Understanding Common Health Insurance Terms

Health insurance can be confusing, especially with all the jargon that comes along with it. In fact, based on a survey conducted by The Harris Poll and commissioned by Justworks, over half of “Zillennials” who participate in open enrollment (51%) admit to having blindly chosen a health insurance plan in the past because they didn’t understand the complicated terms and definitions – double the amount of Gen X or older adults who say the same (25%).

If you’re a small business owner trying to provide healthcare benefits to your employees—or even just trying to choose the best plan for yourself—it helps to understand the most common terms.

Key Health Insurance Terms

Health insurance is a contract between you and an insurance company. Under this agreement, you pay a monthly premium, and in return, the insurance company helps cover your medical expenses. This mutual arrangement serves as a financial safety net, protecting you from the high costs of medical care. However, the specifics can vary significantly between different plans, which is why it's important to understand the terminology.

Different plans come with varying coverage levels, network restrictions, and cost-sharing structures, all of which can impact your healthcare experience and financial responsibilities. Therefore, comprehending the nuances of your policy can lead to better health outcomes and financial peace of mind.

Premium

This is the amount you (or your business, if you’re covering employees) pay for health insurance every month. Think of it as your membership fee for having coverage. Premiums can vary based on factors like your age, location, and the type of plan you choose. 

It's important to balance premium costs with other out-of-pocket expenses, as a lower premium often means higher deductibles and copayments. Additionally, lifestyle factors such as tobacco use or pre-existing conditions can also influence your premium rates, making it essential to shop around and compare options.

Deductible

A deductible is the amount you have to pay out of pocket for medical care before your insurance starts paying. For example, if you have a $1,000 deductible, you’ll need to pay that much in medical costs before your insurance begins to cover the rest.

Understanding your deductible is crucial as it directly affects your initial healthcare spending. Plans with higher deductibles typically have lower premiums, which might be suitable for those who are generally healthy and do not expect frequent medical expenses. However, if you anticipate needing regular medical care, a lower deductible might save you more in the long run.

Copayment (Copay)

This is a flat fee you pay for certain medical services, like doctor’s visits or prescriptions. If your insurance plan has a $30 copay for a doctor’s visit, you’ll pay $30 when you go, regardless of the total cost of the visit.

Copays are a form of cost-sharing that help keep healthcare affordable by reducing the financial burden of individual services. They are generally predictable, making it easier to budget for routine healthcare expenses. However, copays can vary significantly between plans and services, so understanding your plan's copay structure is essential to avoid unexpected costs.

Coinsurance

After you’ve met your deductible, you may still have to pay a percentage of the cost for covered services. That’s where coinsurance comes in. For example, if your plan covers 80% of a procedure, you’re responsible for the remaining 20%—that’s your coinsurance.

This cost-sharing mechanism can significantly impact your out-of-pocket expenses, especially for high-cost services. Understanding coinsurance is crucial for financial planning, as higher coinsurance rates mean a greater share of costs falls on you. Balancing coinsurance with other aspects of your plan, like premiums and deductibles, can help you find a plan that suits your financial and health needs.

Types of Health Insurance Plans

Now that we’ve covered the basics, let’s dive into the different types of health insurance plans. When you’re choosing a plan, it’s important to know the differences between these:

Health Maintenance Organization (HMO)

An HMO is one of the more affordable plan types, but it comes with limitations. With an HMO, you’re required to choose a primary care doctor (PCP) and need a referral from them to see specialists. You’re also generally restricted to a network of doctors and hospitals.

This model emphasizes preventative care and coordinated treatment, often leading to better health outcomes at reduced costs. However, the trade-off is less flexibility in choosing healthcare providers, which may not suit those who prefer a wider range of options. Understanding the network and referral requirements of an HMO is crucial to maximizing the benefits of these plans.

Preferred Provider Organization (PPO)

A PPO offers more flexibility in terms of which doctors and hospitals you can visit. You don’t need a referral to see a specialist, and you can visit out-of-network providers, though it’ll cost you more. PPOs usually have higher premiums than HMOs.

This flexibility makes PPOs attractive to those who frequently travel or require specialized care not available within a specific network. However, the higher costs associated with PPOs mean it's important to assess whether the added flexibility aligns with your healthcare needs and financial capacity.

