Insurance contracts can be complicated legal documents. There are terms used so often, we assume everyone knows what they mean. It’s important to have a basic understanding of these terms and how they apply to health insurance plans.
Deductible: This is the dollar amount an insured person must pay for covered expenses during the designated benefit period, which is typically a calendar year, before the plan begins paying co-insurance benefits. Some plans will have a separate deductible for prescription drug benefits. Others will use an embedded deductible for prescriptions. Embedded means that the full covered cost of prescriptions is paid by the insured, until the deductible is met. Plans that qualify for a health savings account must have the prescriptions deductible embedded.
Co-pay/co-payment: This is the amount an insured individual must pay toward the cost of a particular benefit. For example, a plan might require a $25 co-pay for each doctor’s office visit. This may or may not apply to the deductible. If the plan is compliant with the Affordable Care Act (ACA), also known as Obamacare, this amount will apply to the maximum out of pocket or stop loss. Read the fine print.
Co-insurance: This is the percentage of covered expenses an insured individual shares with the plan. For example, in an 80/20 plan, the health plan member’s co-insurance is 20 percent. Typically co-insurance applies after the insured pays the deductible and is only required up to the plan’s stop-loss amount.
Stop-loss: This is the dollar amount of claims filed for eligible expenses at which the insurance begins to pay 100 percent per insured individual. Stop-loss is reached when an insured individual has paid the deductible and reached the out-of-pocket maximum amount of co-insurance. The ACA states almost all of an individual’s copayments and coinsurance should apply to the stop-loss. This was a change from prior plans which could carve out most any benefit from stop-loss. I refer to these as “Swiss cheese” plans, meaning there are a lot of holes.
Guaranteed Issue: This means the insurance company must accept all applicants. Typically there are restrictions such as time periods or qualifying events that limit the applicant’s opportunity to have the plan be guaranteed issue.
Health Savings Account (HSA): This is a special tax-favored savings account opened by a person insured by an HSA-qualified high deductible health plan. The funds deposited into the account are available to pay for qualified medical expenses. If the funds are not used in the year in which they are deposited, they may rollover without federal tax consequences. If withdrawn for qualified health expenses they are not taxed. This is one way to create “never taxed” funds. Note this is federal only. California does not recognize HSA accounts.
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Community rating and how it affects rates: Along with guaranteed-issue, health-care reform requires health insurance companies to modified community rating for individuals and small businesses. By pooling a group of people together, healthy people help balance health care costs for people who aren’t healthy. The risk and cost is shared among everyone in the pool.
Health care reform has introduced new rules for community rating, which is why it’s called modified community rating. Insurance companies can’t base rates on any person’s health history. Instead, rates can be based on age, tobacco use — but not in California, family size and location. The law limits how much coverage can cost. The highest rate can’t be more than three times the lowest rate.
Individual customers in a state will be in one risk pool. Small business customers will be in another risk pool.
These laws prevent insurance companies from creating separate risk pools that charge higher or lower rates.
Unfortunately this new 3:1 ratio raised rates for younger people. It reduced rates for older people, but not by much. That’s why young people with a grandfathered plan must be cautious; non-grandfathered plans have much higher rates for people younger than 35.
Margaret Beck has been a licensed insurance broker since 1978. Call her at 225-8583.