Understand Your Health Insurance—7 Key Concepts

7 Concepts Essential to Using Your Health Plan Wisely

If you’re new to health insurance there are seven basic concepts you must understand to avoid nasty financial surprises. If you don’t understand these key concepts, you won’t be able to choose a health plan wisely or use your health insurance effectively. This article will explain these concepts so that you'll know what to expect, how to choose a plan, and how to use your coverage.

Woman receiving a checkup from a medical provider

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Cost Sharing

Your health insurance company won’t pay all of your covered healthcare expenses. You’re responsible for paying part of your healthcare bills even when you have health insurance. This is known as cost-sharing because you share the cost of your health care with your health insurance company.

To clarify one point of potential confusion, "covered" does not necessarily mean that the health plan will pay for the service. It means that the service is considered medically necessary and is something that your health plan will pay for if you've met your cost-sharing obligations, which include deductibles, copayments, and coinsurance.

The three basic types of cost-sharing are deductibles, copayments, and coinsurance. Some health plans use all three techniques, while others may only use one or two. If you don’t understand your health plan’s cost-sharing requirements, you can’t possibly know how much you’ll have to pay for any given healthcare service.

Note that if you buy a silver plan in the health insurance exchange in your state and your income makes you eligible for cost-sharing reductions, your out-of-pocket costs will be lower than they would otherwise be.

The deductible is what you have to pay each year before your health insurance coverage kicks in fully and begins to pay its share. For example, if you have a $1,000 deductible, you have to pay the first $1,000 of your healthcare bills (for services that count towards the deductible, as opposed to being covered by a copay) before your health insurance company starts paying. Once you’ve paid $1,000 toward your healthcare expenses, you’ve “met the deductible” that year and you won’t have to pay any more deductible until next year (note that if you have Original Medicare, your Part A deductible is per benefit period rather than per year).

Thanks to the Affordable Care Act, your health insurance company now has to pay for certain preventive health care without requiring you to pay the deductible first (unless your plan is grandfathered). This means your plan will pay for things like your annual flu shot and screening mammogram even if you haven’t met your deductible yet (note that not all preventive care is free; the list is quite specific). However, if you sprain your ankle or get sick, you’ll have to meet your deductible (and/or copays) before your insurer will pay.

Learn more about deductibles in “Deductible—What It Is & How It Works.”

Copayments are a fixed amount—usually much smaller than your deductible—that you pay each time you get a particular type of healthcare service. For example, you might have a $40 copayment to see a healthcare provider. This means each time you see the healthcare provider, you pay $40 whether the healthcare provider’s bill is $60 or $600. Your insurance company pays the rest.

But keep in mind that the copayment-covered visit might also include services that count towards the deductible, which means you'll get a separate bill for those services. For example, if your healthcare provider draws blood and sends it to the lab for analysis, the cost of the lab work might be counted towards your deductible, meaning that you'll be responsible for some or all of that cost in addition to the copayment (assuming you haven't met your deductible—and coinsurance, if applicable—responsibilities yet).

Coinsurance is a percentage of the bill you pay each time you get a particular type of healthcare service (it's not the same thing as a copayment; a copayment is a fixed amount, while coinsurance is a percentage of the cost).

Coinsurance applies after you've met your deductible but before you've met your out-of-pocket maximum. For example, let's say you have a $1,000 deductible that you've already paid for the year, an out-of-pocket maximum of $5,000, and a 30% coinsurance for inpatient hospitalization. Now let's say you have a hospital bill that comes to $10,000 after the network-negotiated discount is applied. In that case, you'll pay $3,000 and your insurance company will pay $7,000.

At that point, your total out-of-pocket costs for the year will have reached $4,000, which is still below your plan's limit.

Out-Of-Pocket Maximum

But what if your hospital bill is $100,000 instead? Does that mean you're on the hook for $30,000? No, because the out-of-pocket maximum will kick in after your share of the coinsurance bill gets to $4,000. That's because your out-of-pocket maximum is $5,000 in this example and you already paid your $1,000 deductible, so another $4,000 in coinsurance charges will put you at your maximum out-of-pocket limit.

But note that your coinsurance responsibility in this example could be lower than $4,000 if you had also been paying copayments throughout the year, in addition to the deductible that you paid. Once your total out-of-pocket costs for covered expenses reach the limit set by your plan—in this case, $5,000—your plan starts to pay 100% of the cost of covered care for the rest of the year (as long as you use in-network medical providers and comply with any prior authorization rules your health plan has).

