To understand individual health insurance, you must understand its terminology. Here are eleven terms that will help you find, use, and manage your own health insurance coverage:
- Enrollment period
- Premium tax credit
- Out-of-pocket maximum
- Cost-sharing reductions
- Prescription drug coverage
- Provider network
- Health savings account
1. Enrollment period
You can only purchase individual health insurance during two types of enrollment periods: 1) “Open Enrollment” Periods, and 2) “Special Enrollment” Periods.
Each year, the government sets aside a specific enrollment period called Open Enrollment. Open Enrollment is the only time of the year you can buy an individual health insurance policy in the U.S. without having a life event. During this time, you can buy any individual or family health insurance plan available in your state for the upcoming year. Open Enrollment starts November 1st and runs through January 15th in most states. To secure coverage effective January 1st, you must enroll in a plan by December 15th. If you enroll after December 15th, your coverage will take effect on February 1st.
If you want to buy health insurance outside of Open Enrollment, you must qualify for a Special Enrollment Period. To qualify for special enrollment, you generally must have had a qualifying life event in the last 60 days or expect to have one in the next 60 days. Life events include getting married, having a baby, losing a job, moving, and more. These life events create a Special Enrollment Period during which you can buy an individual or family health insurance in your state for the remainder of the year.
A premium is the cost of a health insurance policy. Health insurance premiums are usually billed monthly. The monthly premium is the amount you will need to pay the insurance company every month to maintain coverage. If you qualify for premium tax credits (see #3 below), the federal government pays a portion of your premium.
Health insurance premiums vary from plan to plan based on several factors, including:
- You and/or your family members’ residential address and age(s)
- The insurance company offering the plan.
- The plan’s out-of-pocket maximum (see #4 below).
- The plan’s deductible (see #5 below).
- The plan’s coinsurance (see #6 below).
- The plan’s copayments (see #7 below).
- The plan’s prescription drug coverage (see #9 below).
- The plan’s provider network (see #10 below).
In general, premiums increase with:
- Higher ages.
- Lower out-of-pocket maximums, deductibles, coinsurance, and copayments.
- More comprehensive prescription drug coverage.
- Larger provider networks.
There is also a premium surcharge if you or your family members have used tobacco in recent months.
3. Premium tax credit
If you’re like most Americans, you’re probably not familiar with the new health insurance premium tax credits. These tax credits reduce the amount you’re required to pay towards your health insurance premium.
Here's how it works. If you qualify for a premium tax credit of $1,000 per month and you pick a plan with a $1,250 monthly premium (see #2 above), you would only need to pay $250. That’s some serious savings.
You can only get the premium tax credit if you buy coverage through your state’s health insurance Marketplace.
4. Out-of-pocket maximum
A plan’s annual out-of-pocket maximum is the most you'll have to pay in a year for covered health care services. Once you hit a plan’s out-of-pocket maximum, the plan pays 100 percent of covered services.
The out-of-pocket maximum is the most important plan feature for a catastrophic situation. It’s the most you’ll have to pay if you get seriously sick or injured.
Most health insurance plans have separate out-of-pocket maximums for individuals and families.
The annual deductible is the amount a plan requires you to pay out-of-pocket, before the plan-wide coinsurance (see #6 below) kicks in.
Before you meet the plan’s deductible, you are required to pay the full price for services unless the plan provides copayments (see #7 below) or pre-deductible coinsurances for specific services.
Most health insurance plans have separate deductibles for individuals and families.
There are two types of coinsurance: 1) plan-wide coinsurance and 2) pre-deductible coinsurance.
Plan-wide coinsurance is the percentage (e.g. 20%) of all covered services you pay after you've hit the plan’s deductible and until you reach the plan’s out-of-pocket maximum. If the plan has the same deductible (see #5 above) and out-of-pocket maximum (see #4 above), the plan-wide coinsurance is 0% (i.e. there is no coinsurance.)
Some plans also include pre-deductible coinsurance for certain types of services. For these services, the coinsurance applies without you needing to hit the deductible.
A copayment or “copay” is a preset, fixed amount (e.g. $45) you pay any time you receive a certain service. There are many different types of copays. For example, some are for doctor visits, some are for prescription drugs, and some are for hospital services like emergency room visits.
Pay attention to whether copayments are available pre-deductible (i.e. before you hit the plan’s deductible) or post-deductible (i.e. after you hit the plan’s deductible).
8. Cost-sharing reductions
While premium tax credits (see #3 above) reduce the cost of a health insurance plan, cost-sharing reductions (CSRs) reduce the out-of-pocket exposure of a plan. If you qualify, CSRs lower a plan’s out-of-pocket maximums, deductibles, coinsurance, and copayments.
Your household size and income determine if you’re eligible. As a general rule, you qualify if you make less than 250 percent of the federal poverty level (FPL). Unlike premium tax credits which are available on any plan, CSRs are only available on Silver plans.
(Note: If you're a member of a federally recognized tribe or an Alaska Native Claims Settlement Act Corporation shareholder, you may qualify for additional CSRs.)
9. Prescription drug coverage
Each insurance plan has its own drug formulary, which lists all of the medications the plan covers.
Additionally, some plans create unique out-of-pocket maximums, deductibles, coinsurances, and copayments for prescription drugs. And this coverage often varies by drug tier.
If prescription drug coverage is important to you, pay attention to whether your drug is listed on the plan’s formulary and under which tier it is listed. In general, lower-tier drugs cost less and higher-tier drugs cost more.
10. Provider network
A provider network is a list of medical providers who are contracted by the insurance company to provide care to policyholders. These providers are called “in-network providers”. They include specific doctors, clinics, and hospitals.
Most insurance companies have one network, but some have multiple. When you look at a plan, be sure to check which network it comes with and make sure your preferred providers are covered.
Additionally, there are several different types of networks that determine whether specialist referrals are required and whether out-of-network providers are covered. Here’s a quick overview of the three most common network types:
- Health Maintenance Organizations (HMOs) usually limit coverage to in-network providers only and require a primary care doctor’s referral to see specialists.
- Preferred Provider Organizations (PPOs) usually cover a smaller portion of the cost of out-of-network providers and don’t require a primary care doctor’s referral to see specialists.
- Exclusive Provider Organizations (EPOs) usually limit coverage to in-network providers, but don’t require a primary doctor’s referral to see specialists.
11. Health savings account
A health savings account (HSA) is a type of savings account that lets you contribute pre-tax money to cover your out-of-pocket maximum (see #4 above) and deductible (see #5 above) with tax-free dollars.
To contribute to an HSA, you must purchase an HSA-eligible health insurance plan. These plans must meet the copayment, deductible, and out-of-pocket maximum requirements set by the IRS each year.