Health Insurance 101: Key Terms You Need to Know

1. Premium

Definition: A premium is the amount you pay for your health insurance coverage, typically on a monthly basis.

Explanation: This is essentially your membership fee to be covered by a health insurance plan. Regardless of whether you use healthcare services that month, you still pay this amount. Premiums vary based on factors such as age, location, and the type of plan you choose.

2. Deductible

Definition: A deductible is the amount you must pay out-of-pocket for healthcare services before your health insurance begins to pay.

Explanation: For example, if your plan has a $1,000 deductible, you will need to pay the first $1,000 of your medical costs. After meeting your deductible, your insurance starts to share the costs of covered services.

3. Copayment (Copay)

Definition: A copayment is a fixed amount you pay for a covered healthcare service, usually when you receive the service.

Explanation: Copays are typically a flat fee (e.g., $20 for a doctor’s visit). They can vary depending on the type of service—visits to specialists, emergency room visits, and prescription drugs may each have different copay amounts.

4. Coinsurance

Definition: Coinsurance is your share of the costs of a covered healthcare service, calculated as a percentage of the allowed amount for the service.

Explanation: If your coinsurance is 20%, you pay 20% of the cost of the service after you’ve paid your deductible, and your insurance covers the remaining 80%. For instance, if a service costs $100 and you’ve met your deductible, you would pay $20, and the insurance pays $80.

5. Out-of-Pocket Maximum

Definition: The out-of-pocket maximum is the most you will have to pay for covered services in a plan year.

Explanation: Once you reach this amount in deductibles, copayments, and coinsurance, your health insurance will cover 100% of covered services for the rest of the year. This limit is designed to protect you from very high costs.

6. Network

Definition: A network is a group of doctors, hospitals, and other healthcare providers that your insurance plan has contracted with to provide care at lower rates.

Explanation: Staying within your plan’s network means lower costs. Going outside the network can result in higher out-of-pocket costs or no coverage at all, depending on your plan’s rules.

7. In-Network vs. Out-of-Network

Definition: In-network providers have agreements with your health insurance plan to provide services at discounted rates. Out-of-network providers do not.

Explanation: Using in-network providers usually results in lower out-of-pocket costs for you. Out-of-network providers can be significantly more expensive, and some insurance plans may not cover out-of-network care except in emergencies.

8. Health Maintenance Organization (HMO)

Definition: An HMO is a type of health insurance plan that requires members to use healthcare providers within its network and usually requires a referral from a primary care physician to see a specialist.

Explanation: HMOs typically offer lower premiums and out-of-pocket costs but less flexibility in choosing healthcare providers.

9. Preferred Provider Organization (PPO)

Definition: A PPO is a type of health insurance plan that offers more flexibility in choosing healthcare providers and does not require referrals to see specialists.

Explanation: PPOs generally have higher premiums and out-of-pocket costs compared to HMOs, but they provide greater freedom to see any doctor or specialist without needing a referral.

10. Exclusive Provider Organization (EPO)

Definition: An EPO is a type of health insurance plan that combines features of HMOs and PPOs. It requires members to use the plan’s network but does not require referrals for specialists.

Explanation: EPOs typically have lower premiums than PPOs but offer less flexibility in choosing providers compared to PPOs.

11. Point of Service (POS)

Definition: A POS plan is a type of health insurance that combines features of both HMOs and PPOs.

Explanation: POS plans require a primary care physician and referrals to see specialists (like an HMO) but offer more flexibility in choosing providers and the option to see out-of-network providers at a higher cost (like a PPO).

12. High-Deductible Health Plan (HDHP)

Definition: An HDHP is a health insurance plan with higher deductibles and lower premiums.

Explanation: These plans are often paired with Health Savings Accounts (HSAs) to help pay for out-of-pocket costs. HDHPs are beneficial for individuals who do not expect to need much medical care and want to save on monthly premiums.

13. Health Savings Account (HSA)

Definition: An HSA is a tax-advantaged savings account available to individuals enrolled in a High-Deductible Health Plan (HDHP).

Explanation: Money contributed to an HSA can be used to pay for qualified medical expenses. HSAs offer triple tax advantages: contributions are tax-deductible, growth is tax-free, and withdrawals for qualified expenses are also tax-free.

14. Flexible Spending Account (FSA)

Definition: An FSA is a tax-advantaged savings account that allows employees to set aside pre-tax dollars for eligible healthcare expenses.

Explanation: FSAs are offered by employers, and funds must be used within the plan year (or a short grace period). Unlike HSAs, FSAs are not tied to a high-deductible plan and are generally “use it or lose it.”

15. Explanation of Benefits (EOB)

Definition: An EOB is a statement provided by your health insurance company that explains what medical treatments and services were paid for on your behalf.

Explanation: The EOB is not a bill. It details the services provided, the amount billed by the provider, the amount covered by insurance, and any balance you owe.

16. Prior Authorization

Definition: Prior authorization is a requirement that your healthcare provider obtain approval from your health insurance plan before a specific service is provided to ensure coverage.

Explanation: This process helps control costs by ensuring that the care is medically necessary and covered under your plan. Not obtaining prior authorization when required can result in higher out-of-pocket costs or denial of coverage.

17. Formulary

Definition: A formulary is a list of prescription drugs covered by a health insurance plan.

Explanation: Drugs on the formulary are usually categorized into different tiers, which determine the copayment or coinsurance amount. Lower-tier drugs generally have lower out-of-pocket costs.

18. Preventive Care

Definition: Preventive care refers to medical services aimed at disease prevention and health maintenance.

Explanation: Many health insurance plans cover preventive services at no cost to you, even before you meet your deductible. These services can include immunizations, screenings, and annual check-ups.

19. Catastrophic Health Insurance

Definition: Catastrophic health insurance is a type of plan designed to provide emergency coverage for worst-case scenarios.

Explanation: These plans typically have low premiums and very high deductibles. They are available to individuals under 30 or those with a hardship exemption and primarily cover essential health benefits after the deductible is met.

20. Essential Health Benefits (EHBs)

Definition: EHBs are a set of healthcare service categories that must be covered by certain health plans.

Explanation: Under the Affordable Care Act (ACA), insurance plans must cover these benefits, which include services such as emergency services, maternity and newborn care, mental health services, and prescription drugs.

21. Subsidies

Definition: Subsidies are financial assistance provided by the government to help individuals afford health insurance.

Explanation: Subsidies under the ACA are available to people with incomes between 100% and 400% of the federal poverty level (FPL). These subsidies lower the cost of premiums and, in some cases, out-of-pocket costs.

22. Open Enrollment Period

Definition: The open enrollment period is the time each year when you can sign up for health insurance, switch plans, or make changes to your current plan.

Explanation: Missing this period usually means you have to wait until the next open enrollment period unless you qualify for a Special Enrollment Period (SEP) due to a life event like marriage, birth of a child, or loss of other coverage.

23. Special Enrollment Period (SEP)

Definition: An SEP is a time outside the open enrollment period during which you can sign up for health insurance if you experience certain life events.

Explanation: Qualifying events include changes in household size, changes in residence, loss of health coverage, and other specific circumstances. SEPs ensure that people can obtain coverage when they need it most.

24. Minimum Essential Coverage (MEC)

Definition: MEC refers to the type of health insurance coverage that meets the Affordable Care Act’s requirement for having health insurance.

Explanation: Plans that qualify as MEC include most employer-sponsored plans, individual market plans, Medicare, Medicaid, CHIP, and certain other coverage options. Having MEC avoids the penalty that was previously imposed for not having health insurance.