheaper than if one were to buy an individual policy straight from an insurance company.

Statistically speaking, the larger the size of the group, the better the insurance company can predict the total future expenses. On the other hand, one person purchasing an individual policy would be very unpredictable. A group of 1,000 people is more predictable than 1 person, so the overall risk is lower for the insurer and they can sell the policy at a lower rate.

To give an example of the advantage health benefits can be from an employer, I was paying $8 per month at my previous job for health insurance with a $4,250 out-of-pocket maximum. After I left the job and searched around for an individual policy, I found similar policies being sold for around $100 per month. The price difference is a combination of the lower group rates and what the employer is paying. (COBRA was going to cost $344 per month for the same plan I was paying $8 per month)

Health Insurance 101

The first time you start looking at health insurance information, it can be painful. There are so many unfamiliar words with complicated definitions. Here, I’ll explain in very simple terms the basics of insurance and what they mean to you.

Premium – the amount you pay to be covered by the insurance policy

Deductible – The amount that you will pay on medical expenses before the insurance company pays anything. For example, if you have a $1,000 deductible and your total year medical expenses were only $800, the insurance company will not pay a cent towards those expenses. However, if total medical expenses were $1,500, the insurance company will apply the coverage to $500 ($1,500 expenses – $1,000 deductible). Generally speaking, a high deductible means you will pay a lower premium. The deductible typically resets at the end of the year.

Coinsurance – The percent that the insurance company will pay for medical expenses after the deductible is met. Most insurance policies are 100% or 80% coinsurance, but they may be as low as 50%.

Let’s use the example above and say the insurance policy has 80% coinsurance. From the $1,500 medical expenses, you are responsible for the deductible ($1,000), and the insurance company will pay 80% of the remaining $500, which equals $400. Your total bill comes to $1,100 ($1,000 deductible plus 20% coinsurance).

Copay – a set amount you pay for each doctor visit or drug prescription. For example, there is a $25 copay and you need to see the doctor. Your total cost for the office visit is $25. Nothing more, nothing less. If additional testing or procedures are needed, the associated expenses would be applied towards your deductible. But the actual doctor visit would cost $25 flat. Same with drug prescriptions. If the drug actually costs $200, you will only pay $25. Copays are beneficial if you often see doctors or buy prescription drugs.

Out-of-Pocket Maximum – The highest dollar amount you may pay in a year. If the out-of-pocket max is $2,000, you can rest easy knowing you will not pay more than this in a given year. In the example above, you would be responsible for your deductible ($1,000) and coinsurance (20% of all medical bills after your deductible has been reached) until the $2,000 out-of-pocket max is reached. See the example below with four different scenariosHealth Insurance Basics:

Note that the coinsurance of 80% in the policy is what the insurance company covers, so you are responsible for 20%. Coinsurance applies to everything above and beyond the deductible until the out-of-pocket max is reached.

In-network/Out-of-network – Insurance companies have special pricing with specific medical providers. These medical providers are considered to be in-network. Because of this, insurance companies will cover a higher percentage of your costs if you stay within the network. The insurance company may pay 80% coinsurance for in-network providers, but they may only pay 60% for out-of-network providers. The out-of-pocket max for in-network providers may be $2,000, but it may jump up to $3,000 if you use out-of-network providers. It’s very important to use in-network providers to keep your costs down.

Preventative Screenings – Most insurance policies offer to cover preventative screenings at no cost to you. These may include routine yearly checkups, cancer screenings, HIV tests, etc. This is a great benefit to both you and the insurance company, since you are more likely to find something before it develops into something more severe. Free for you and more cost effective for the insurance company.

Which plan is right for me?

Deciding on which plan can be a pain, but you’ll want to really think about the decision; picking the right plan vs. the wrong plan could save you hundreds if not thousands. Here are some general Q&As that may provide guidance.

Do you make regular visits to the doctor/hospital?

Sign up for the plan with a low deductible, with copays, or both.

Do you have prescription medications that you regularly purchase?

Depending on the cost of these, you may want to have an insurance plan with copays. Your only expense would be the copay for each purchase, rather than paying up to the deductible.

Are you typically healthy and rarely have any medical expenses?

Consider getting a high deductible health plan (HDHP). Because the premiums will be much lower, you could save hundreds of dollars per month on the premium alone. You would still be eligible for completely covered preventative screenings.  Plus, you will be able to use a Health Savings Account (HSA), one of the best health savings tools.

I have personally used an HDHP for the past three years. I spent around $200 per year in medical expenses while I paid a small premium. I was able to put the savings in my HSA before any taxes were taken out, and I can now use this for any future medical expenses.

My employer offers both a Flexible Spending Account (FSA) and a Health Reimbursement Account (HRA). How do I compare these to an HSA?

FSAs and HSAs are both tax-saving tools but have key differences. An HRA is an account funded by an employer with a certain amount for you to pay medical expenses. Essentially, it is free from the employer to use on qualified medical expenses. An HRA can be used alongside an FSA, but an HRA cannot be used along with an HSA.

With your insurance, you will only have the option between an FSA or an HSA (not both), depending on the plan you choose. An HSA is for high deductible health plans while FSAs are for everything else. FSAs have a use it or lose it policy, whereas money contributed to an HSA is yours to keep.

Choosing your plan

Health insurance is expensive, complicated, boring, and every other negative adjective in the book. But it’s important. Take some time to learn what it all means, and decide which plan is best for you based on the amount of medical expenses you typically incur and how much risk you are willing to take on. After it’s been selected, you won’t need to think about it for another year!

This is part of the Ultimate Guide to New Employee Benefits. Click here to visit the other posts!

Image courtesy of Stuart Miles / FreeDigitalPhotos.net

About Trent

I started Frugal Purpose to share my love of personal finance to assist your pursuit of a more fulfilling life. I am a financial analyst by trade, traveler at heart, and want to share with you the beauty of this world.

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