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How Health Insurance Works

How Health Insurance Works

Health insurance policies are complicated. Here’s the skinny on open enrollment and a breakdown of health insurance lingo to help you understand health insurance policies.

How Health Insurance Works

First, you can only make changes to your health insurance plan during open enrollment.

Open enrollment starts on November 1 and depending on what state you live in ends within a month or so. Find your states deadlines here.

You can’t make changes to your policy any other time throughout the year unless you have a qualifying life event like you get married, have a baby or adopt, permanently move to an area that has different health care plan options, or you if lose health coverage. Find out more on special enrollment at healthcare.gov.

Understanding how your policy works is confusing.

Here are the health insurance terms to know:

Premium- your monthly payment that is required to maintain your policy. In general, the lower your premium is, the higher your deductible will be.

Co-Pay-what you’ll pay for specific services like your doctors’ visits, prescriptions, or hospitalizations.

Deductible– how much you will pay for medical expenses before the coverage kicks in.  This varies greatly from $0 up to over $6000.

Here’s where it gets tricky with health insurance.

If you break your arm it isn’t like driving through a fast food restaurant and choosing from a menu for a surgery and a cast. 

You’ll likely go to the ER and find out later how much everything costs. Medical billing and coding is incredibly complicated, but those that are not insured will have to pay significantly more.  According to CNN Money more than 20% of Americans from 26-34 still are not insured. Without insurance a broken arm could cost over $16,000 according to WebMD

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Allowable Amount- your health insurance has a discounted rate of what is charged. According to WebMD, a broken arm with health insurance the allowable amount charged would be around $4,800.

Coinsurance-this is a percentage of what your health insurance pays after your deductible is met.  On healthcare.gov if you’re checking plans you will see four different groups of plans that are divided based on your coinsurance. Bronze plans cover 60% of costs after your deductible, Silver plans cover 70% of costs, Platinum plans cover 80% of costs, and Gold plans cover 90% of costs.  

Out of Pocket Maximum– this is the limit in the total amount that can be spent in a year on your co-pays, deductible, and coinsurance.

Here’s an example of a plan.

This plan has a deductible of $2,500, with 70% coinsurance, and a maximum out of pocket of $5,500.

Amount Billed: (What the hospital charges) $25,000

Allowable Amount: (What your health insurance has pre-negotiated as a discounted rate for those services) $9,000

Deductible: You’ll pay your entire deductible of $2,500

Coinsurance: Your deductible is met, so your coinsurance will kick in.  There is a remaining $6,500 due ($9,000-$2,500) and your insurance will pay 75% of that ($4,550). You will have an additional $1,950 due. 

Let’s say it’s a crazy bad year and you find yourself back in the ER with an allowable amount charged of $30,000. You have already met your deductible of $2,500 plus $1,950 = $4,450.  With your maximum out of pocket of $5,500 you will only pay $1,050 because you’ve reached the limit for the year. If you have other expenses that year your insurance will then pay 100% of the cost.

That’s how health insurance plans work in a nutshell.

P.S. The best way to avoid medical debt is to have an emergency fund or 3-12 months of expenses saved for emergencies. Here’s an easy guide to emergency funds.

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