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Health Benefits 101

In our conversations with clients regarding health benefits, we often encounter some basic misunderstandings regarding the terminology and mechanics of health coverage. Here’s a quick review:

Coverages: Most Americans are covered by health insurance offered by their employers, otherwise known as group coverage. Group coverage tends to offer lower rates because the risk is spread over a large group of enrollees.

Conversely, individual coverage is purchased directly by a person or family from the insurer, and is not associated with an employer or a larger group of policyholders.

Premiums: A premium is the amount charged by the insurer for coverage. In a group plan, some of this cost may be borne by the employer. Premiums are determined by a number of factors including coverage levels, age of the participant(s), geographic area, tobacco use and others. In group plans, the premium is usually deducted from the participant’s paycheck and often, but not always, has the advantage of being deducted before taxes are withheld, thus reducing the tax burden on the participant.

Copayment: There is often some confusion over the difference between a copayment and a deductible, so let’s review. A copayment is the insured’s portion of the cost for a provided service. For example, an office visit to a doctor may cost $150 in total. If the insured’s policy specifies a $20 copayment for that service, the insured would be responsible for only $20 of that cost, with the insurer covering the remaining $130. Copayments will often vary depending on the type of service, and with some policies, whether the provider is within the insurer’s provider network or not.

Deductible: The deductible is the amount the insured must pay each year before the insurance company begins to pay. In the example above of an office visit, the insured would in most cases be responsible for the full $150 cost if their annual deductible had not yet been met. Since lower deductibles tend to be associated with higher premiums, and vice versa, high deductible health plans (HDHPs) have become much more common in recent years. These place a larger out-of-pocket burden on the insured in exchange for lower premiums. HDHPs are often associated with health savings accounts (HSAs), a tax-advantaged savings vehicle dedicated to health care expenses and intended to help offset the financial impact of those higher deductibles.

Out-of-pocket maximum (OOPM): This is the limit on what an insured should have to pay for their health care in any given year, and can vary widely from policy to policy. Once the OOPM has been met, the insurer should cover 100 percent of any additional expenses in that annual policy period. Note, however, that premium payments generally do not count towards the OOPM, and some plans also do not factor in annual deductibles, copayments or other expenses when calculating this limit.

Questions about health coverage? Contact the benefits experts at Consolidated Insurance.