Shopping for health insurance? Deciphering the costs and provisions of the various plans out there can be very confusing. Here are some key terms that will help — whether you’re selecting a new plan or just trying to figure out your existing one.
Quick-Reference Guide to Health Insurance Terms
Allowed Amount – (also known as eligible expense, payment allowance, or negotiated rate) Your health insurance company has negotiated a pre-agreed rate schedule for services provided by its preferred (or in-network) providers. The allowed amount is the agreed-upon charge for a particular service.
Balance Billing – When a provider (out-of-network) bills you for the difference between the provider’s charge and the allowed amount. An in-network provider (or preferred provider) may NOT balance bill for covered services.
Co-insurance – Your share of the costs of a covered health care service, calculated as a percent of the allowed amount for the service. For example, if your plan is an 80/20 plan, this means that the insurance company will pay 80% and you will pay 20%. Your share of the co-insurance for out-of-network care is higher than in-network.
Co-payment – A fixed amount (example, $15) you pay for a covered service, usually at the time of service. The co-payment amount can be different for different services.
Deductible – The amount you pay for covered health care services before your health insurance begins to pay. Not all services may count toward your deductible. Out-of-network deductibles are higher than in-network deductibles.
Maximum out-of-pocket – the most you pay during the policy year, after which your health insurance pays 100% of the allowed amount. This limit does not apply to premiums, balance-billed charges from out-of-network health care providers, or services that are not covered by the plan.
Health Insurance Scenario
Let’s consider a scenario to show how health care costs are shared between you and your insurance company. Suppose your health plan has the following:
- Deductible: $4,500
- Co-Insurance: 80/20
- Maximum out-of-pocket: $7,350
Suppose your first medical expense of the policy year is a visit to the doctor. The allowable charge is $225. Because you have not met the deductible, you pay the full $225, insurance company pays $0.
As the months go by, you see the doctor several more times, fill prescriptions, and pay for other covered services that cause you to reach your $4,500 deductible. Now, co-insurance kicks in.
Your next covered medical expense (eg., doctor visit, prescription, etc), will be paid 20% by you, and 80% by the insurance company.
This 80/20 split continues until your total expenditure reaches $7,350.
At this point, you have reached your out-of-pocket maximum. All of your covered health care expenses will be paid 100% by the insurance company (and you will pay $0) for the rest of the policy year.
It is important to keep in mind that some plans have separate deductibles, co-insurance, co-payment, and other limits for in-network vs. out-of-network providers. Be sure you know your plan’s rules!