Exclusive Provider Organization (EPO)

An EPO is like a blend of an HMO and a PPO. You don’t need a referral to see a specialist, but you’re still limited to a network of providers. If you go outside of that network, the insurance won’t cover the costs unless it’s an emergency.

EPOs often strike a balance between cost and flexibility, offering lower premiums than PPOs while providing direct access to specialists. They are ideal for individuals who are comfortable with a more restricted network but appreciate the freedom to see specialists without gatekeeping. Understanding the network limitations of an EPO is key to avoiding unexpected costs and ensuring your preferred providers are included.

Point of Service (POS)

POS plans also combine features of HMOs and PPOs. You’ll need a referral to see a specialist, like with an HMO, but you have the option to see out-of-network providers, like with a PPO. POS plans often have lower premiums than PPOs but higher than HMOs.

This hybrid model offers a middle ground for those seeking both cost control and flexibility in provider choice. While offering more options than a traditional HMO, a POS plan typically comes with higher premiums and out-of-pocket costs when using out-of-network services. Evaluating the trade-offs between cost and provider flexibility is essential when considering a POS plan.

Additional Health Insurance Terms

Out-of-Pocket Maximum

This is the most you’ll have to pay for covered health care services in a year. Once you reach this limit, your insurance pays 100% of the costs for the rest of the year. It includes your deductible, coinsurance, and copays, but not your premiums.

Understanding this cap is crucial for financial planning, as it provides a safety net against catastrophic healthcare expenses. By knowing your out-of-pocket maximum, you can better estimate your total financial exposure and ensure you have the necessary funds to cover unforeseen medical events.

Network

The network is the group of doctors, hospitals, and other healthcare providers that have agreed to work with your insurance plan. In-network providers have negotiated rates with your insurance company, which means lower costs for you. Going outside of the network typically results in higher costs or no coverage at all. Understanding the nuances of your plan's network can prevent unexpected expenses and ensure continuity of care.

Formulary

This is a list of medications that are covered by your health insurance plan. Drugs on the formulary are divided into different tiers, with lower-tier drugs being less expensive than higher-tier ones. Formularies are designed to encourage the use of cost-effective medications, balancing affordability with access to necessary treatments. Understanding your plan's formulary can help you manage medication costs and avoid surprises at the pharmacy. Additionally, knowing which drugs are covered can aid in discussions with your healthcare provider about suitable alternatives.

Explanation of Benefits (EOB)

After you receive medical care, your insurance company will send you an EOB. This is not a bill—it’s a breakdown of what services were provided, what your insurance covered, and what you may owe out of pocket. Reviewing your EOBs can provide valuable insights into how your plan works, ensuring transparency in billing and claims processing. By carefully examining EOBs, you can catch errors or discrepancies, helping to resolve issues quickly and avoid unnecessary costs. Understanding the information in your EOBs is key to managing your healthcare expenses effectively.

Choosing the Right Plan

When it comes to choosing the right healthcare plan, there are a few factors to consider:

1. Budget: The cost of healthcare can add up, so think about how much you can afford to pay in premiums each month. Also, consider the out-of-pocket expenses like deductibles, copays, and coinsurance when comparing plans.

2. Healthcare Needs: It’s important to think about your healthcare needs. Do you prefer lower premiums with higher deductibles, or are you looking for a plan with more coverage and fewer out-of-pocket costs? 

3. Network: Make sure the plan’s network includes the healthcare providers you want to use. If you’re choosing between an HMO and a PPO, ask yourself if the flexibility of seeing out-of-network providers is worth the higher premium.

4. Coverage: Review the coverage options carefully. Some plans offer better coverage for things like prescription drugs, mental health services, or maternity care. Think about the services that are most important for you and your employees.

5. Flexibility: How much flexibility do you need? If you want the freedom to see any doctor or specialist without a referral, a PPO or EPO might be the best option. If cost is your main concern, an HMO or POS plan may offer more affordable coverage.

How Justworks Can Help

Choosing the right healthcare plan can be overwhelming, but you don’t have to do it alone. Justworks can take the pressure off by helping you manage employee benefits, including health insurance. Justworks has access to better rates and plan options because they pool small businesses together, giving you the buying power of a larger company. 

We can also handle the administrative side—like enrolling employees and staying compliant with regulations—so you can focus on running your business. Get started with Justworks today!