What is health insurance? And how the Health Insurance system in the U.S works?
The healthcare and health insurance is among the most costly on the planet, however, we don’t get the best care our system is broken but without understanding it we can’t fix it. In order to help decode this for you, we are going to use the analogy situation.
Meet Linda. Linda just graduated from college and got her first job at Corporate Co. The job is great: free food, friendly colleagues, and even a health insurance plan. However, there’s just one problem, Linda has no idea what health insurance is, or even if their plan is right for her. What should she do?
Well her first step is simple, understand how health insurance works. Like all insurance, in return for a monthly fee called a premium, health insurance reduces the costs associated with a risk, in this case, excessive medical bills due to sickness or injury. However, unlike other forms of insurance, health insurance premiums are unique, they’re only based on a few factors, like age, location, and smoking habits, and not on your health status. That means if you have a pre-existing health condition, like diabetes or asthma, your insurer cannot raise your rates or deny you coverage. That is undeniably great for the consumer, though health insurance also has a lot of problems, mainly the confusing jumble of terms, HMO, deductibles, the list goes on and on. However, Linda shouldn’t worry cause when explained properly, health insurance isn’t actually all that complicated.
Let’s walk through another example but this time with some numeric figures to make it easier.
Say Linda has a $200 monthly policy with a $1,000 deductible, 20% coinsurance, and a $5,000 out-of-pocket maximum. Let’s also say that she recently broke her leg playing soccer and has just been stuck with a $100,000 medical bill. Yikes! How much of that enormous bill does she have to pay? Let’s start with the deductible first.
A deductible is simply the amount of money Linda must pay each year before her insurer starts paying their share. Linda’s plan has a $1,000 deductible. That means, for a $100,000 medical bill, Linda must pay the first $1,000 herself. Then, the remaining $99,000 is split between Linda and her insurer, based on her plan’s coinsurance. Coinsurance is the percentage of costs Linda must meet after her deductible has been met. Linda’s plan has 20% coinsurance. That means for every $4,000 the insurer pays, Linda must pay $1,000. This cost-sharing continues until Linda reaches her out-of-pocket maximum. This is quite literally the maximum amount of medical expenses Linda has to pay each year before her insurer pays the rest.
In this example, Linda’s plan has a $5,000 out-of-pocket maximum, and she’s already spent $1,000 on her deductible and $4,000 on coinsurance. That means she’s reached her out of pocket maximum. And her insurer will have to cover the rest. All in all, Linda only paid $5,000 for a $100,000 medical bill. If Linda didn’t have health insurance, that payment would have been all on her! Linda is thrilled by this but also wonders if a similar type of calculation applies to routine services. Like doctor’s visits or medications. Well, no, as it generally turns out. Copay covered those routine expense.
A copay is a simple flat fee associated with a specific routine event. Like $25 for a doctor’s visit or a certain prescription drug. As for you pay for these services, it couldn’t be easier. Linda will either pay directly at the doctor’s office or just get a bill from them later on.
Hopefully, you and Linda now have a better understanding of how health insurance works.
Now, since Linda has a better and basic understanding of health insurance on a basic level of how health insurance works. However, she remains baffled by the general jargon of health insurance: HMO, Gold Plan, the list goes on and on. However, luckily for Linda, we’ve got her covered. Let’s start with the metals.
Most insurance plans you see are listed with an associated metal: bronze, silver, gold, or platinum. Each metal is in turn associated with an actuarial value. While that term may seem rather “math”, actuarial value is simply. The average percentage of medical costs your insurer pays each year.
For example, bronze policies have an actuarial value of 60%. That means, on average, insurers pay for 60% of their policyholders’ medical costs. For silver, it’s 70%, for gold, its 80%, and platinum, the highest metal, it’s 90%. However, there’s a wrinkle in this neat hirecharcy: catastrophic plans.
These are plans are only available to those below 30 years of age or to those with hardships exemptions, such as filing for bankruptcy or even being homeless. These plans cover very few routine expenses, like prescription drugs, making them a risky option. So which plan should Linda choose? Well, when deciding between metals. It is important to understand that these categories have nothing to do with the quality or amount of care you get.
All metals provide the same healthcare benefits. Instead, the only thing they differ on is the actuarial value. Worse metals come will come with lower monthly premiums, but will cover a lower percentage of healthcare costs. Better metals provide the opposite. Thus, as you can see, metals and actuarial values are a great way for Linda to understand her expected healthcare costs. However, with that being said, there is another factor that determines your healthcare costs: the type of plan you have, of which they’re four: HMO, EPO, PPO, and POS.
HMOs and EPOs are by far the strictest. As they only cover the cost of the healthcare received within their provider network. Which is a network of hospitals and clinics they have contracts with. Besides, all health care received in an HMO, though not an EPO, must be coordinated through a primary care physician.
This means if you need to be looked at by a specialist, like a cardiologist, or need any tests done, like an X-ray. You cannot get coverage in an HMO without a referral from your primary care physician. These traits can make HMOs, and to a lesser extent EPOs, restrictive, though they do come with one major benefit: cost.
HMOs and EPOs generally have the lowest costs of any health care plan. Plus, they’ll always cover true medical emergencies, even out of network. PPOs are the third type of plan. With a PPO, you can visit any provider without a referral, both inside and outside your network. This flexibility makes PPOs a good choice for some, though be warned. Their costs are higher than other plans, plus out of network care will always be more expensive. Finally, we have POSs. They are like a mix between HMOs and PPOs. Like PPOs, they cover out of network healthcare, and like HMOs, they center on a primary care physician. This combination of traits makes them less expensive than PPOs but more expensive than HMOs.
Hopefully you and Linda now better understand health insurance.