So the out-of-pocket maximum is the point at which you can stop taking money out of your own pocket to pay for deductibles, copayments, and coinsurance. Once you’ve paid enough toward deductibles, copays and coinsurance to equal your health plan’s out-of-pocket maximum, your health insurer will begin to pay 100% of your covered healthcare expenses for the rest of the year. Like the deductible, the money you’ve paid toward the out-of-pocket maximum resets at the beginning of each year or when you switch to a new health plan.

Under Affordable Care Act rules, non-grandfathered health plans cannot have out-of-pocket maximums in excess of $8,700 per person ($17,400 per family) in 2022. Health plans can have out-of-pocket limits below these amounts, but not above them. The ACA's cap on out-of-pocket costs only applies to services that are received from in-network providers and considered essential health benefits.

Provider Networks

Most health plans have healthcare service providers that have made a deal with the health plan to provide services at discounted rates. Together, these healthcare service providers are known as the health plan’s provider network. A provider network includes not just physicians, but also hospitals, laboratories, physical therapy centers, X-ray and imaging facilities, home health companies, hospices, medical equipment companies, outpatient surgery centers, urgent care centers, pharmacies, and a myriad of other types of healthcare service providers.

Healthcare providers are called “in-network” if they’re part of your health plan’s provider network, and “out-of-network” if they’re not part of your plan’s provider network.

Your health plan wants you to use in-network providers and provides incentives for you to do so. Some health plans, usually HMOs and EPOs, won’t pay anything for medical care you get from out-of-network healthcare providers. You pay the entire bill yourself if you go out-of-network.

Other health plans, usually PPOs and POS plans, pay a portion of the cost of care you get from out-of-network providers, but less than they pay if you use an in-network provider. For example, my PPO requires a $45 copay to see an in-network specialty physician, but 50% coinsurance if I see an out-of-network specialist instead. Instead of paying $45 to see an in-network cardiologist, I could end up paying $200-$300 to see an out-of-network cardiologist, depending on the amount of the bill.

And it's always important to understand that out-of-network providers are not obligated to accept anything less than the full amount that they charge for a given service. In-network providers have signed contracts with the insurance company, agreeing to accept a negotiated rate for each service. This is why your explanation of benefits might say that the provider billed $200, but $50 was written off, with the remaining $150 split between the patient and the insurance company according to the specifics of the health plan. The in-network provider cannot then send you a bill for that other $50—writing it off is part of their contractual obligation.

But out-of-network providers have no such contractual obligations. Let's say you see an out-of-network provider who bills $300 for a given service, and your insurance plan pays 50% for out-of-network services. That does not mean, however, that your insurer is going to pay 50% of $300. Instead, they're going to pay 50% of whatever usual and customary amount they have for that service. Let's say it's $200. In that case, your insurer is going to pay $100 (50% of $200). And the out-of-network provider can balance bill you for the rest of the charges, which will amount to $200 out of your pocket.

If your health plan covers out-of-network charges, you'll also want to keep in mind that the normal out-of-pocket limit will not apply to the out-of-network charges. Instead, your health plan will likely have a separate (higher) cap that applies to out-of-network care. Or, they may have no limit at all on how high your out-of-network costs can be. So you'll want to make sure you understand all the details about how your plan will cover the care and how the medical provider will bill for their services. It's safe to assume that you'll pay quite a bit more for out-of-network care, even if your health plan does include out-of-network coverage.

(Note that this discussion has been about out-of-network care that you voluntarily choose to receive. If it's an emergency situation, or a situation in which you go to an in-network hospital but unknowingly receive care from an out-of-network provider while you're there, a new federal law protects you from out-of-network balance billing as of 2022.)

Prior Authorization

Most health plans won’t allow you to get whatever healthcare services you wish, whenever and wherever you wish. Since your health plan is footing at least part of the bill (or counting it towards your deductible), it will want to make sure you actually need the health care you’re getting, and that you’re getting it in a reasonably economical manner.

One of the mechanisms health insurers use to accomplish this is a pre-authorization requirement (also referred to as prior authorization). If your health plan has one, it means you must get the health plan’s permission before you get a particular type of healthcare service. If you don’t get permission first, the health plan will refuse to pay and you’ll be stuck with the bill.

Although healthcare providers will usually take the lead roll in getting services pre-authorized on your behalf, it’s ultimately your responsibility to make sure anything that needs to be pre-authorized has been pre-authorized. After all, you’re the one who ends up paying if this step is skipped, so the buck quite literally stops with you.

Claims

Your health insurance company can’t pay bills it doesn’t know about. A health insurance claim is how health plans are notified about a healthcare bill. In most health plans, if you use an in-network provider, that provider will automatically send the claim to your health insurer.

