I have come across multiple individuals who had unexpected bills because of a problem with their medical insurance or their medical practitioner. This post will cover the basics of health insurance, as is relevant for most consumers. Remember, like many other topics discussed in our advice sections, your choices for healthcare are personal. The health insurance policy that’s best for one individual may not be the best for someone else.
- Health Insurance Vocabulary
- An Illustrative Example
- Negotiated Rates
- Fully-covered Services
- Types of Insurance Policies
- Comparing Insurance Policies
- Lowering the Cost of Healthcare
- Preparing for Medical Treatment
- Dental Insurance
Health Insurance Vocabulary
When looking at a health insurance policy, there are four numbers you really want to look at when you’re comparing health insurance plans: The policy’s premium, deductible, co-insurance, and out-of-pocket maximum.
The premium is the cost of the insurance coverage. It can be billed weekly, monthly, or however often the insurance company/your employer decides.
The deductible is the amount that you pay out-of-pocket for medical services each year before insurance starts paying anything.
Co-insurance is the percentage of medical costs that you pay after meeting the deductible.
A co-pay is a fixed amount that you pay for a service. You usually only pay co-pays for services not subject to the deductible.
The out-of-pocket maximum is the maximum you pay for medical expenses in the calendar year. Once the out-of-pocket maximum has been met, the insurance company will pay 100% of medical costs for the remainder of the year.
An Illustrative Example
Bob who pays $500/month has an insurance policy with the following characteristics: A $2,000 deductible, 20% co-insurance, and an out-of-pocket max of $5,000.
In January, Bob got sick and had to visit the doctor. Because he hadn’t yet met the deductible, Bob had to pay for $150 for the visit out of his own pocket.
Out-of-pocket Maximum: $150/$5,000
In June, Bob had a heart attack and went to the emergency room. The bill for the hospitalization and the diagnostic exams came out to $2,850. From the bill of $2,850, Bob is required to pay $1,850 towards the deductible (he paid $150 for his earlier sick visit) and $200 (20% of the next $1,000) as co-insurance. Bob has now met his deductible and has paid $2,200 towards his out-of-pocket maximum. Bob’s insurance company has paid $800 of Bob’s medical expenses.
Out-of-pocket Maximum: $2,200/$5,000
In August, Bob needed emergency surgery and spent a week recovering in the hospital. The bill for the surgeon and hospital stay is roughly $30,000. Because Bob met his deductible, he is only required to pay the 20% co-insurance of $6,000. But Bob already paid $2,200 towards his out-of-pocket maximum of $5,000. So Bob only needs to pay $2,800 to meet his out-of-pocket maximum, and the insurance company pays the remaining $27,200. Bob is not having a good year.
Out-of-pocket Maximum: $5,000/$5,000
Disaster strikes again. In October, Bob breaks his leg and racks up another $10,000 in medical bills. Because Bob met his out-of-pocket maximum, he doesn’t have to pay anything. Bob’s health insurance pays the full $10,000.
Out-of-pocket Maximum: $5,000/$5,000
Over the course of the year, Bob spent $6,000 for his health insurance and $5,000 on medical expenses for a total of $11,000. Bob’s insurance company spent $38,000 ($800 + $27,200 + $10,000) on Bob’s medical expenses. Bob’s wallet is hurting, but at least he has something left in it.
Under the Affordable Care Act, medical insurance providers cannot put an annual or lifetime cap on how much they’ll pay for expenses for essential health benefits. Essential health benefits include emergency services, hospitalization, maternity and newborn care, prescription drugs, and more.
In the above example, having health insurance was financially an excellent move for Bob. For $11,000, he avoided paying $43,000 worth of medical bills. But most people don’t have medical bills that exceed their out-of-pocket maximum. For those individuals, health insurance provides a secondary benefit called “negotiated rates”.
When you visit a medical practitioner or hospital, they can bill any amount they want (although some are limited by local laws). For some practitioners, the insurance company negotiates how much they’ll pay them for that service. For example, a doctor may charge $200 for a sick visit. But the insurance company negotiates that they’ll only pay $75 for a sick visit. The $200 bill sent by the doctor to the insurance company is called the pre-negotiated rate. The $75 bill in this instance is called the negotiated rate. An insured patient at an in-network practice will not need to pay more than the negotiated rate.
The medical practices that have a negotiated rate with your insurance company are considered to be in-network. The medical practitioners that did not agree to the discounted rates are considered to be out-of-network. An out-of-network medical provider can charge you the pre-negotiated rate. Taking the above example, the insurance company may only pay $75 for a $200 out-of-network sick visit, leaving the patient responsible for the $125 balance.
