Health Insurance Terminology for the Consumer
While jargon and acronyms (or more often and accurately, initialism) are ways to increase communication (e.g., FBI versus the Federal Bureau of Investigation), they can also confer expertise – whether real or feigned – and confuse the audience. The use of acronyms and jargon occurs quite a bit within the health insurance sector. So, in the continuing effort to educate our readers to be better consumers, we are sharing a glossary of common terms and acronyms in the industry that you are likely to encounter. We will start with some of the most basic and work into some of the more complex ones.
Health Insurance: keeps someone from paying full price for health care because he or she pays a monthly premium (like a subscription cost) to the health insurance carrier, and the employer (in cases of self-funding) or the insurance carrier pools all premium money to pay all or part of the actual health care costs for its members.
Insurer or carrier: The insurance company providing coverage to the policyholder.
Plan: The type and specifics of insurance coverage, whether for individuals or groups (see below).
Policyholder: The individual or business (“group”) that has entered a contractual relationship with the insurance company. Note that within the industry, “group” is used interchangeably with “company”, and “life” or “lives”, is equivalent to “employees” on the payroll of a group.
Insured: The person with health insurance coverage. For individual health insurance, you may be both the policyholder and the insured. In group coverage, it can be the same person as well, or it may be a family member.
Premium: The amount of money charged by an insurance company for coverage. The cost of premiums may be determined by several factors, including age, geographic area, number of dependents, tobacco consumption, etc. Policyholders pay these rates annually or in smaller payments over the course of the year, and the amount may change over time. When insurance premiums are not paid, the policy is typically considered void, and companies will not honor claims against it. Self-employed persons may deduct the cost of their individual health insurance premiums from their taxes.
Copayment: A fixed amount you pay for a covered health care service, usually when you get the service. The amount can vary by the type of covered health care service.
Deductible: The amount you owe for health care services each year before the insurance company begins to pay. For example, if your annual deductible is $1,000, your plan won’t pay anything until you’ve met your $1,000 deductible for covered health care services that are subject to the deductible. The deductible may not apply to all services, such as preventive care services.
Deductibles are useful for keeping the cost of insurance low. The amount varies by plan, with lower deductibles generally associated with higher premiums. They are standard on most types of health coverage.
Coinsurance: Your share of the costs of a covered health care service calculated as a percent (for example, 20 percent) of the allowed amount for the service. You pay coinsurance plus any deductibles you still owe for a covered health service.
Out-of-Pocket Maximum: The most you will be required to pay for your health care during a year, excluding the monthly premium. It protects you from very high medical expenses. After you reach the annual out-of-pocket maximum, your health insurance or plan begins to pay 100 percent of the allowed amount for covered health care services or items for the rest of the year. Copays, deductibles, and coinsurance count towards the out-of-pocket maximum.
Preventive Care: Medical tests and checkups, immunizations, and counseling services used to prevent chronic illness from occurring.
ERISA: The Employee Retirement Income Security Act of 1974 is a federal law that sets minimum standards for most voluntarily established pension and health plans in private industry, to provide protection for individuals in these plans. ERISA requires plan administrators to maintain and distribute SPDs (Summary Plan Descriptions) to plan participants. Plan Documents are required to be in compliance, and documentation is required outside of basic-plan summaries and Summaries of Benefits and Coverage.
Types of Health Insurance Plans
Fee-for-Service Plans: Straight-forward type of coverage in which insurers pay for health care services provided to plan participants. With this type of coverage, you can choose any doctor you wish and change doctors any time or go to any hospital in any part of the country.
Self-Funded Plans: The employer assumes most of the risk with a self-funded, self-insured plan, meaning that the business pays for its employees’ medical claims and fees from its own assets. The business is the insurer. Therefore, while the employee can offer health insurance at much lower premiums to employees, it does so at its own risk if claims are higher than expected, especially if there are any catastrophic claims. Stop-loss insurance protects the business by setting a ceiling that they know they will not exceed in payouts. Larger employers are more frequent users of self-funded plans, as they usually have more capital than smaller businesses.
Pros of Self-Funded Plans:
Employers can reduce healthcare costs and save money. What was once insurance company profit now becomes employer savings.
Employees can have more control over benefits.
Employers gain a better understanding of healthcare spend.
Cons of Self-Funded Plans:
The employer assumes the risk.
Cost reduction may not be immediate, as the employer may begin cautiously and face an early learning curve about risk and claims.
The employer is responsible for benefits and services.
Employer answers to issues with claims and coverage.
Fully Funded Group Health Plans: The biggest difference between fully insured (or fully funded) and self-insured (or self-funded) is that the insurance carrier takes all the risk with a fully insured plan. The employer pays the insurance carrier a set premium price each year. If claims exceed projections, the carrier assumes all financial risk. The price and terms are fixed until the contract is up for renewal, so the employer has no real surprises. However, if claims are excessive, the premium for renewal will likely be higher. Smaller businesses tend to go with fully insured plans because they have a lower appetite for risk and have fluctuating operating costs.
Pros of Fully Funded Plans:
Month-to-month expenses and coverage terms remain the same.
Low claims allow the employer to negotiate lower costs at renewal.
Claims are managed by the insurance company (carrier).
The insurance company assumes all the risk
Cons of Fully Insured Plans:
Premium costs are likely higher than with self-funded and level-funded plans
The contract must be renewed and re-negotiated each year.
A year of high claims can not only mean higher costs at renewal with the current carrier but with other carriers as well, since claims history can be required, depending on the group size.
Level-Funded Employer Health Plans: A level-funded employer health plan (also known as a partially self-funded plan) combines the cost reduction and risk of self-funded and fully funded plans by contracting the plan through an insurance company but negotiating an amount of the risk that the employer will assume. As a result, month-to-month payments can be more consistent and predictable but not as low as they could potentially be if self-funded.
