Essential Health Insurance Terms

Why This Matters

Health insurance terminology isn't just vocabulary—it's the foundation for understanding how healthcare costs flow between you, your insurer, and your providers. When you're being tested on healthcare systems, you need to demonstrate how these terms interact: how a deductible triggers coinsurance, why network status affects your out-of-pocket maximum, and how plan types like HMOs and PPOs structure access differently. These concepts reveal the underlying logic of the American healthcare financing system.

Don't just memorize definitions—know what each term represents in the cost-sharing relationship between patients and insurers. Ask yourself: Does this term describe when I pay, how much I pay, or what I can access? Understanding these categories will help you analyze any insurance scenario, whether it's a multiple-choice question about claim processing or an FRQ asking you to compare plan structures.

---

Cost-Sharing: What You Pay and When

These terms define the financial relationship between you and your insurer. Cost-sharing mechanisms distribute healthcare expenses across premiums (fixed, predictable payments) and point-of-service costs (variable, based on usage).

Premium

• Monthly payment to maintain coverage—this is your "membership fee" regardless of whether you use healthcare services
• Varies by plan type, coverage level, and age—higher premiums typically mean lower out-of-pocket costs when you need care
• Non-payment terminates coverage—unlike other cost-sharing, premiums are mandatory whether you're healthy or sick

Deductible

• Annual threshold you must pay before insurance kicks in—resets each plan year, creating a predictable cycle of cost responsibility
• Varies widely between plans—high-deductible plans ($\geq \$1,400$ individual) trade lower premiums for higher upfront costs
• Preventive care often exempt—the ACA requires certain services to be covered before meeting your deductible

Copayment

• Fixed dollar amount paid at time of service—predictable costs like $\$25$ for primary care or $\$50$ for specialists
• Varies by service type—tiered structure encourages use of lower-cost care options (primary care vs. emergency room)
• Applies regardless of total cost—you pay the same copay whether your visit costs $\$100$ or $\$500$

Coinsurance

• Percentage of costs you pay after meeting deductible—typically expressed as ratios like 80/20 (insurer pays 80%, you pay 20%)
• Creates shared financial risk—unlike fixed copays, your cost scales with the expense of treatment
• Continues until out-of-pocket maximum—this is the mechanism that connects deductibles to annual spending caps

Out-of-Pocket Maximum

• Annual cap on your total cost-sharing—includes deductibles, copays, and coinsurance (but not premiums)
• Triggers 100% coverage once reached—provides catastrophic protection for expensive medical events
• ACA sets federal limits—in 2024, maximums cannot exceed $\$9,450$ individual or $\$18,900$ family

---

Access and Networks: Who Provides Your Care

These terms determine which providers you can see and at what cost. Network structures are how insurers control costs—by negotiating rates with specific providers in exchange for directing patients to them.

Network

• Contracted group of providers and facilities—insurers negotiate discounted rates with in-network providers
• In-network vs. out-of-network cost difference—using out-of-network providers often means higher cost-sharing or no coverage
• Network adequacy matters—plans must provide reasonable access to specialists and hospitals within their network

Preferred Provider Organization (PPO)

• Flexible network with no referral requirements—you can see specialists directly without going through a gatekeeper
• Higher premiums, greater provider choice—the trade-off for flexibility is increased monthly costs
• Out-of-network coverage available—unlike HMOs, PPOs provide some coverage for non-network providers at higher cost-sharing

Health Maintenance Organization (HMO)

• Requires primary care physician (PCP) selection—your PCP coordinates all care and must refer you to specialists
• Care limited to in-network providers—except for emergencies, out-of-network care typically isn't covered
• Lower premiums and cost-sharing—the trade-off for restricted choice is reduced overall expense

---

Administrative Processes: How Insurance Works

These terms describe the mechanics of how claims move through the system. Administrative processes exist to verify coverage, control costs, and document the flow of healthcare dollars.

Claim

• Formal request for payment submitted to insurer—can be filed by providers (most common) or patients (for reimbursement)
• Triggers the adjudication process—insurer reviews to determine covered amount based on your plan terms
• Denial possible—claims can be rejected for reasons including lack of prior authorization or out-of-network care

Explanation of Benefits (EOB)

• Summary document sent after claim processing—details what was billed, what insurance paid, and what you owe
• Not a bill—it's an informational statement; your actual bill comes from the provider
• Key for tracking cost-sharing—shows progress toward deductible and out-of-pocket maximum

Prior Authorization

• Pre-approval requirement for certain services—insurer must agree treatment is medically necessary before covering it
• Common for expensive procedures and medications—surgeries, imaging, specialty drugs often require authorization
• Failure to obtain can result in claim denial—even if treatment was appropriate, lack of authorization shifts cost to patient

---

Prescription Drug Coverage: The Formulary System

These terms specifically address how insurance handles medication costs. Formularies are tools insurers use to steer patients toward cost-effective medications while managing pharmacy expenses.

Formulary

• Tiered list of covered medications—typically organized into 3-5 tiers with increasing cost-sharing at each level
• Tier placement affects your costs—generics (Tier 1) have lowest copays; specialty drugs (Tier 4-5) have highest
• Not all drugs covered—medications not on formulary may require appeals or full out-of-pocket payment

Prior Authorization (for Medications)

• Required approval for certain prescriptions—especially for expensive, high-risk, or easily misused medications
• Step therapy may apply—insurers may require trying cheaper alternatives before approving expensive drugs
• Can delay treatment—authorization process typically takes 24-72 hours, longer for complex cases

---

Tax-Advantaged Accounts: Paying with Pre-Tax Dollars

These terms describe savings vehicles that reduce the tax burden of healthcare expenses. Tax-advantaged accounts incentivize personal responsibility for healthcare costs while providing financial benefits.

Health Savings Account (HSA)

• Triple tax advantage—contributions are pre-tax, growth is tax-free, withdrawals for qualified expenses are tax-free
• Requires high-deductible health plan (HDHP)—you cannot have an HSA with traditional low-deductible insurance
• Funds roll over indefinitely—unlike FSAs, unused money stays in your account year after year and is fully portable

Flexible Spending Account (FSA)

• Employer-sponsored pre-tax account—reduces taxable income by setting aside money for healthcare expenses
• "Use it or lose it" rule applies—most funds must be spent within the plan year, though some plans allow limited carryover
• No HDHP requirement—available with any employer-sponsored health plan

---

Coverage Boundaries: What's Not Included

Understanding what insurance doesn't cover is as important as knowing what it does. Exclusions define the limits of the insurance contract and represent areas where cost-sharing doesn't apply—you pay 100%.

Exclusions and Limitations

• Services explicitly not covered—common exclusions include cosmetic procedures, experimental treatments, and fertility services
• Pre-existing condition exclusions largely prohibited—the ACA banned most exclusions for pre-existing conditions in individual and group markets
• Reading your policy is essential—unexpected exclusions are a leading cause of surprise medical bills

---

Quick Reference Table

---

Self-Check Questions

1. Which two cost-sharing mechanisms are variable based on how much care you use, and how do they differ from each other?

2. A patient has met their deductible but not their out-of-pocket maximum. Which cost-sharing mechanisms are they currently subject to?

3. Compare and contrast HMO and PPO plan structures: What trade-off do they represent, and which type of patient might prefer each?

4. Why might a medication appear on a formulary but still be inaccessible to a patient without additional steps? What administrative process might be required?

5. An FRQ asks you to explain how a patient could pay $\$0$ for a $\$50,000$ surgery. Using at least three terms from this guide, describe the scenario that would make this possible.