Commonly Misunderstood Health Insurance Terms

Millions of Americans shop for individual health insurance on government-run health exchanges. Many people find shopping for individual coverage a difficult task because either they’re used to work-issued health plans with limited choices, or they’ve never even had health insurance.

It can be a confusing and overwhelming experience, but here at American Better Health Organization, we want to help you figure out the odds and ends of health insurance. We’ve put together a list of words you may come across while shopping for health insurance. We’ve paired these commonly misunderstood insurance terms with easy definitions.

Actuarial Value- The percentage of total costs for covered benefits that a plan will cover. For example, if a plan has an actuarial value of 70%, you would be responsible for 30% of the costs of all covered benefits. (You could be responsible for less or more of total costs of covered services, depending on the terms of your insurance policy.) Marketplace plans are defined by the actuarial value- Bronze plans have an actuarial value of 60%, the lowest, while Platinum plans cover 90% of covered benefits.

Advanced Premium Tax Credit- A new tax credit to help you afford Marketplace health plans. Advance payments of the tax credit can be used right away to lower monthly premium costs. If you qualify, you may choose how much advance credit payments to apply to your premiums each month, up to a maximum amount.

Benefits- The services or health care items you receive from your health insurance company. Every health insurance plan should come with an explanation of benefits- a document explaining what benefits are covered, and what is excluded.

CO-OP (Consumer Operated and Oriented Plan)- A new type of health insurer created by the Affordable Care Act. CO-OPs are member-governed, nonprofit health care systems. CO-Ops can be formed at a national, state, or local level and must be licensed as issuers in each state which they operate. CO-OPs can offer health plans both on and off exchange.

Coinsurance- A percent that the insurer pays after the insurance policy's deductible is exceeded. So it’s your share of the costs of a covered benefit. For example, if the health insurance or plan’s allowed amount for an office visit is $100 and you’ve met your deductible, 20% coinsurance payment would be $20. The insurance carrier pays the rest of the allowed amount.

Copayment- A fixed amount you pay for a covered health care service, like a doctor’s visit, usually when you get the service. For example, if you have a $15 copay, you pay that to the doctor, and your health insurance carrier is billed for the remainder of the bill.

Cost Sharing- The share of costs you pay “out of pocket” for, that are not covered by health insurance. This term generally includes deductibles, coinsurance, and copayments, but it doesn't include premiums, out of network charges, or the cost of non-covered services. The "out-of-pocket" payment varies among healthcare plans.

Deductible- The amount you are required to pay for health care before your health insurance begins to pay. For example, if your deductible is $1,000, your plan won’t pay anything until you’ve met your $1,000 deductible for covered health care services. The deductible may not apply to all services.

Essential Health Benefits- A set of health care services that must be covered by Affordable Care Act approved plans. The ACA dictates all major medical plans offered in the individual and small group market, both on and off exchange, must off a comprehensive package of health items and services. Essential health benefits must include items and services within at least the following 10 categories:

• ambulatory patient services
• emergency services
• hospitalization
• maternity and newborn care
• mental health and substance abuse services
• prescription drugs
• rehabilitative and habilitative services and debices
• laboratory services
• preventive and wellness services and chronic disease management
• pediatric services, including oral and vision care.

Formulary- A list of prescription drugs covered by a health plan offering prescription drug benefits. Also called a drug list.

Health Maintenance Organization (HMO)- A type of health plan that limits coverage to a network of doctors who work for or contract with the HMO. An HMO usually won't cover out-of-network doctors except in the case of an emergency. HMOs often require members to live or work within its service area to qualify.

Health Savings Account (HSA)- A health savings account available to tax payers enrolled in a High Deductible Health Plan. The funds contributed to the account aren't subject to federal income tax at the time of deposit. Funds have to be used to pay for qualified health expenses, or they may incur penalties. Funds roll over year to year if they’re not used.

In-network- Usually refers to a provider contracted with the health insurance carrier to provide services to plan members at a negotiated rate. An out-of-network provider is a provider not contracted with the plan. Usually the out of pocket costs for an in-network provider will be less than those for an out-of-network provider. PPO, POS and HMO plans make use of provider networks but indemnity plans usually do not.

Minimum Essential Coverage- The minimum amount of health coverage a person needs to have to meet the individual responsibility requirement under the Affordable Care Act. Anyone who does not have this coverage must either qualify for an exception or face a tax penalty.

Open Enrollment Period- The period of time during which individuals can buy ACA approved health plans in the Marketplace.

Out-of-Pocket Costs- Expenses for health care that aren't reimbursed by insurance. Out-of-pocket costs include deductibles, coinsurance, and copayments. All health services not covered by a health plan is also considered an out-of-pocket cost.

Preferred Provider- A provider who has a contract with an insurance carrier to provide services at a discount.

Preferred Provider Organization (PPO)- A health plan that contracts with providers like hospitals and doctors to create a network. Providers in the plan’s network are less costly. You can use providers outside of the network, but for an additional cost.

Premium- The amount that must be paid for your health insurance plan. It’s usually a monthly, quarterly or yearly bill.

Premium Tax Credit- A new government issued tax credit to help people afford health coverage bought in the Marketplace. Under the Affordable Care Act, advance payments can be used right away to lower monthly premium costs. If you qualify, you can choose how much is applied to your premium each month. If your yearly amount of advance credit is less than the tax credit you're due, you’ll get the difference as a refundable credit when you file your federal taxes. If your advance payments for the year are more than your credit, you must repay the excess with your tax return.

Reinsurance- A reimbursement system that protects insurance companies from extremely high claims. It usually involves another company paying part of an insurance carrier’s claims once they surpass a certain amount. Reinsurance is a way to stabilize the market, and make coverage more affordable.

Subsidized Coverage- Financial assistance with health coverage for people with low and middle incomes.

If you don’t see a particular term defined here, don’t worry, we can still help! Reserve your spot now for American Better Health Organization’s webinar, “Smart Shopping: Choosing Individual Health Insurance” later this month. Our experienced, licensed insurance agent will explain many common insurance terms in detail, as well as provide information beneficial to anyone shopping on the individual market. There will also be a question and answer period, to make sure you understand every aspect of health insurance.