Additionally, insurance companies also may have different deductibles, co-insurance, and out-of-pocket maximums for in-network vs out-of-network visits. For example, the deductible may be $3,000 for in-network visits and $4,000 for out-of-network visits. It is usually most efficient financially to only use in-network providers.
All ACA-compliant insurance policies fully cover well visits and preventative care at in-network providers. These include medical care like immunizations and checkups. That means that someone going for a regular check up does not have to pay anything for the visit, independent of whether or not the deductible was met.
For example, Alice has a health insurance policy with a $1,000 deductible. Alice is healthy and wants to stay that way, so she schedules a flu shot at her doctor’s office. Even though it’s January and Alice hasn’t paid anything towards her deductible, her insurance policy completely covers the flu shot and Alice does not have to pay any part of the cost.
Types of Insurance Policies
- HMO (Health Maintenance Organization): HMO insurance plans generally have cheaper premiums than the other types of plans. The drawback is that they are also usually the most restrictive when it comes to selecting health care providers. Most HMO insurance plans also require a referral from your primary care physician (PCP) to see a specialist.
- EPO (Exclusive Provider Organization): EPO insurance plans, like HMO, usually will only cover non-emergency medical costs from providers that are in-network. Referrals are not usually required in order to see specialists.
- POS (Point of Service): POS insurance plans will usually cover medical costs both in- and out-of-network, though you will typically pay less at in-network providers. Referrals from a primary care provider may be required to see specialists.
- PPO (Preferred Provider Organization): PPO insurance plans, like POS, cover medical costs both in- and out-of-network, with cheaper costs when staying in-network. A referral is usually not required to see specialists.
HMO and PPO plans are the most common. Most health insurance plans can be compared by looking at the participating (in-network) providers, whether a referral from your physician is needed to see a specialist, the deductible and/or co-pays, and the out-of-pocket maximum.
Most of these options can be improved at the expense of increasing the premium. With all else being equal, a plan with a lower deductible will have a higher premium. Similarly, a plan with a lower out-of-pocket maximum or a larger provider network may also have a higher premium.
Comparing Insurance Policies
When considering insurance policies, you’ll want to verify that your doctors are all in-network and that you’ll be able to easily visit an in-network practice in the event of an emergency. If you can’t use your health insurance to lower your medical bills, it doesn’t make a difference how low the premium is.
When comparing healthcare policies, I’ve found it worth examining the minimum, expected, and maximum cost for each policy. The minimum cost would be for the premiums and any regular prescriptions and medical visits necessary. The maximum cost would be the sum of the premiums and out-of-pocket maximums. The expected cost would be the average amount you expect to spend on healthcare over a year, including the premiums and the cost of several sick visits.
The expected cost of an insurance policy can be affected by many factors. The larger your family, the more sick visits you’ll likely have during the year. The expected illnesses and complications for a 25-year old are very different than those of a 55-year old. Another factor to consider is that if a family member has a chronic condition, your calculation for the expected cost could be very different. Likewise if you (or your wife) is pregnant and has been having minor complications, you can expect that you’ll have many more doctor’s visits than normal, and you’ll need to evaluate the chance of the baby spending time in the NICU.
The expected cost of your health expenses is where health insurance becomes extremely personal.
Lowering the Cost of Healthcare
Healthcare expenses can be quite high, with deductibles of several thousand dollars and out-of-pocket maximums over ten thousand dollars. Luckily, the IRS allows people to sometimes lower the actual cost of healthcare expenses by paying for them pre-tax.
Some employers grant access to a Healthcare Flexible Spending Account (HCFSA, sometimes called FSA), where money is taken out of the employee’s paycheck pre-tax. Then, as the healthcare expenses are incurred, the employee submits the receipts to the HCFSA program, which then reimburses the expenses from the pre-tax allotment. Some HCFSA programs also supply a debit card which can be used to pay for eligible expenses.
One of the biggest issues with HCFSAs is that the money allocated for them is “use-it or lose it”, meaning that only expenses incurred during the calendar year can be reimbursed from the HCFSAs. Any money left in HCFSA cannot be used in the following calendar year. While some companies allow carrying over up to $500, you’ll need to check your companies exact policy to determine what amount, if any, can be carried over to the following year.
For example, Joe allocated $2,000 for his HCFSA. Over the course of the year, Joe incurred $1,000 of medical expenses. Joe’s company’s HCFSA does not allow carrying over any funds in his HCFSA, so Joe loses the remaining $1,000 in the HCFSA.
Another option available is called a Health Savings Account (HSA). If someone has an insurance policy classified as a High-Deductible Health Plan (HDHP), they are allowed to open and fund an HSA. An HSA can be funded with pre-tax dollars, and unlike an FSA account, the balance is not forfeited at the end of the year. Any money left in the HSA at age 65 can be withdrawn without penalty, similar to a traditional 401(k).
