Health Insurance Definitions and Basics

A health insurance policy is a contract between an insurance company and an individual or his sponsor (such an employer). This contract may be lifelong or renewed annually or monthly.  The type and amount of health care costs covered by the health insurance company are specified in advance, usually in a member contract or "Evidence of Coverage" booklet. The insured person's obligations are usually in several forms:

•    Premium: is the amount the insured or his sponsor pays to the insurance company to purchase health coverage.

•    Deductible: is the amount the insured should pay out-of-pocket before the insurance company pays its share. For example, a policy-holder might have to pay a $500 deductible per year, before any of their health care is covered by the insurance company. It may take several office visits or prescription refills before the insured person reaches the deductible and the insurance company starts to pay for care.

•    Co-payment: is the amount the insured person must pay out of pocket before the health insurance company pays for a particular visit or service. For example, an insured person might pay a $45 co-payment for a doctor's visit. A co-payment must be paid every time a particular service is obtained.

•    Coinsurance: is a percentage of the total cost that insured person may also pay, instead of or in addition to paying a fixed amount up front (a co-payment). For example, the insured might have to pay 20% of the cost of a surgery over and above a co-payment, while the insurance company pays the other 80%. If there is an upper limit on coinsurance, depending on the actual costs of the services they obtain, the insured could end up owing very little, or a great deal.

•    Exclusions: are the services that are not covered by the insurance company. The insured is usually expected to pay the full cost of non-covered services out of their own pockets.

•    Coverage Limits: are the certain dollar amounts up to which some insurance companies would pay for health care costs. The insured may be expected to pay any charges in excess of the health plan's maximum payment for a specific service. Also, some insurance company schemes have annual or lifetime coverage maximums. In these cases, the insurance company will stop payment when they reach the benefit maximum, and the insured must pay all remaining costs.

•    Out-of-pocket Maximums: are similar to coverage limits, except that in this case, the insured person's payment obligation ends when they reach the out-of-pocket maximum, and the insurance company pays all further costs. Out-of-pocket maximums can be limited to a specific benefit category (such as prescription drugs) or can apply to all coverage provided during a specific year.

•    Capitation: is an amount paid by insurer to health care provider, for which the provider agrees to treat all members of the insurer.

•    In-Network Provider: is a health care provider on a list of providers preselected by the insurance company. The insurance company will offer discounted coinsurance or co-payments, or additional benefits, to the insured to see an in-network provider. Generally these providers have a contract with the insurance company to accept rates.

•    Prior Authorization: is a certification or authorization that the insurance company provides prior to medical service occurring. Obtaining an authorization means that the insurance company is obligated to pay for the service, assuming it matches what was authorized. Most routine services do not require authorization.

•     Explanation of Benefits: is a document that may be sent by an insurance company to a patient explaining what was covered for a medical service, and how payment amounts by the insurance company and the insured were determined.