Health Insurance: Do You Understand the Basics?
Life is full of uncertainties that benefit us or do us harm. On one hand, we might be fortunate enough to enjoy good health and be kept out of harms way. On the other, we might suffer a injury or become ill. A night in hospital can cost upward of $5,000. If you were to be hospitalized, where would you get the money to pay for it? Medical bills, according to a Harvard study, caused 62% of personal bankruptcies in the United States in 2007.
To help you avoid huge medical bills and related bankruptcies, insurance companies offer policies to reduce the cost of your care. In order for you to carry a policy, you must pay a premium, which is based on a complicated formula and statistics used by insurers to determine price versus risk. Older people pay higher premiums than younger people, as they are statistically more likely to get sick. Since the advent of the Affordable Care Act, insurance companies cannot deny or charge higher premiums to people who have been denied health care coverage in the past or who have preexisting conditions.
Your premium is paid on a regular basis to cover the cost of the policy. An insurance company will agree to pay a policyholder’s medical bills once a certain amount, known as a deductible, has been paid. Generally, the higher the deductible, the lower the premium, and vice versa. Most insurance companies have preferred vendors and facilities with which they have negotiated lower prices for their policyholders – a bit like member benefits and discounts at stores.
Insurance companies typically offer two types of health care plans: PPO (preferred provider organization) and HMO (health maintenance organization).
Under a PPO plan, a policyholder can use the insurance company’s network of providers for discounted prices or go out of network and pay substantially more. This is much like having a discount card for a certain store that gives you a negotiated prices, but having to pay higher prices at a store that doesn’t accept the card. The insurance company will still cover some of the costs outside its network of providers, but the policyholder will ultimately pay far more.
An HMO plan will allow you to use only the Insurance company’s network of providers. If you do not, you’ll have to pay the whole bill. The one exception to this is a life-threatening situation — for example, you’re unconscious and paramedics take you to a hospital that is not part of your network.
In addition to the premiums you pay, there are additional expenses you must cover when you access care. These generally include a deductible, copays, and coinsurance. A deductible — a set amount determined by your policy that is anywhere from $250 to $6,000 — are the first dollars you pay toward treatment. A copay is a specific dollar amount, usually $10 to $70, that is paid for office visits and prescriptions. Any service or treatment beyond the scope of an office visit or a prescription copay is subject to coinsurance, which is a percentage of the cost that is split between you and the insurance company. This kicks in after you’ve met your deductible, and the percentage varies depending the policy you purchased.