Last week, we looked at some ways that health insurance isn’t like any other kind of insurance. If you missed it, may I commend it to you?
This week, let’s look at some terms that show up in health insurance that we don’t see in other policies, or terms that might mean something different in the health insurance.
Deductible (individual and family)
We all understand the idea of a deductible. It works kind of in a similar way in health coverage as it does in property insurance. In property insurance, a deductible is the insured’s share of a loss. It is often written in a specific dollar amount ($500, $1,000, etc.). Some deductibles are written as a percentage of property replacement cost. You’ve seen these on losses related to specific causes of loss, such as windstorm or hail, earthquake, and sinkhole. This deductible often applies per occurrence, which is to say that each time there is a loss, there is a deductible. When settling a claim, the payment is offset by the deductible amount. For example, if you have $10,000 worth of damage to your home, and a deductible of $1,000, you should receive a check for the loss less the deductible, which should equal $9,000. We’re kind of used to it working that way.
If you have a deductible on your health coverage, it works a little differently. This deductible is often expressed in two numbers, the individual deductible and the family deductible. Every medical expense that is included in the deductible, which may include primary physician visits, specialist visits, pharmacies, tests, etc. reduces the individual and family deductibles. That means that whatever the fee that the insurance company and doctor agree on is charged to the individual until they spend their deductible. That amount also counts toward the family deductible.
For example, a family has a $3,000 individual deductible and $6,000 family deductible. One of the children gets sick, so they make an appointment with their primary doctor. Doc bills $200, but the agreed fee for the visit is $100. The family is responsible for the $100 and that reduces the child’s individual deductible to $2,900 and the family deductible is down to $5,900. Each expense that applies to the deductible reduces it until it reaches $0. It’s important to remember that until the deductible is reached, the health coverage doesn’t make any payments, but once the deductible is reached, they start paying a portion of the expenses. More on that later.
In-network and out-of-network
In a lot of ways, health coverage is a contract created by the middle party in a transaction. It’s like the company brings together a customer and a service provider. The company contracts with medical providers: doctors, hospitals, pharmacies, imaging centers, etc. The providers agree to accept the company’s payment schedule for services, conditions for providing services, and deductible structure. That’s when the providers become part of the network. They are the in-network providers. All other providers are out-of-network.
What’s the difference to the customer? There are two different deductible and out-of-pocket structures for in-network and out-of-network providers. The customer will pay more for out-of-network providers than they would for in-network providers. One of the benefits of using an in-network provider is that they agree that the customer is only responsible for the agreed upon fee. Whether that fee is paid by the customer in their deductible, or paid by the company, that’s all that get’s paid. The out-of-network provider doesn’t always have that requirement. In some health coverages, that out-of-network provider isn’t required to waive any fee above the company agreement.
We had a situation that required an ambulance ride for someone in my family. Our health coverage included an amount for ambulance rides. When I received a bill from the ambulance company, I called to ask about it. I found out that the ambulance company was out-of-network. When I called the health company for more information, I found out that most ambulance companies aren’t in-network for most customers. I was on the hook for over $500 for a 2.5-mile ride to the hospital. Thanks, out-of-network provider.
Once a customer meets the deductible amount, then the health company starts to cut checks to the providers. However, the money can still flow out of the pocket of the customers. There is still a co-pay that has to be dealt with and co-pay means different things to different plans (of course it does, why make it unnecessarily easy to understand).
Co-pay can refer to simple out of pocket requirements for certain services. Some health plans include a flat fee for primary doctor visits. The customer pays a set amount each time they visit their doctor. Those dollars will often count toward their deductible. This kind of co-pay may extend to specialist doctors and prescriptions. Space doesn’t allow us to discuss the medication tables that they use to determine how much customers will pay for which medication.
Co-pay can also refer to the amount that a customer will have to pay after the deductible is met. Plans often refer to the co-pay as a percentage of the allowable fee. Some plans would state that the health plan will pay 80% of the fee and the customer will pay 20% of the fee. This co-pay will apply to all allowed services. There is one more term that we need to handle to fully understand the financial impact of many health coverage plans.
Out-of-pocket maximum (individual and family)
This is a term that actually means exactly what it sounds like. Many health coverage plans have a financial stop-loss for the customer. They call it an out-of-pocket maximum. At some point, the customer will reach a place where the only additional money that they are charged are the monthly premiums. Once a customer’s medical expenses reach a predetermined point, the health coverage plan pays 100% of the agreed fee and the customer is responsible for nothing more. This is normally high enough where only those with multiple health problems or those with catastrophic health issues can exceed their out-of-pocket maximum. Like the deductible, there is an individual and family maximum that must be dealt with.
Flex Spending Account (FSA)
The FSA, or Flex Spending Account can be used for many out-of-pocket medical expenses, including expenses that aren’t covered by a health coverage plan. This includes deductibles, co-pays, and prescriptions. A customer can also use their FSA for other medical items, such as over the counter medications and first aid supplies. The interesting aspect of the FSA is that the customer chooses how much money to add for the year (up to $2,600 currently). That money is available as soon as the institution issues the debit card. Even though the customer will take all year to add their money to the account, it is all considered available immediately. The other side of that coin is that any money left over at the end of the year’s grace period is forfeited. That’s right, use your money or lose your money. I prefer not to comment any farther on that topic.
High-deductible (HSA eligible) plan
This is a particular health coverage plan that is different in two ways. The first major difference is the deductible. It is what it sounds like. The individual and family deductible is high, really high, but after that, many plans have no more out-of-pocket costs at all. What that means practically is that these plans seem to be a great cost saving measure for healthy families that don’t go to the doctor very much or those families that have a lot of medial expenses (that exhaust the deductible annually).
There is another way that these plans are different. If a customer has one of these plans, they have the option of opening a Health Savings Account. These accounts are similar to FSAs, but are different in a few significant ways. The HSA can be opened at a local bank and customers can make deposits as often as they need to. Unlike the FSA, HSA money is only available based on what is actually in the account. HSA deposits are limited annually based on your age and whether it’s for an individual or a family. Another way that it’s different from the FSA is that the HSA money is always yours so if you don’t use it all in a year, you can continue to build the balance up and use it for your medical expenses later.
There are other terms we could explore, and we haven’t really fully explored all of these terms. This is really a kind of primer for health insurance terms. Understanding the basics can help us to understand some of the struggles that our customers have. If you don’t have health insurance experience (or license) make friends that do, or get a license and experience. You might find it helpful in helping your customers.