Level-funded plans have become increasingly attractive to smaller employers, especially as an opportunity to ‘dip their toes’ into the self-funding payment model of assuming risk when they begin to offer their employees insurance and learn what they can expect from claims and costs.
Pros of Level-Funded Plans:
Potential for greater cost savings compared to fully funded plans.
Greater opportunity to customize health plans.
Reduced regulations and administrative responsibility that would come from self-funding.
Cons of Level-Funded Plans:
Risks of level-funded plans all depend on how the employer and carrier define the risk-sharing. But you can assume the carriers will place stringent conditions on claims to ensure that their end of risk is as controlled as possible.
Health Maintenance Organizations (HMO): Usually limits coverage to care from doctors who work for or contract with the HMO. Premiums are paid monthly, and a small copay is due for each office visit and hospital stay. HMOs generally won’t cover out-of-network care except in an emergency. An HMO may require you to live or work in its service area to be eligible for coverage.
HMOs also require that you select a primary care physician who is responsible for managing and coordinating all your health care. Your primary care physician will provide all your basic health care services and must give a referral for you to see a specialist. HMOs often provide integrated care and focus on prevention and wellness. HMO plans sometimes include dental and vision coverage.
Preferred Provider Organizations (PPO): PPOs are similar to HMOs in that health care providers enter into an agreement with the insurance companies to offer substantially discounted fees for covered health care services. Your copay and deductibles will also be lower if you choose a provider that is in the PPO network. The payment ratio may be high for a PPO plan. You do not have to choose a primary care physician – you can choose doctors, hospitals, and other providers from the PPO network or from out of network. If you want to stick with a particular doctor (not in the network) you are able to do so; however, the costs will be higher. PPOs include preventive care, wellness, immunizations, well-baby care, and mammograms, along with regular doctor visits. PPOs use membership cards instead of requiring medical insurance claim forms for payment processing.
Exclusive Provider Organization (EPO): An EPO is like a PPO in structure and operation, with the main difference being that services are covered only if you go to doctors, specialists, or hospitals in the plan’s network, although there are exceptions for emergencies.
Point of Service Plan (POS): Combines elements of both HMO and PPO plans. Like HMO plans, you may be required to designate a primary care physician who will then make referrals to network specialists when needed. Depending on the plan, services rendered by your primary care physician are typically not subject to a deductible, and preventive care benefits are usually included. Like a PPO plan, you may receive care from non-network providers but with greater out-of-pocket costs.
High Deductible Health Plan (HDHP): HDHPs are health plans with high deductibles and low premiums, in which the insurer will not cover most medical expenses until the deductible is met. As an exception, preventive care services are typically covered before the deductible is met. The high deductible provides financial security for more severe illnesses. HDHPs are often designed to be compatible with Health Savings Accounts (HSAs). HSAs are tax-advantaged accounts that can be used for qualified out-of-pocket medical expenses before the HDHP’s deductible is met. These expenses can include copayments and coinsurance.
Tax-Advantaged Health Accounts: These are a type of medical savings vehicle that helps individuals pay for qualified medical expenses and are often paired with HDHPs. There are specific rules for each type of account, such as how much can be contributed and what the account’s funds can be used for. Many of these accounts are employer-based, but people with individual insurance plans can take advantage of health savings accounts provided they meet eligibility criteria.
Health Savings Accounts (HSA): HSAs are available to people who are enrolled in an HSA-complaint HDHP. The account is individually owned, and money may be contributed by the owner of the account or a dependent.
The funds contributed to the account are pre-tax which means they aren’t subject to federal income tax at the time of deposit. Funds must be used to pay for qualified medical expenses; there is a heavy tax penalty for paying for non-qualified expenses. Funds roll over year to year if you don’t spend them and can accumulate a significant balance. There is a limit to how much money can be put into an HSA every year, but no cap on how much money can be in the account.
Other Types of Insurance
Dental: This coverage is for dental care and usually includes regular checkups, cleanings, x-rays, and certain services required to promote general dental health. Some plans will provide broader coverage than others, and some will require a greater financial contribution from you when services are rendered. Some plans may also provide coverage for certain types of oral surgery, dental implants, or orthodontia.
Vision: Vision Insurance entitles you to specific eye care benefits defined in the policy. This typically covers routine eye exams and other procedures and provides specified dollar amounts or discounts for the purchase of eyeglasses and contact lenses. Some vision insurance policies also offer discounts on refractive surgery.
Life: Life Insurance protects against financial hardship after the death of the insured by paying out a lump sum to beneficiaries upon the insured’s death. Term life insurance offers policies that cover a set period, while permanent life insurance, such as whole and universal life, provides lifetime coverage. Death benefits from all types of life insurance are generally free from income tax.
Disability: Disability Insurance protects the insured against disability. You are awarded a disability benefit as a partial replacement of income lost due to illness or injury. Short-term Disability Insurance (STD) helps you remain financially stable if you become injured or ill and cannot work. Usually, STD coverage begins within one to 15 days of the event that caused your disability. The coverage allows you to continue to receive pay at a fixed weekly amount or a set percentage of your income. The benefits last up to 52 weeks, although the amount of time you receive STD benefits varies between specific plans. When STD coverage ends, long-term disability (LTD) coverage takes effect. LTD insurance protects workers if they become disabled for a prolonged period prior to retirement. The length of LTD plans varies. Some may be limited to a period between two and ten years, which other plans continue paying until the age of 65.
We hope this primer of health insurance terms educates you to be a better consumer of one of the most opaque industries and one that affects every single member of society. If you would like more information on how to increase your coverage while lowering your spending or dealing with any of the concepts addressed in this blog, please contact a Commonwealth Insurance Partners benefits advisor today.