Anyone who’s ever dealt with health insurance knows that it can be complicated. Here’s a general, easy to understand explanation of how it works. Typically, people pay a fixed monthly amount for their health insurance. This is called your premium. The premium is the cost of your policy. Whether you get sick or not, or whether you visit a doctor or not, you must pay your premium in order to maintain your policy.
Most insurance policies have a deductible. That means you must pay out-of-pocket for your medical expenses until your deductible is met. For example, if your policy has a $1,500 deductible that means you must pay the first $1,500 of any medical costs. After that, your insurance starts kicking in. You may also have a co-pay (e.g. $25) on your plan which is typically applied towards an office visit. This is not included as part of the deductible but may go towards your out-of-pocket expenses.
Your policy may also have a co-pay or co- insurance. After you’ve met your deductible, your insurance will start paying a portion of your medical expenses, but they also require you to pay a small portion. That small portion is known as a co-insurance. A co-insurance is typically a percentage of the medical expense (e.g. 10%).
Your policy likely has a maximum out-of-pocket expense. That means once you’ve paid a certain amount out-of-pocket for the year, your insurance will cover 100% of any additional medical expenses. Your maximum out-of-pocket expense includes what you’ve paid towards your deductible and co-pay.
Here’s an example. Tom has a health insurance policy with a $1,500 deductible, 10% co-insurance, and a maximum annual out-of-pocket expense of $2,500. Tom is involved in an accident and needs to go to the hospital. After being released from the hospital, Tom has a series of doctors’ visits and therapy. His medical bills total over $10,000. He would be responsible for the first $1,500 for his deductible. He would then be responsible for a 10% co-insurance of each visit. However, once he’s paid $1,000 worth of his co-insurance, he’ll have met his maximum annual deductible of $2,500. His insurance is responsible for covering the remaining $7,500.
As you can see from the example above, once you’ve met your deductible, you’ve gotten a large portion of your out-of-pocket medical expense out of the way. If you were to see your general physician after you’ve met your deductible, your office visit may only cost you $10. Further, from the example above, we also see that once you’ve met your annual maximum out-of-pocket expense, your insurance will cover 100% of any additional medical expenses. If you were to see your general physician after you’ve met your annual maximum, your office visit would cost you nothing.
So, if you’ve met your annual deductible or annual maximum out-of-pocket expense, you can save a lot of money by taking care of any other medical issues within the same calendar year. I hope this explanation has simplified a complicated subject.