Insurance Terminology In Plain English by Mark Squires

Policy Year: An individual health insurance policy will run for 12 months from the effective date of the policy. For instance if the effective date of the policy is March 1, 2010 the policy will be in effect, (as long as premiums are paid) until February 28, 2011. All Deductible and OOP Maximum figures are based on the Policy Year, not the calendar year.

Premium: This is the amount of money you will pay to the insurance company in exchange for them taking the majority of the financial risk in the event of a major heath care related expense. Premiums may be paid monthly by automatic bank draft. Premiums may also be paid quarterly, semi annually and annually. Most individual health insurance policies provide a 12 month rate guarantee. Some Health Insurance companies offer rate guarantees up to 36 months in exchange for a nominal additional premium amount.

Deductible: This is the initial dollar amount you must pay before your insurance company begins to pay for health care services. You get to choose what deductible you want to work with when you apply for health coverage. Deductible and premium are inversely linked. That is: the higher the deductible the lower the premium. Your deductible should be high enough for you to afford the premiums but low enough for you to be able to pay in the event of a health crisis. (Outpatient prescription drugs and over the counter medication expenses generally do not apply to the annual deductible)

If you recently left a group health plan you may find that the deductibles you are used to, if available in an individual policy, are very expensive. Many folks are used to a $250 deductible and they are shocked when they discover the real cost of such a plan. Don’t get discouraged. When you consider that a vast majority major health care expenses are related to either an accident or sudden onset of a critical illness, (such as heart attack stroke, or life threatening cancer), you will find that it is very economical to add coverage for such events.

Also make sure you know if the policy has a family deductible or an individual deductible with a cap. Generally a cap will be 3 times the individual deductible. As an example let’s say you are considering a $2500 individual deductible the maximum deductible for the family would be $7500. So if you have a family of 5 and have some health care expenses but no one person meets their individual deductible your exposure is still limited to $7500 in this example.

Whereas a Family Deductible works sort of the same way if one family member has a major health care episode, (such as a ruptured appendix) once the total health care expenses reach the family deductible you move into the coinsurance phase of the policy. A typical Family Deductible might be $4200

Coinsurance: In most cased a health insurance policy will have a co-insurance percentage following the deductible. During the coinsurance phase of your coverage you and the insurance company will share the cost of health care expenses. This can be customized in most cases with the insurance company paying as much as 90% and you paying as low as 10%. You get to choose this percentage when you apply for the policy. Coinsurance and premium are directly linked. That is the higher the coinsurance percentage the higher the premium.

On your quote it will look something like this: Coinsurance 80/20 $4000

This means that after you have reached your deductible you and the insurance company will split the cost of health care. The company will pay 80% and you will pay 20% until

The $4000 figure leads us to the most important part of the money equation of your health coverage plan: The OOP maximum.

OOP Maximum: OOP stands for “Out of Pocket”. This is the maximum dollar amount you will spend during the coinsurance phase of your health care plan. Here is where most Health Plan shoppers make a BIG MISTAKE. Most Health Plan shoppers focus so intently on the Coinsurance percentage that they miss the more important OOP maximum. Maximum financial risk is far more important than the percentage of coinsurance.

In the example above (Conisurance 80/20 $4000) the $4000 is the maximum amount you will pay during the policy year after your deductible is met.

By now things are about as clear as mud. So let’s try to focus it in a little bit.

All of this leads to your health care Annual Financial Exposure: Once you make a decision on your deductible and coinsurance you need to calculate your Annual Financial Exposure for healthcare expenses. This is done by adding your deductible and OOP Maximum.

So in our example from above we would have a family deductible of $4200 and a coinsurance choice of 80/20 $4000.

Now add the deductible of $4200 to the OOP Maximum of $4000 and you have your family’s Annual Financial Exposure to health care expenses (does not include premium). In this example you know that in the worst case scenario the most you will have to pay for health care expenses (not including premium) is:

Deductible: $4200
OOP Maximum: $4000
_____
Annual Financial Exposure: $8200

This may seem like a large figure but remember that health insurance is a risk management tool, not a risk reduction tool. You can be confident that you will not have to spend more than the combined amount of your deductible and OOP Maximum during the policy year.

As a final word on Annual Financial Exposure it is often much more economical to consider a 50/50 coinsurance with a lower OOP Maximum. In virtually every case I have quoted purchasing a 50/50 $2000 versus a 80/20 $4000 saves almost 20% in premium.

Again I have seen time and time again where a health plan buyer will focus so intently on the percentage versus the dollars that they end up paying more in premium than they really need to. There was a line in a movie a few years back and it went: “SHOW ME THE MONEY!”.

Office Visit Co-pay: Some policies offer an add on benefit of a Doctor’s Office Visit Co-pay. If your policy has this option you will pay a limited fee when you go to your doctor. Most policies with this feature limit you office visit co-pay fee to about $35.

While this may sound like a great deal you should stop and take a long look at the actual expense of such a benefit. Generally speaking this is the single most expensive add on available to any policy. And it never ends. Even if you have surpassed your deductible and OOP Maximum you still must pay the Office Visit Co-pay whenever you visit your doctor’s office.

If you have a large family with 2 or more children who bring home every sniffle from school you may want to consider adding this benefit. If you are a 20-30 something single person who never goes to the doctor you will find that this is a very expensive benefit.

In the case that you do not have an office visit co-pay benefit you will pay nothing when you see your doctor. The claim will be submitted to the company and will undergo “re-pricing” based on the network contract and a few days later you will receive an Explanation of Benefits from the insurance company and a bill from your doctor.
These two documents should match and you then pay the doctor’s bill. The network re-pricing will reduce the actual bill and save money for you.

Special thanks to Mark Squires for sharing this article. Mark may be reached at: (816-841-9141) or emailto:squires.m@squiresfirst.com

Duaine Owings
President
Plan To Win Insurance Agency
800-559-8777