Understanding health insurance terms: The definitive guide

According to the Centers for Medicare and Medicaid Services, “Health insurance is a legal entitlement to payment or reimbursement for your health care costs, generally under a contract with a health insurance company. Health insurance provides important financial protection in case you have an accident or sickness.” Health insurance can generally be used to help pay for medical services, care, medications, and special equipment needed for injury or sickness. Keep reviewing to understand major terms used in the insurance industry.  

Premium

“Simply put, a health insurance premium is the regular fee paid to the insurance company or health plan to maintain coverage,” explains US News.

Section 42 U.S. Code § 300gg of the Affordable Care Act (ACA) states how insurers determine the cost of a premium. Factors may include age, geographic location, family size, and tobacco use. Insurance companies may not use pre-existing conditions, gender, or medical history as a factor when determining premium costs.

Reminders for healthcare organizations:

• Premium payment status affects patient eligibility for services
• Verification of active coverage should include confirmation of premium payment status
• Non-payment of premiums can trigger retroactive claim denials during grace periods
• Premium structures vary significantly between individual, employer-sponsored, and government plans

Deductible

One study analyzing deductions stated, “The insured person must pay a certain and fixed amount for covered health care services before the insurance organization starts to pay. The philosophy of deductibles is that most insured persons can afford low expenses of visits, medications, etc. without suffering much pressure. The reason for using this kind of cost-sharing was that insurers, physicians, and many other people believed that if insurers were involved in paying for these costs from the very beginning of health costs, this would increase excessive use of medical services and consequently increase health care costs.”

Reminders for healthcare organizations:

• Deductibles reset annually, usually at the beginning of the calendar year
• Some plans exempt certain services (like preventive care) from deductible requirements
• Family plans often have both individual and family deductibles
• High-deductible health plans (HDHPs) require specific collection strategies

Copayment (Copay)

The Bureau of Labor Statistics defines copayment as, “A form of medical cost sharing in a health insurance plan that requires an insured person to pay a fixed dollar amount when a medical service is received. The insurer is responsible for the rest of the reimbursement.

• There may be separate copayments for different services.
• Some plans require that a deductible first be met for some specific services
• before a copayment applies.

Points for healthcare organizations:

• Copays may apply before or after meeting the deductible, depending on the plan
• Front-end collection processes should include copayment verification and collection
• Copays generally do not count toward the deductible but do count toward the out-of-pocket maximum
• Waiving copays may violate payer contracts unless part of a documented financial assistance program

Coinsurance

Forbes explains that, “coinsurance is a percentage of a healthcare bill you pay after reaching your plan’s deductible and before hitting a plan’s out-of-pocket maximum. During coinsurance, you split the costs for healthcare services with your insurer. Coinsurance levels are often between 20% and 40%, depending on the health plan. Unlike copays, coinsurance doesn’t have different amounts based on the type of care. Plans with lower coinsurance levels often have higher premiums; plans with higher coinsurance levels may have lower premiums. Once you reach your out-of-pocket max, the insurance company picks up the rest of the year’s healthcare service costs.”

Reminders for healthcare organizations:

• Coinsurance amounts cannot be precisely calculated until claims are adjudicated
• Patient estimation tools should incorporate coinsurance calculations
• Coinsurance applies until the patient reaches their out-of-pocket maximum
• In-network services usually have lower coinsurance rates than out-of-network services

Out-of-pocket maximum

”An annual out-of-pocket maximum is the most you will pay for in-network health care services in a year before the health insurance plan pays for all the health costs. This out-of-pocket maximum is in place to reduce the possibility of financial ruin if you face a busy year of healthcare costs and hospitalizations,” explains Forbes.

Points for healthcare organizations:

• Includes deductibles, coinsurance, and copayments
• Does not include premiums or costs for non-covered services
• Provides financial protection against catastrophic medical expenses
• Verification of out-of-pocket status can inform collection strategies

FAQs

Why should healthcare organizations understand these health insurance terms?

Healthcare organizations must understand these terms to verify patient coverage, manage billing efficiently, and ensure proper reimbursement.

How do these terms impact patient billing?

Terms like premiums, deductibles, copays, and coinsurance determine what portion of medical costs patients must pay, affecting collections and revenue cycles.

How does insurance terminology affect patient care?

Patients may delay necessary treatments due to cost concerns, making it important for providers to communicate financial responsibilities clearly.