The Fundamentals Of Health Insurance

The state of health insurance today is one of America’s most heated debates. The Affordable Care Act, widely referred to as Obamacare, aims to revamp the American health care industry, and some provisions of the Act are already kicking in. In this rapidly changing environment, it pays to be aware of the fundamentals.

As an informed consumer, understanding the building blocks of health insurance can help you avoid confusing, even misleading, lingo, which will ultimately end up saving you money. Regardless of the particulars of any plan, some concepts are applicable to all of them.

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Coverage Options

Currently, insurance plans fall into two categories: group coverage and individual coverage. Group plans are provided by an employer, government agency or worker’s union while individual plans are negotiated between an individual policyholder and their insurer. Generally, group coverage is less expensive because the provider pays most of the premium for the user.

Group Plans

If a group insurance plan is available to you, it will probably provide more comprehensive coverage than an individual plan. This is because group plans pool policies within an organization and ultimately reduce costs for insurers. Under these plans, you’re more likely to be covered for maternity care, well-baby services, preventive care, vision and dental care.

Keep in mind that the way your group plan is set up can make a difference. Group plans are either self-funded or fully insured. What this boils down to is who makes decisions regarding your coverage.

Self-Funded vs. Fully Insured Group Plans

In a self-funded plan, your employer pays all medical costs and assumes all risk for its employees. Instead of paying a fat premium to a partner insurance company, self-funded plans are allowed to calculate a maximum annual risk and then keep that amount in reserve until it might be needed. For instance, if it’s anticipated that a company’s maximum risk is $1.5 million per year, the company is allowed to keep that money and even invest it. At the end of the year, anything that wasn’t spent out of these funds goes back into the company coffers.

In what’s called a fully insured plan, an employer partners with an insurance company and pays it a premium to manage its employees’ health care claims. The premium amount is based on the company’s maximum annual risk, and the insurer assumes all administrative and legal responsibilities related to claims management. If we use the same example as above, the $1.5 million potential risk is paid directly to the insurer, where it remains regardless of what is spent.

A key difference is that self-funded plans are exempt from state laws, which govern fully insured plans. This leaves your employer with considerable leeway in deciding what kind of coverage you get and whether an expensive surgery or procedure will be approved. If, for example, a benefit included in the plan ends up costing your employer more than they bargained for, they are freely allowed to rescind that benefit if they so choose. State mandates that dictate the breadth of coverage do not apply to these plans.

If you appeal, you are appealing to an employer, not an insurance company. Your only access to legal action is in Federal Court, should it come to that. If your group health insurance plan is self-funded, be sure to carefully inspect the details of your coverage. Self-funded plans are cheaper for employers and are often promoted to employees, but they operate in the company’s best interest, not yours.

Individual Plans

Individual plans are sometimes referred to as single-payer plans. You purchase an insurance plan independently from the open market and your employer is not involved. Single-payer plans are generally much more expensive than group coverage and provide limited coverage.

Expanding Your Individual Plan

For a fee, single-payer insurers offer additional riders to cover specialized expenses like pregnancy and labor and delivery. This excess cost is charged to you because you are not part of a large pool of insureds and the insurance company’s risk is higher.

Example: Scott and Zelda, a married couple, both have group coverage through their employers. Scott’s plan is fully insured and meets all requirements of New York state, including pregnancy/labor and delivery coverage. Zelda’s plan is self-funded and doesn’t answer to New York state mandates. Scott and Zelda would like to have a baby, but due to a company-wide outbreak of pregnancies last year that cost Zelda’s company a fortune, her employer no longer provides pregnancy coverage.

The couple has three options:

Modify Zelda’s plan with an added rider that covers pregnancy and pay a higher premium
Pay out of pocket for all pregnancy-related expenses
Delay pregnancy until the next open enrollment period at Scott’s company, when Zelda can be added to Scott’s plan and receive the same comprehensive benefits at a reasonable cost

Consider how widely coverage options can vary by state. This is a comparison of health insurance in two states, Massachusetts and Minnesota. Click image to enlarge.

If you cannot afford an individual plan that covers your needs, there are other options. Public insurance refers to Medicare, Medicaid and other state-based coverage programs. Currently, the qualifications for these programs are determined by age, disability status and income, and they can vary by state.

But if you haven’t qualified for these programs in the past, you may soon–one of the major features of Obamacare is the expansion of public insurance eligibility. By the start of 2014, for example, new provisions from the Affordable Care Act will come into effect and an additional fifteen million low-income Americans will qualify for Medicaid.

Cost Terminology

Regardless of where your insurance plan comes from or how it works, all of them have cost-sharing methods in place. A premium is simply a monthly bill that keeps your insurance policy active; sometimes this may be partially or wholly paid by an employer.

While they structure them differently, all insurance companies use three specific cost-sharing mechanisms: co-pays, deductibles and coinsurance.

Co-pays are flat fees that consumers must pay when receiving a medical service. These are fixed amounts and specified for things like emergency room visits, primary care physician visits or specialist visits.

Your co-pay is the amount you pay for each prescription refill or doctor’s visit. (Usually this is around $15-30, respectively.)

Deductibles refer to an out-of-pocket expense ceiling that you must meet before some facets of your plan begin to pay. Deductibles apply to a given benefit period, usually of one year at a time.

For instance, you may be expected to pay the first $1000 toward any hospital visits before your plan begins to cover expenses.

Coinsurance stipulates that the insured pay a certain percentage of the total cost for services; this feature commonly kicks in after deductibles are met.

Many coinsurance plans involve an 80/20 split in which you assume 20% of costs and your insurance plan covers the remaining 80%.

Flexible Spending Accounts, or FSAs, are pre-tax deductions from your wages that can be applied toward health care in a given benefit period. If an FSA is part of your insurance coverage, you can use these funds for co-pays, coinsurance bills, over-the-counter products and other out-of-pocket spending. This savings tool has been tweaked by the Affordable Care Act.

As of 2010, FSA contributions are capped at $1,200 per plan year for individuals, a considerably smaller amount than many users once opted to save. The IRS is reviewing acceptable expenditures and whether unused funds may be rolled over or refunded at year’s end; new details about FSA use will be reported here as they emerge.