Tuesday, June 5, 2012

Health Insurance Fundamentals

First, and most basically, I'll describe the use and purpose of a deductible. A deductible is money you pay towards a claim before the insurance company begins to pay. Deductibles are often attached to prescription benefits and hospital benefits but they can be used with any benefit. When they are attached to prescription benefits, you pay your deductible first and then you pay coinsurance with the insurance company or you pay a copay and the insurance company pays the balance. Lets look at an example. Suppose you have a prescription plan that has a $200 deductible and co-pays of $10 for generic, $45 for preferred brand name drugs, and $65 for non-preferred brands. Also, suppose you had a prescription that costs $100 per month. For the first two months you would pay the full amount out of pocket until you met your $200 deductible, then on the third month you would pay the copay and the insurance company would pay the difference. Insurance companies usually decide to put drugs in different tiers depending on how expensive they are and whether there is a generic alternative. Now, for the remainder of your benefit period (either calendar year or policy inception year) you will just have to pay your copay. One thing to be wary of is the maximum benefit the insurance company will pay for drugs. Some companies have a cap on the amount they will spend and other companies will switch to coinsurance after a certain dollar amount.
Another common context in which you will encounter a deductible is for outpatient surgery or for admission to a hospital. This type of deductible is fairly straight forward. Suppose you are admitted to the hospital and you have a $3,500 deductible and 100%/0% coinsurance. Also suppose your hospital bill totals $50,000. Under this scenario, you would pay the first $3,500 and your insurance company would be responsible for the rest. There's a few things to note in this situation. First, you want to be aware of how your insurance company pays for claims. Do they only pay certain amounts for certain procedure (allowed amounts) or do they pay 100% if the hospital charges more than the insurance company usually negotiates for procedures. This is one reason why it's important, when not in an emergency situation, to go to providers in your insurance company's network, because in-network the company has already negotiated procedure rates with the provider and coverage for you should be more comprehensive. Also, be very skeptical of a company that doesn't cover 100% after your deductible and coinsurance. If a company specifies certain dollar amounts they will pay towards procedures and days in the hospital, then I would steer clear of them. You could be stuck with massive medical bills with a policy like that.
Next, it's important to understand how coinsurance works. Coinsurance is a cost sharing after your deductible. You can also see coinsurance in some types of prescription plans or for other specific benefits that are defined in the policy. Most often though, you will see coinsurance described in the context of outpatient surgery and hospital admission. In the example we described above, suppose your coinsurance was a 70/30 plan. This means that the insurance company pays 70% and you pay 30% after your deductible. Before we continue with our example though, it should be noted that almost all health insurance policies from reputable companies will have a maximum out-of-pocket (OOP) for coinsurance. This is either described as your coinsurance max OOP or your total max OOP for deductible and coinsurance together. For this example we will assume the max OOP is $3,000 for coinsurance. In this scenario, you would pay the first $3,500 and then 30% of the next $10,000, which is your $3,000 coinsurance max. Some policies will describe this max as $6,500, and all they are doing is adding your deductible and coinsurance together. It is important to make this distinction when comparing policies.
Many potential policy holders have two common misconceptions about the deductible. The first is that they will be required to pay the entire deductible before they can go to the doctor with a copay. Any policy design is possible, but a common health insurance policy structure is to allow you to use your copay before the deductible is met. Another misconception about the deductible is that you will have to pay the deductible before services are rendered. In emergency situations, this won't be an issue, the facility must provide care as soon as you arrive. In other situations where you have time to talk with the hospital and schedule a surgery or other procedure, they may ask for you to pay up front. However, many hospitals will allow you to make payments towards your deductible after services have been rendered.

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