Preparing for Medical Treatment
There are many stories of people being shocked with a bill for thousands of dollars. Below are the steps you can take to avoid owing (potentially) thousands of dollars.
- Choose an in-network practitioner. Verify that they’re in-network by calling your insurance company or checking your insurance company’s online directory. Many people have been told by a secretary that the practice is in-network and then learned otherwise. If you go out-of-network, you’ll likely have to pay the full charge for the service and will likely need to submit the bill to the insurance company yourself for reimbursement.
- If a referral or preauthorization is needed, make sure the paperwork is squared away. You may receive an EOB for the upcoming procedures. If you don’t receive an EOB, call your insurance company to verify that all necessary paperwork went through.
- After each visit, you should receive an explanation of benefits (EOB) with an itemized list of what the doctor billed for. If there is an unexpected or fraudulent item, contact the doctor’s office to clarify why that line is included on your bill. Health providers are required to provide an itemized bill. If the charge is fraudulent, contact your insurance company.
- If you go to an out-of-network practice, keep a copy of the statement from the doctor’s office, in case you need to submit the claim to your insurance company yourself. Even if the secretary says they’ll submit the claim to your insurance for you, they may not – and you’ll be the one who has to foot the bill.
- Once you determine how much is owed from a medical visit, submit the expense to your HCFSA for reimbursement.
Dental insurance operates similarly to health insurance, with similar plan types, provider networks, deductibles, and co-pays. However, dental insurance policies can have an annual or lifetime maximum for services, as they are not legally required to offer unlimited benefits.
Many details of health insurance were left out of this writeup. Below is a list of omissions for anyone interested in learning more:
- Preventative Care: Not all preventative care is fully covered by insurance. Make sure that when you schedule an appointment for one of these services, you confirm that it is a covered preventive benefit, and if you get charged afterward, appeal it with your insurer.
- Policy Years: The examples above assumed the health insurance’s “Policy year” is the calendar year (Jan-Dec). Some employers use other 12-month periods. For example, a school might use use July-June instead.
- Family vs Individual plans: Many people get a single health insurance plan to cover their entire family. Family plans often have a larger collective deductible and out-of-pocket maximum, but may also have individual deductibles and out-of-pocket maximums.
- Prescription drug tiers: Most insurance companies will have different copays for different medications. A drug on a higher tier may cost you much more than a functionally-equivalent drug on a lower tier. Generics will usually be on the lowest tier. It may be worth bringing your insurer’s drug tier list to the doctor to make sure your prescriptions are covered. Your doctor may also be able to prescribe an equivalent drug on a lower tier.
- Healthcare Exchange: Every state has a healthcare exchange where you can purchase a policy. You may be eligible for subsidies or tax credits if you purchase a plan through the exchange.
- COBRA: If you lose your job, you can keep the policy you had through your employer, but you have to pay the full premium (including what your employer previously paid) and an administrative fee (often around 2%).
- Negotiating a cash discount: You can sometimes get a better rate on a medical procedure if you offer to pay cash, immediately. If you have a high enough deductible that you’re confident you won’t hit, this can sometimes help.
- Requesting Charity Care: Low-income patients may be able to request Charity Care: free or reduced-cost medical care.
- Fighting a medical bill: There are many ways one can attempt to prevent large medical bills. You can try to get a discount by requesting charity care or negotiating a cash discount or no-interest payment plan. Someone can stay with the patient and keep records of what care and procedures were actually performed (there are plenty of stories of charges for procedures that never occurred). You can demand an itemized bill and possibly request procedure results to force the hospital to prove they were performed. If your insurer denies a claim, investigate why. It may be possible to obtain documentation proving that a procedure was medically necessary. Certain states (like NY) also have laws on how much out-of-network doctors and specialists can bill patients at an in-network facility.
- Planning an emergency fund: In the event of an expensive medical emergency, you’ll likely need to pay your deductible. You may also not be able to work. If possible, it’s worth increasing your emergency fund to cover a significant portion (or all) of your deductible so a single medical emergency isn’t guaranteed to force you into debt.
- Dental insurance limitations: Dental insurance providers may not cover some procedures they deem cosmetic. Dental insurance plans may also require coverage for a duration (could even be a year) before providing benefits for major work like root canals or crowns.
- Fee for not having health insurance: Anyone not covered by health insurance for more than two complete 2 months during a calendar year has to pay a fine. The fine for 2015 is 2% of the household income (up to a max of the average national Bronze plan) or $325 per adult and $162.50 per child under 18 (up to a max of $975), whichever is larger. The fine for 2016 is 2.5% of the household income (up to a max of the average national Bronze plan) or $695 per adult and $347.50 per child under 18 (up to a max of $2,085), whichever is larger.