Health insurance is one of the first things you are required to purchase as an bright eyed adult entering the workforce. There are few things in this world that are as confusing as health insurance. Premiums, deductibles, out-of-pocket… it all gets jumbled and you find yourself wondering: How does health insurance work?
I know the confusion well. My first “big kid” job was in health and life insurance, and I didn't even fully understand how it worked until 6 months on the job.
After many years of marinating in my brain, I've been able to boil it down to the basics. Here is what you need to know about how health insurance works!
For your convenience, I've also summarized everything you need to know in a Health Insurance Cheat Sheet. You can download it by entering your e-mail below!
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What does my health insurance provider do?
Your health insurance company is responsible for several things when you select them as your insurance provider.
Health insurance companies set up plans for insurance. Each health insurance company may have many different plans that they offer. If your employer does not offer health insurance, you have the opportunity to choose the company and the plan that you will select.
If your employer offers health insurance, they will select the companies to partner with to offer you health insurance and negotiate the rates. You have to be an employee of the specific business to have access to that plan. Also, if you are an employee of a business that offers health insurance as a benefit, your employer may have one or more insurance companies that you can select from.
Typically, plans offered by your employer are less expensive than plans you can get on your own. Your employer can negotiate lower rates in order to sign up all of its employees. Also, some companies pay part of your expense for you, even though you may not see it in your pay check, they are paying part of the expense for their employees.
What is included in my health insurance plan?
First, health insurance companies negotiate rates with Doctors and hospitals. You may have heard of doctors that are “in-network”. Doctors that are “in-network” for a specific plan have negotiated a special rate for that plan. Theoretically, these rates are less expensive than when you would walk in off the street. Many times they are, but you should always do research to confirm you're getting the best price for quality care!
However, that does not mean that the negotiated rate with a doctor is the lowest price available. For example, think of your 2 doctor's offices. One named Doctor Joe and one named Doctor Bob. Doctor Joe offers a rate for you to walk in off the street for a checkup for $100. However, if you're “in-network” you get a special rate of $90. Yay savings. Thanks insurance company!
However, you decide to just check on the price at the doctor's office next door, and the front desk staff informs you that Doctor Bob is not in your network!? Oh no, well, you ask, what's the price for a visit anyway? They tell you it will be $50. How is Doctor Bob less, even though they are out of network?
Basically, “in network” usually means that you're not paying full price for that doctor, but, it doesn't necessarily mean that you can't find a better price out of network.
To get access to health insurance you pay something called a Premium. Let's talk about the Premium
What is my health insurance Premium?
The premium is the amount you pay your insurance company to cover you in their plan. It's a monthly amount that you pay the insurance company to have access to the discounted rates negotiated through their network (“in network” health care providers). Additionally, many people often get a couple of things included like an annual checkup. You can read your specific plan to see if there are any other visits included like dental cleaning, an eye exam or glasses.
Wait, you ask, you mean I pay a premium (which keeps going up every year) and then I still have to pay to go to the doctor for anything outside of my regular checkup? The answer is, yeah, you probably still have to pay to go to the doctor! This is where your deductible comes in.
What is a deductible?
Deductibles is the amount you would have to cover before the insurance company starts to contribute to the expenses. So, the deductible is like a track record of how much you spend on healthcare. As you spend money on doctors visits (except the free checkups we talked about earlier) that money is counted toward your deductible.
Some things can be counted toward your deductibles, some things can't and it really depends on your insurance provider. Some therapies, medicines and medical devices are specifically not included, and those things won't count toward your insurance deductible.
Insurance companies reset your deductibles every year. That means in any given year (most plans are a calendar year, but some run for 12 months from October – September) you would have to spend the full amount of the deductible (and pay your monthly insurance premiums) in order to have the health insurance company pay anything toward your healthcare.
Ok, well at least after I cover my deductible I'm off the hook right? Not exactly…
What is an out-of-pocket max?
After you kick in the full amount of your deductible, the insurance company does start to help out, but they don't necessarily cover everything.
After you shell out your full deductible, every dollar that you spend on health care is now partially covered by the insurance company. Many plans split every dollar 20% you pay, 80% they pay, but you should check your plan to be sure.
You still have to contribute at 20% of the charges until you have actually paid what is called your out-of-pocket max. After that, the insurance company covers every dollar 100%. Let's pause for an example.
For simple numbers, I'm going to say my deductible is $1000 and my out of pocket max is $2,000. (These are very low). Say I had my free checkup and my doctor says I need to have surgery for $10,000. I look around at in network and out of network providers and decide that, $10,000 is the best rate for quality care. For this surgery, I would be required to pay the first $1,000 for my Deductible. Then I would be working toward my out of pocket max. I would pay $1,000 to cover my out of pocket max (my 20%) and the insurance company would pay 80% or $4,000 to match and that would be the out of pocket maximum. But this only covers $6,000 and the surgery was $10,000, so the insurance company would cover the last $4,000 due. So, I paid $2,000 and my insurance paid $8,000.
This is what you're paying a monthly premium for: the risk that the insurance company has to cover the biiiiig medical expenses.
The problem is that many people have deductibles of $5,000 or more, and out-of-pocket max's at tens of thousands of dollars. Gosh, that's a lot of money to have to spend if you have a big medical expense! Is there any relief?
What is a HSA?
Luckily, the US government has decided that they don't want to tax you on money that you have to spend on healthcare, so they've come up with a few accounts to give you a break.
An HSA is a Health Savings Account. You don't have to pay taxes on money that you put into your HSA. And you can use this account to save up and spend on healthcare. You can even invest this money via the stock market and any returns you make stay in your HSA tax free!
Many HSAs are set up through an employer sponsored health insurance benefit or through a health insurance plan that you choose.
HSAs can have different rules about what you can spend those dollars on than your deductible. The US government determines how you can spend your HSA dollars. For example, you cannot spend HSA dollars on allergy medicine.
What if I don't have access to an HSA?
Lucky you, there are ways to get access to the tax free healthcare spending. But they're not quite as flexible as an HSA.
Ironically, these accounts are called flexible spending accounts or FSA. Just like a Health Savings Account, you can contribute to your FSA with money before taxes. However, you cannot invest the money and, most importantly, if you don't use the money by the end of the year, it expires and it goes back to your employer.
What does all of this mean to me? How do I optimize my Insurance?
Health insurance is a tough subject as we enter a new era of government involvement in healthcare. But there are a few things you can do to optimize your insurance.
First, if possible, stack all of your medical expenses in one calendar year. For example, if you have been putting off a treatment that has a long recovery, try to fit the complete treatment in 1 calendar year. If you cross calendar years, your deductible will reset and you will have to pay the deductible twice.
Second, while it may be tempting to go with a very high deductible plan to save on insurance premiums, consider how much you actually have saved to pay for an emergency medical expense.
Last, take advantage of tax savings through HSA or FSA's. These will help you spend less overall on your medical care!
Don't forget to enter your e-mail below to get a copy of my Health Insurance Cheat Sheet!
GET MY FREE HEALTH INSURANCE CHEAT SHEET
& get weekly updates from The Practical Penny