If you’ve ever learned a foreign language, you know how hard it can be—new words to learn, verbs to conjugate, and grammar galore. You might be able to understand bits and pieces of a conversation, but it takes a while before you’re fluent.
It’s kind of like that with health care insurance plans, too.
Unless you work in the trenches every day, learning the lingo takes a lot of time and effort. Health insurance explanations are usually part of a long and confusing benefits guide that many employees may not even read. Then they end up making hasty decisions, and choose a health insurance plan they don’t fully understand. Then they receive medical bills they don’t anticipate, or they book appointments with providers who are more expensive. They may also forgo care to save money. The result? Higher costs (for them and your company), poorer outcomes, and unhappy employees.
The good news? COVID-19 has inspired employees to become more informed consumers who want to stretch their healthcare dollar as far as possible. In fact, 59% of employees said they’d be paying more attention to their benefits this year.
What does this mean for employers? It’s time to step up and offer better benefits education—because your employees are looking for it. And for HR managers, that starts with clearly explaining important health insurance definitions, minus the jargon. Consider this a glossary to share with your employees. (Go ahead, copy-paste…we won’t tell.)
Health Insurance Definitions
Allowable amount: The allowable amount is the maximum amount your plan will pay for a covered healthcare service. Think of it as a price cap. It’s the amount your insurer has agreed to pay—and your provider has agreed to accept.
What does this mean for you? Not much if you’ve already met your deductible. You’ll simply pay your copayment or coinsurance. But if you haven’t met your deductible, an in-network provider is only allowed to charge you up to the allowable amount. Out-of-network providers, however, can charge you more than the allowable amount, and you could be on the hook for all or most of it directly out-of-pocket.
Coinsurance: You’ve probably heard the phrase ‘share the wealth,’ but when it comes to coinsurance, it’s all about ‘sharing the costs.’ Coinsurance is the percentage of costs you pay for a covered healthcare service after you’ve paid your deductible.
Here’s an example of how it might work: Your health insurance plan allows $120 for an office visit with an in-network provider, and your co-insurance is 20%. After you’ve met your deductible, you pay 20% of $120, which is $24. Your health insurance plan pays the rest. If you haven’t met your deductible, you pay the entire $120.
Copay: A copay is a fixed amount (e.g., $10) you pay for a covered health service after you’ve met your deductible. Note that copayments may differ for drugs, lab tests, office visits, and visits to specialists. For example, after you’ve met your $1,000 deductible, you might pay $10 for an office visit, and $20 for prescriptions.
Deductible: In order to understand your health insurance plan, you need a clear health insurance deductible definition. A deductible is the amount you’ll pay out-of-pocket each year before your health insurance plan kicks in. For example, if your deductible is $3,000, this means your plan won’t cover anything until you’ve paid $3,000 for health services.
Some health insurance plans have separate deductibles for certain services, such as prescription drugs. Some plans may also have a lower deductible for in-network doctors, and a higher deductible for out-of-network providers. They may also have a per-episode deductible, meaning a deductible you have to meet each time you receive a particular type of service (e.g. each time you’re hospitalized).
For family health insurance plans, you’ll have an individual deductible for every member of your family, as well as a family deductible for everyone on your plan. With a family plan, coverage begins as soon as individuals meet their individual deductible. All individual deductibles funnel into the family deductible. Once the family deductible is met, everyone in the family is covered—even if their individual deductibles are not met.
Here’s a simple example: The family deductible for a family of three people is $750. Each individual deductible is $500. Person A pays $500 toward the deductible, and person B pays $300. Thus, the entire deductible is met even though person C didn’t pay anything. Everyone in the family will continue to pay coinsurance and copayments until they meet the maximum out-of-pocket amount.
Dependents: A dependent is someone who relies on you for healthcare coverage, like a child or elderly relative. Your spouse can be a dependent as well. (Check out the official IRS dependent definitions here.) They’ll have access to your same plan and benefits, and any healthcare they receive on your plan will count towards your total deductible.
Formulary: A formulary is a fancy name for the list of drugs your insurance plan covers. Each formulary categorizes drugs into tiers based on their actual cost, the payer’s negotiated cost, and whether there are cheaper options. The higher the tier, the more you’ll likely pay out-of-pocket.
For example, a generic drug listed in tier one might not cost you anything, while a newly-approved specialty drug listed in tier four might cost you several hundred dollars or more. Expensive brand-name drugs may also be on a higher tier, costing you more money and even requiring a prior authorization in some cases.
Health savings account: A health savings account—also known as an HSA—is for pre-tax money you can set aside for qualified medical expenses. Think of it as a rainy day fund for deductibles, copayments, coinsurance, and some other expenses. If you have a large healthcare expense in the future, you’ll already have money set aside to pay for it.
There’s one caveat: you can only use an HSA if you’re on a high-deductible health plan (HDHP). In 2021, the IRS defines HDHPs as those with a minimum individual deductible of $1,400 and a minimum family deductible of $2,800.
There are also limitations on how much you can contribute to an HSA each year. The 2021 annual HSA contribution limit is $3,600 for individuals, and $7,200 for families.
In-network: ‘In-network’ healthcare providers are approved for use on your health insurance plan. Your health insurance rewards you for sticking with these providers by giving you a discount. Think of in-network providers as your all-star team, because they can usually save you a lot of money while still providing high-quality care.
Out-of-network: ‘Out-of-network’ healthcare providers do not have a contract with your health insurance carrier. You can still use out of network providers in most cases, but unfortunately you’ll probably have higher out-of-pocket costs.
Out-of-pocket maximum: The out-of-pocket maximum is the most you could pay during a coverage period (usually one year) for healthcare services. This includes deductibles, copayments, and co-insurance. After you pay this amount, your plan will usually pay 100% of the allowed amount.
For example, you pay $200 a month for a plan with a $3,000 deductible. Once you meet the deductible, you must continue to pay a 20% coinsurance until you’ve met your $10,000 out-of-pocket maximum.
Why is this dollar amount important?
It can help you plan financially for the worst-case scenario. In the example above, it means you’d pay $10,000 in out-of-pocket costs, plus a $200 monthly premium for a yearly total of $12,400. You’ll need to determine whether you’re willing to take on this risk, or whether a plan with a lower out-of-pocket maximum (and higher premiums) is better for you.
Premium: Looking for a simplified health insurance premium definition? Your premium is the amount you pay—usually per month—for your health insurance plan. You pay this amount regardless of whether you require any healthcare services during that period of time. General rule of thumb? The lower the premium, the higher the deductible (and vice versa).
How Jellyvision can help
If you’re an HR manager looking for more information about how to help employees make smarter, wallet-friendlier choices about their health insurance plans, get in touch with us. Powered by behavioral science and proprietary technology, ALEX helps employers save money on premiums, payroll taxes and more.