Health Insurance Terms Explained: Clearing Up Common Confusion

If you have trouble understanding the ins and outs of your insurance plan’s deductible, you probably don’t want to ask the person sitting next to you – because it appears to be a widespread issue.

Many patients aren’t clear on the meanings of the most common health insurance terms. In fact, fewer than one-third of people can correctly define three of the most often-used insurance terms: deductible, premium, and copay, according to research by Policygenius.

This lack of clarity can have serious consequences. In 2019, 27.2% of adults avoided medical treatments because they were uncertain of their insurance coverage. Such avoidance can put a person at risk of serious health issues. A delayed colonoscopy, for example, could increase the likelihood of developing colon cancer.

Putting a Premium on Healthy Understanding

Don’t let a few words put you at risk. Most insurance terms can be explained in straightforward language that’s easy to make sense of. Here’s a breakdown of some of the most frequently used terms:

Premium – This is the payment required, typically monthly, to keep an insurance policy active. If the plan is offered through an employer, the premium is usually taken out of payroll, with the employer sharing the cost. In 2021, the average annual premium for an individual was $7,739, of which employers covered nearly 83%, according to the Kaiser Family Foundation. Usually, the higher the premium, the lower the deductible.

Deductible – Many insurance policies require the holder to pay a set amount, or deductible, for healthcare services each year before the policy kicks in. In 2020, the average annual insurance deductible was $4,364 for an individual and $8,439 for a family, meaning an individual policy holder would pay the first $4,364 of covered services for the year before insurance took over.

Note: Most policies cover preventative-care services like annual physicals, vaccinations, and some cancer screenings without requiring your deductible is met.

After the deductible is paid, the policy holder typically owes just a share of covered treatments. Such out-of-pocket expenses include:

  • Copayments – These cost-sharing payments represent the fixed dollar amount the patient owes for each medical service even after reaching the deductible. Say a doctor’s visit costs $100 and the policy’s copayment is $25; the patient would pay $25 and the insurer would pay the rest.
  • Coinsurance – Another form of cost-sharing, coinsurance is a percentage of total treatment costs the patient is responsible for after meeting the deductible. One of the most common copayment models is the 80/20 split, under which the insured person pays 20% of the medical cost and the policy takes care of the balance. A patient receiving a $100 treatment would owe $20, and the insurance company would pay $80.

Out-of-pocket maximums – Insurance policies put a cap on how much a person has to pay out of pocket, each year, for covered healthcare expenses. Let’s say the out-of-pocket maximum is $8,000 and the patient had paid this amount in the form of deductibles, copayments, and coinsurance. The insurer will pick up 100% of the remaining expenses. Note: Monthly premiums do not go toward the out-of-pocket maximum, and it applies only to services the plan covers. Some elective procedures, such as cosmetic surgeries, for example, may not be included.

What about Colorectal Cancer Screenings?

The Affordable Care Act (ACA) requires both private insurers and Medicare to cover the costs of colorectal cancer screening tests, because these tests are recommended by the United States Preventive Services Task Force (USPSTF). The law stipulates that there should be no out-of-pocket costs for patients, such as co-pays or deductibles, for these screening tests. But the definition of a “screening” test can sometimes be confusing.

Read more here to understand if you’re covered.

This Lack of Understanding is Treatable

For most of us, health insurance is a big-ticket consumer product, like a large appliance or computer, so it deserves the same degree of research. Anyone enrolled in an employee-sponsored program, or shopping for an individual or family policy, should review the coverage literature to learn the benefits offered, the costs related to each, and the physicians in the network. Doing so will pay off in the long run.

To download a handy sheet explaining these terms, click here.