Health Insurance 101: The Basics (Health Insurance 1/3)

Meet Susie. Susie just graduated from college and got her first job at Corporate Co. The job is great: free food, friendly colleagues, and even a health insurance plan. However, there’s just one problem: Susie has no idea what health insurance is, or even if their plan is right for her. What should she do? Well her first step is simple: understand how health insurance works. Like all insurance, in return for a monthly fee called a premium, health insurance reduces the costs associated with a risk, in this case, excessive medical bills due to sickness or injury. However, unlike other forms of insurance, health insurance premiums are unique: they’re only based on a few factors, like age, location, and smoking habits, and not on your health status. That means if you have a pre-existing health condition, like diabetes or asthma, your insurer cannot raise your rates or deny you coverage. That is undeniably great for consumer, though health insurance also has a lot of problems, mainly the confusing jumble of terms: HMO, deductibles, the list goes on and on.

However, Susie shouldn’t worry. Explained properly, health insurance isn’t actually all that complicated. Let’s walk through an example. Let’s say Susie has a $200 monthly policy with a $1,000 deductible, 20% coinsurance, and a $5,000 out-of-pocket maximum. Let’s also say she recently broke her leg playing soccer and has just been stuck with a $100,000 medical bill. Yikes! How much of that enormous bill does she have to pay? Let’s start with the deductible first. A deductible is simply the amount of money Susie must pay each year before her insurer starts paying their share. Susie’s plan has a $1,000 deductible. That means, for a $100,000 medical bill, Susie must pay the first $1,000 herself. Then, the remaining $99,000 is split between Susie and her insurer, based on her plan’s coinsurance. Coinsurance is the percentage of costs Susie must meet after her deductible has been met. Susie’s plan has 20% coinsurance. That means for every $4,000 the insurer pays, Susie must pay $1,000.

This cost-sharing continues until Susie reaches her out-of-pocket maximum. This is quite literally the maximum amount of medical expenses Susie has to pay each year before her insurer pays the rest. In this example, Susie’s plan has a $5,000 out-of-pocket maximum, and she’s already spent $1,000 on her deductible and $4,000 on coinsurance. That means she’s reached her out of pocket maximum, and her insurer will have to cover the rest. All in all, Susie only paid $5,000 for a $100,000 medical bill. If Susie didn’t have health insurance, that payment would have been all on her! Susie is thrilled by this, but also wonders if a similar type of calculation applies to routine services, like doctor's visits or medications. Well, no, as it generally turns out. Those routine expenses are instead covered by something called a copay. A copay is a simply flat fee associated with a specific, routine event, like $25 for a doctor’s visit or a certain prescription drug. As for you pay for these services, it couldn’t be easier.

Susie will either pay directly at the doctor’s office or just get a bill from them later on. Hopefully, you and Susie now have a better understanding of how health insurance works. Be sure to watch our next video, which covers everything from HMOs to Gold Plans, and be sure to check out our website, where you can find more educational material and great health insurance plans.