Insurance 101

Ready for a crash course on the basics? Read the definitions below. Next, review the chart at the end of this section which gives you a visual explanation of these words!

Note: As you go through the questions below you will see letters highlighted in yellow by some questions. Those are "keys" to help you find the corresponding information in the chart below.

  • Q: What is a "deductible"? (See label A on chart below.)
  • A: A deductible is an annual dollar amount that you must pay before the insurance begins to cover most medical services.

    With most plans the deductible is accumulated on a calendar year basis (January 1 - December 31), regardless of when your coverage becomes effective.
  • Q: What is a "coinsurance"? (See label B on chart below.)
  • A: The "coinsurance" defines the percentage of the bill that the insurance company will pay once you meet your deductible. Most plans pay 80% once the deductible has been met, while you pay 20%, hence the term "co-insurance."
  • Q: How much will the insurance company me once I meet my deductible?
  • A: That depends on your "coinsurance" amount. The coinsurance defines the percentage of the bill that the insurance company will pay once you meet your deductible. Most plans pay 80% once the deductible has been met, although some will pay as low as 50% and others will pay 100% after the deductible.
  • Q: What is an "out-of-pocket maximum"? (See label C on chart below.)
  • A: This is the maximum annual amount you pay as your share of the coinsurance before the plan pays at 100% for the rest of the year. When comparing different plans, be sure to check whether the out-of-pocket maximum includes the deductible or not. Unfortunately, there is no uniformity—so do be sure to ask! Otherwise, you will not be making an apples-to-apples comparison.
  • Q: What is a "copay"? (See label D on chart below.)
  • A: A copay is, in essence, a deductible bypass. For example, if you have a doctor or office copay of $25, you would pay the doctor $25 and that would take care of the examination fee. The nice thing about the copay is that you DO NOT HAVE TO MEET YOUR DEDUCTIBLE FIRST! That's why I call it a deductible bypass; it's not a technical name, but does a nice job of explaining what happens. Another typical copay is for prescription drugs. If you had a $15 Rx copay, you would pay $15 to the pharmacy and that would take care of the entire drug bill, again WITHOUT having to meet your deductible! Copays are a popular feature, but keep in mind that they do increase the price of the insurance.
  • Q:What is the difference between a PPO, HMO and an Indemnity Plan?
  • A:There are many important differences between these types of plans.
    • An Indemnity Plan is a traditional, "vanilla" health policy that allows you to see any doctor, anywhere in the country. It is typically a comprehensive policy with a deductible, but no copays. This type of policy is the most expensive, because there are no network restrictions. Until the mid-1970's virtually all plans were Indemnity plans.
    • HMO stands for "Health Maintenance Organization." These plans experienced a period of dramatic and explosive growth in the mid-1970's. They offer plans with low or no deductibles and have copays for doctors and prescription drugs. You are required to choose a "primary care physician," who controls your access to medical care. If you want to see a specialist, you must first see your primary doctor and get a referral. You are restricted to going to a doctor or hospital that is part of the HMO network. Typically, these networks are relatively small. If you go outside of the network, nothing will be covered unless it is a life or limb threatening emergency. HMO's typically impose many restrictions on what they will or will not pay for in order to control the premium.
    • PPO stands for "Preferred Provider Organization." Since the HMO's caused a dramatic loss of business for Indemnity plans (due to HMO's low premiums and the popularity of copays) the insurance industry responded by developing the PPO, which took the best elements of a traditional indemnity plan and of the new HMO's. While you are still required to go to a PPO network doctor or hospital, the network is much larger than with an HMO. This gives you more choices in selecting a local physician. In addition, many PPO networks are national, meaning that you can normally find a participating provider anywhere in the country. PPO's also give you the ability to go outside the network and still get reimbursed, although at a lower percentage than when you are in-network. Finally, you do not need to select a primary doctor, which leaves you free to see a specialist without having to beg for a referral. The most popular plans today are PPO's due to their lower cost and flexibility. PPO's are available either with or without a copay.
  • Q:What is a Health Savings Account (HSA)?
  • A: An HSA is a new type of insurance plan that allows you to put money into a special side-fund account with a bank and get a tax deduction—just like your IRA. Because an HSA insurance plan has a high deductible, the premiums are lower. Because of the side-fund account, you can use tax-free dollars to pay for medical expenses you are currently paying anyway before your deductible is reached. The IRS guidelines also allow you to reimburse yourself out of this account for things that are normally not covered by insurance, such as dental, eye-care and more—tax free! Click here to get a fuller explanation on HSA's.