Navigating the world of health insurance can be confusing, especially with the many terms and concepts that are essential to understanding your coverage. To help you make informed decisions about your health care, we’ve put together a guide to some of the most common health insurance terms. We’ll define each term and provide examples to illustrate how they work in practice.

Premiums

Definition

A premium is the amount you pay for your health insurance every month. It is the cost of purchasing your health insurance plan and is usually paid to the insurance company on a monthly basis. Even if you don’t use any medical services, you still need to pay your premium to maintain your coverage.

Example

If your health insurance plan has a monthly premium of $300, you will pay $300 each month to your insurance provider. Over the course of a year, this amounts to $3,600.

Deductibles

Definition

A deductible is the amount you must pay out of pocket for covered medical services before your insurance company starts to pay. Essentially, it’s a threshold you have to meet each year. After you meet your deductible, you share the costs of your care with your insurance company through copays or coinsurance.

Example

Suppose your health insurance plan has a deductible of $1,000. This means you must pay the first $1,000 of your medical bills yourself. If you have a hospital visit that costs $2,000, you would pay the first $1,000 (your deductible), and then your insurance would start covering part of the remaining $1,000 according to the terms of your plan (such as copays or coinsurance).

Copays (Copayments)

Definition

A copay, or copayment, is a fixed amount you pay for a covered health care service after you’ve paid your deductible. Copays are typically due at the time of the service and can vary depending on the type of care you receive.

Example

If your plan has a $20 copay for a visit to your primary care physician, you will pay $20 each time you see your doctor. If the visit costs $150, your insurance will cover the remaining $130 after you pay your $20 copay, provided you’ve already met your deductible.

Coinsurance

Definition

Coinsurance is your share of the costs of a covered health care service, calculated as a percentage of the allowed amount for the service. You start paying coinsurance after you’ve paid your deductible. Unlike a copay, which is a fixed amount, coinsurance is a percentage of the total cost.

Example

If your plan has 20% coinsurance, you will pay 20% of the cost of the covered service. For instance, if you have already met your deductible and you have a $200 medical bill, you will pay 20% ($40), and your insurance will pay the remaining 80% ($160).

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. After you spend this amount on deductibles, copays, and coinsurance, your health insurance pays 100% of the costs for covered benefits. Premiums and non-covered expenses do not count toward your out-of-pocket maximum.

Example

If your health plan has an out-of-pocket maximum of $5,000, once you have paid $5,000 in deductibles, copays, and coinsurance, your insurance will cover all remaining covered costs for the rest of the plan year.

Network

Definition

A network is a group of doctors, hospitals, and other health care providers that have agreed to provide services to health insurance plan members at discounted rates. There are typically two types of networks: in-network (preferred) and out-of-network (non-preferred).

Example

If you visit an in-network doctor, your insurance will cover a larger portion of the cost, and your out-of-pocket expenses will be lower. If you go to an out-of-network provider, you might have to pay more, or the service may not be covered at all.

Explanation of Benefits (EOB)

Definition

An Explanation of Benefits (EOB) is a statement from your health insurance company that describes what costs it will cover for medical care or products you’ve received. The EOB is not a bill but rather a detailed account of how your insurance benefits were applied to a particular claim.

Example

After a doctor’s visit, you might receive an EOB that details the cost of the visit, how much your insurance covered, how much was applied to your deductible, and any amount you are responsible for paying.

Formulary

Definition

A formulary is a list of prescription drugs covered by your health insurance plan. It typically includes both generic and brand-name drugs and is categorized into tiers that determine the cost to the patient.

Example

If your medication is listed in Tier 1 of your plan’s formulary, it might be the least expensive, whereas a Tier 3 drug might cost significantly more. Always check your plan’s formulary to understand the cost of your prescriptions.

Preauthorization (Precertification)

Definition

Preauthorization, or precertification, is the process by which your insurance company reviews a proposed treatment plan before you receive care to determine whether the service is medically necessary and covered under your plan.

Example

If your doctor recommends a surgery, they might need to obtain preauthorization from your insurance company. The insurance company will review the request, and if approved, you will be notified that the procedure is covered under your plan.

Understanding these common health insurance terms can help you better navigate your coverage options and make informed decisions about your healthcare. By knowing the difference between premiums, deductibles, copays, and coinsurance, you can plan for medical expenses and understand your financial responsibilities. Additionally, being familiar with networks, EOBs, formularies, and preauthorization processes can further empower you to use your health insurance effectively and ensure you receive the care you need. Always review your specific health plan details to understand how these terms apply to your coverage, and don’t hesitate to reach out to your insurance provider for clarification on any terms or benefits.