Decoding health insurance decisions

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Health insurance slang?

If you're not a golfer this sentence might leave you scratching your head: -

“I hit a stock 7 fat and it left me scrambling from the short side.”

• What's a stock 7? Should it lose some weight?
• What are you scrambling for? A breakfast burrito?
• Will the short side ever grow to be as tall as the other side?

Golf has tons of slang. It’s a part of the subculture that unites us all as golfers and signifies our identity and belonging. Casual references to “breakfast balls” and “fried eggs” are code and only we know that we’re talking about golf and not the first meal of the day.? ???

Every culture, profession, or group has its own lingo. It’s a way to bond. If you’ve ever been on the outside of one of these conversations it can be uncomfortable. That’s when slang becomes jargon.

Personal finance has a TON of jargon.?

In most areas of personal finance, you’ll have a member of your team who can help interpret the opaque language.?

• Your tax preparer can help you understand the difference between MAGI and AGI.?
• Your attorney can explain what Crummey letters and spendthrift clauses are.
• Your financial advisor can tell you the difference between a limit order and a stop loss.

Having a team of professionals on your side can be valuable.?

However, when it comes to health insurance from your employer, you’re often on your own.

Open enrollment season

Open enrollment is a critical period during which you have the opportunity to make decisions about your employee benefits for the upcoming year. The specific choices available will vary depending on your employer's benefits package; but health, vision, dental, long-term and short-term disability, and tax-deferred spending accounts are a few of the more common opportunities you’ll have to make decisions on.?

However, without a full understanding of all the jargon on those enrollment forms, you might not be making the most of your opportunities and leaving some dollars on the table.?

Health insurance is one of the biggest decisions you’ll make from both a financial and a well-being perspective.?

Here’s the 8 most important “jargony” terms you need to know to help you stick to your approach to picking the right health insurance plan for your family.

Types of coverage

There are two main kinds of health insurance plans – PPO and HMO. Understanding the difference between these two types of plans will ensure you have access to the doctors and specialists you want to see.

PPO (Preferred Provider Organization): These plans offer a network of preferred healthcare providers but allow you to see out-of-network providers at a higher cost. You do not need referrals to see specialists, such as a dermatologist or an allergist. Premiums and out-of-pocket costs are typically higher than HMOs.

HMO (Health Maintenance Organization): These plans focus on providing cost-effective and coordinated healthcare services. Your primary care physician will act as your quarterback for health care decisions and will make referrals to specialists within a specific network of providers.? HMO plans are not as flexible as PPO plans, but typically have lower premiums.? ?

Costs associated with health insurance

With either type of plan, there are a few different costs associated.

Premium: This is the amount that your health care coverage costs. Your employer may cover some or all of this expense. Any portion you’re responsible for is usually deducted from your paycheck.

Deductibles: You may have an annual deductible to meet before the insurance company starts covering certain medical expenses. Once the deductible is met, the insurance plan covers a portion of the costs, and you’re responsible for the remaining portion.

Copayment: Sometimes referred to as a “copay,” this is the upfront fee you pay at the time of services, such as doctor visits or for prescription medications.?

Coinsurance: After your deductible is met, coinsurance will kick in. This is a cost-sharing arrangement where you and the insurance company each pay a percentage of covered healthcare expenses. For example, with a 20% coinsurance, you’re responsible for 20% of the costs, and the insurer covers the remaining 80%.

Out-of-pocket maximum: This is the highest amount you’re required to pay for covered healthcare expenses in a specific insurance plan year. Once this limit is reached, the insurance company covers all eligible expenses, providing you with financial protection and limiting your financial responsibility for the rest of the year.

Calculating your total spend

Here’s a comparison of two plans to illustrate how the above terms translate to real dollars spent:

• Plan A: $750 monthly premium, $500 deductible, 80% coinsurance with an out-of-pocket maximum of $6,000.
• Plan B: $500 monthly premium, $6,000 deductible with 100% coinsurance with an out-of-pocket maximum of $6,000.

Plan B’s premiums are lower and total just $6,000 for the year vs. $9,000 for Plan A. This means that if you don’t spend $1 on health care during the year (an unlikely scenario), you’ll come out ahead with Plan B.

However, Plan A carries a lower deductible and coinsurance than Plan B. This means that after paying the initial $500 deductible, you’re only paying 20 cents on the dollar for every healthcare expense up to the $6,000 out-of-pocket maximum.

Plan B carries a much higher deductible and 100% coinsurance after that. Under this format, the amount you spend on health care rises dramatically, but levels off once you’ve hit your out-of-pocket maximum.?

Both of these plans have an out-of-pocket maximum of $6,000, so they both limit the upside on the amount you will potentially spend on healthcare, but you’ll hit Plan B’s out-of-pocket maximum first because you’re shouldering more of the expenses on the way there.?

One more bit of health insurance jargon…

Plan B is also considered a High-Deductible Health Plan or HDHP.

High Deductible Health Plan (HDHP): These plans have higher deductibles and lower premiums than some other plans. They are often paired with Health Savings Accounts (HSAs) which allow pre-tax contributions for medical expenses. HDHPs are designed to encourage cost-conscious healthcare choices and often cover preventative care without required a deductible.?

Health Savings Accounts are one of my favorite types of accounts because of their triple tax advantages.?

Which plan is right for you?

If you’re choosing between two plans, there’s a few factors to consider.

• Are the doctors you prefer to see in the plan’s network?
• If you are on prescription medicine, are the drugs covered in the plan’s formulary?
• Will you need a referral to see specialists?
• Do you prefer a lower premium and higher out-of-pocket expenses or are you willing to pay a higher premium in exchange for lower out-of-pocket expenses?
• What is the out-of-pocket maximum?

Answer these questions, and you’ll be able to stick to your approach to open enrollment and not leave yourself short-sided.