However, if you use an out-of-network provider, you may be the one responsible for filing the claim. Even if you don’t think your health plan will pay anything toward a claim, you should file it anyway. For example, if you don’t think your health plan will pay because you haven’t met your deductible yet, you should file the claim so the money you’re paying gets credited toward your deductible. If your health plan doesn’t know you’ve spent $300 on treatment for a sprained ankle, it can’t credit that $300 toward your out-of-network deductible (assuming your plan covers out-of-network care).

Additionally, if you have a flexible spending account that reimburses you for healthcare expenses not paid by your health insurance, the FSA won’t reimburse you until you can show that your health insurer didn’t pay. The only way you can show this is to file the claim with your insurer.

Premiums

The money you pay to buy health insurance is called the health insurance premium. You have to pay health insurance premiums every month, or every pay period if your plan is obtained via your employer. If you don't pay your health insurance premiums by the end of the grace period, your health insurance coverage is likely to be canceled.

Sometimes you don’t pay the entire monthly premium yourself. This is common when you get your health insurance through your job. A portion of the monthly premium is taken out of each of your paychecks, but your employer also pays part of the monthly premium (in most cases, employers pay the majority of the total premium).

The employer's contribution is helpful since you’re not shouldering the entire burden yourself, but it makes it more difficult to understand the true cost and value of your health insurance. And it can sometimes result in sticker shock when a person wants to utilize COBRA or state continuation to keep their coverage after leaving a job, since they're suddenly responsible for paying the full cost on their own.

If you buy your health insurance on your state’s Affordable Care Act health insurance exchange, you may qualify for a government subsidy (premium tax credit) to help your pay your monthly premiums. Subsidies are based on your income and are paid directly to your health insurance company to make your share of the monthly premium more affordable. Learn more about Affordable Care Act health insurance subsidies in “Can I Get Help Paying for Health Insurance?

Open Enrollment and Special Enrollment

You can’t sign up for health insurance whenever you want; you’re only allowed to sign up for health insurance at certain times. This is to prevent people from trying to save money by waiting until they’re sick to buy health insurance.

You can sign up for health insurance during the open enrollment period.

If you don’t sign up for health insurance during the open enrollment period, you’ll have to wait until the next open enrollment period, usually a year later, for your next opportunity.

An exception to this rule, triggered by certain events, is a special enrollment period. A special enrollment period is a brief time when you’re allowed to sign up for health insurance even if it’s not open enrollment.

Special enrollment periods are allowed when you experience a qualifying life event. In most cases, this involves the loss of other health insurance, but qualifying events also include things like getting married or gaining a dependent.

So if you lose (or quit) your job and thus your job-based health insurance, that would trigger a special enrollment period—in both the individual market and for another employer-sponsored plan (like your spouse's) for which you're eligible—during which you can sign up for a health plan even though it’s not open enrollment.

Note that special enrollment periods in the individual market (including plans purchased via the health insurance exchange in your state) last for at least 60 days, while employer-sponsored plans only have to offer 30-day special enrollment periods.

Summary

If you're new to health insurance, there are several key concepts that you'll want to make sure you understand. They include:

  • How cost-sharing and out-of-pocket maximums work.
  • What a provider network is and why it's important to seek care within your plan's network.
  • Prior authorization rules.
  • Health insurance claims, including what you need to know about out-of-network claims.
  • Monthly premiums that you'll pay to keep your plan in force.
  • How open enrollment and special enrollment periods work; you can't just enroll anytime.

A Word From Verywell

Health insurance can be overwhelming if you're just starting to learn about it, or if you're facing a transition from having employer-sponsored health coverage to having to figure out your own coverage.

But understanding the basic concepts will get you on the right path to being able to understand the details of the plan you have and any other plans you might be offered in the future.

Although you might be tempted to just stick your policy in a drawer and forget about it until you need to use it, that's not a great idea. It's much better to understand the details when you're well, so that you're not scrambling to learn them when you're also struggling with an illness or injury.

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4 Sources
Verywell Health uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Healthcare.gov. Preventive Health Care.

  2. U.S. Department of Health and Human Services; Centers for Medicare and Medicaid Services. Patient Protection and Affordable Care Act; HHS Notice of Benefit and Payment Parameters for 2022 and Pharmacy Benefit Manager Standards. May 5, 2021.

  3. Kaiser Family Foundation. 2021 Employer Health Benefits Survey. November 10, 2021.

  4. Legal Information Institute. 29 CFR § 2590.701-6 - Special enrollment periods.