Top 7 health insurance terms to know

If you're new to health insurance policies or shopping for a plan on the individual market for the first time, understanding health insurance terminology is one of the first challenges you may face. Choosing the best health insurance coverage can be tricky if you don't know the difference between a premium and a deductible.

In this article, we'll walk you through the seven most common health insurance terms you need to know to understand your options during your annual open enrollment period.

Table of contents

• Premium
• Deductible
• Copayment
• Coinsurance
• Out-of-pocket maximum
• Pre-existing condition
• Medicare

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1. Premium

There are many different types of health insurance plans, such as a health maintenance organization (HMO), preferred provider organization (PPO), or exclusive provider organization (EPO). You can also have either a low-deductible or high-deductible health plan (HDHP). But there's one thing all health coverage has in common—a premium.

Your premium rate is the dollar amount you pay to the health insurance company to maintain active coverage. Most people pay theirs monthly, but depending on your type of insurance plan, your payments could be quarterly or annual.

When you're researching plans, it's usually the first cost you'll see and consider when budgeting your monthly medical costs. However, it's best to consider all costs when choosing a health plan.

For example, a plan with a low monthly premium might have a higher deductible or copayment, which could increase the amount of your total out-of-pocket cost if you frequently see primary care physicians.

There are a few ways you can control premium costs. Federal programs and subsidies, like premium tax credits, are available for eligible lower-income individuals and families to offset the costs of health insurance premiums for plans purchased on the marketplace.

If your employer offers you a health reimbursement arrangement (HRA) health benefit, you could get tax-free reimbursements on insurance premiums and other eligible expenses. You'll want to check if the type of health plan you choose qualifies and if your HRA allowance will fully or mostly cover your premium.

2. Deductible

A deductible is the dollar amount you must pay on your own for any covered medical services before your health insurance company starts to pay. For instance, if your plan has a $4,000 annual deductible, you'll pay $4,000 on your own, and then your insurance company will pay for the rest of your expenses or cover a set percentage for the rest of the year.

A plan can have a comprehensive deductible for all services or a separate deductible for specific essential coverage, such as prescription drugs. However, plans often cover the cost of things like network doctor visits before you've paid your full deductible amount.

Generally speaking, plans with lower deductibles offer more comprehensive health insurance coverage but have higher premium costs. Plans with higher deductibles tend to have lower premium costs. Evaluating your individual or family coverage needs and specific medical conditions may help you decide the right deductible amount for your budget.

3. Copayment

A copayment, or copay, is what you'll pay your primary care doctor for a covered medical service such as an office visit. Generally, copays won't count toward your deductible. However, this depends on your plan, so you should read your plan details carefully or call your health insurer to find out what your specific tier of coverage allows.

Copay amounts can vary depending on the kind of healthcare service you're getting and what network of providers you choose. For example, you may have to pay a $250 copay for emergency care, a $20 copay for visits to primary care physicians, and a $10 copay for each generic drug you get filled at your pharmacy.

Copayments vary from plan to plan, but even though they're usually smaller amounts, these payments can add up over time. If you visit your network doctor often, you should look for a plan with an affordable copay amount to maximize your overall health savings.

4. Coinsurance

Both copayments and coinsurance are ways for health insurance companies to spread risk among their plan participants. Coinsurance is the percentage of costs you pay each year toward covered health services, including your deductible and copay.

For example, if a plan has a 30% coinsurance payment, health insurance companies will cover 70% of the charges for any covered medical services, leaving you responsible for the remaining 30%. Until you meet your deductible, you must typically pay 100% of these expenses.

Coinsurance rates can also significantly affect the price of your insurance premium. As with deductible amounts, health insurance plans with low premiums tend to have higher coinsurance, and health coverage with higher premiums has lower coinsurance.

5. Out-of-pocket maximum

An out-of-pocket maximum is just what it sounds like: the maximum amount of money you'll pay for covered services during a period of time, typically a full benefit year.

Out-of-pocket maximum amounts can help an insured person avoid significant financial pitfalls associated with high healthcare costs in years when they need a lot of treatment because they'll know what their set out-of-pocket limit will be ahead of time.

There are some limitations on what can count toward out-of-pocket maximums, though. This will vary from one type of insurance plan to another, but it typically includes copays, deductibles, and coinsurance costs. However, your out-of-pocket maximum doesn't include your premium cost, out-of-network services, or any medical expenses your plan doesn't cover.

Once you've paid the full amount toward your out-of-pocket maximum, your insurance will pay 100% of your following covered medical expenses for the benefit year, as long as the plan considers it essential coverage and you incurred the expenses from in-network providers.

For 2024¹, the out-of-pocket limit for a Health Insurance Marketplace plan is $9,450 for individual coverage and $18,900 for a family plan.

6. Pre-existing condition

A pre-existing condition is any disease, disability, or health condition you have before enrolling in health coverage with an insurance company.

Before the Affordable Care Act (ACA), health insurers in the individual market used medical underwriting in nearly every state to examine individuals' medical records. This meant they could reject applications altogether, charge higher monthly premium costs, deny services, or institute a waiting period for people with pre-existing conditions. Today, pre-existing condition exclusion is illegal in most cases, although there are a few types of health insurance where it's still allowed.

If you're on a short-term health plan or have to renew your individual plan every three to six months, you should confirm your covered benefits. Your insurance company may be able to deny you coverage based on your previous medical history or pre-existing condition.

7. Medicare

Medicare is a federally funded health insurance program for people 65 or older or people with disabilities. The original Medicare plan has two parts. Part A is a hospital insurance plan that covers hospital stays, hospital services, hospice, inpatient care, and skilled nursing care. However, Part A doesn't cover custodial or long-term care.

Medicare Part B is medical insurance coverage for physician services, medical supplies, and clinic care. Remember that with this type of coverage, you may have to use the plan's health care provider and hospitals to get medical attention.

There are also Medicare Advantage health insurance programs that are Medicare-approved but run by private insurance companies.

With this type of plan, you typically will receive:

• All your Medicare-covered healthcare through the plan
• Prescription drug coverage
• Extra benefits without additional costs, such as medical transportation, vision, hearing, and dental coverage, or health and wellness programs
• Lower out-of-pocket medical expenses than the original Medicare plan

Conclusion

With a good understanding of common healthcare terms, you should be able to shop for a health insurance plan without added stress. Choosing your health insurance policy empowers you to control your budget and medical care rather than getting stuck with a group insurance health plan that may not fit your needs.

Health insurance shopping is even better when you have an HRA to get tax-free reimbursements on your health insurance premiums and healthcare expenses to allow for flexible spending. If your employer offers an HRA as a health benefit, check out the HRA's summary plan description for details so you can choose the right plan.

This article was originally published on June 10, 2021. It was last updated on December 18, 2023.

1. https://www.healthcare.gov/glossary/out-of-pocket-maximum-limit/