Providing a great benefits package is critical to being a competitive employer. But if employees are confused by the terminology, they may not recognize just how great their benefits package is. Here’s a breakdown of the most common terms found on a health insurance policy.
Premium is the amount you and/or your employer pay each month towards an insurance policy. At Stratus.hr, each month’s premium is divided in half for semi-monthly or biweekly payroll, or divided by four when employees are paid weekly. This helps spread the cost for premiums which are then collected throughout the month. If an employee is paid biweekly (let’s say every other Friday) and there are three paydays in one month (since there are usually 26 Fridays in a year), premiums will only be collected on the first two paychecks. The same is true for weekly payrolls when there are five paydays in a month; premiums will only be collected on the first four paydays of the month.
When premiums are collected one month in advance, it means that money paid over the course of a month is collected and spent on the following month’s coverage. For example, premiums collected in January are for February’s coverage. This enables the employer to pay February’s insurance bill at the beginning of February and allows the employee to have coverage for the entire month, even if the employee quits on February 1.
A deductible is how much you pay before insurance kicks in to cover any remaining expenses. For example, let’s say you have an individual deductible of $500 and a family deductible of $1,500 and you end up in the hospital after falling off a cliff. If this is the first time you’ve been in the hospital all year and your plan says it will pay 80% of services after you’ve met your deductible, you must pay the first $500 and then expect to pay 20% of the remaining expenses charged by the hospital. If, however, your family has had a year of medical expenses where several family members have collectively paid $1,500 of deductible-worthy expenses (let’s say your 9-year-old had a tonsillectomy, your spouse had a hernia, and your 14-year-old broke his leg), then congratulations! Your family members have already met the $1,500 family deductible and you will only be responsible for 20% of the expenses of your hospital stay. The deductible may not apply to every service (such as office visits), so check your plan for coverage details.
Coinsurance is the amount you pay after you’ve met your deductible, which is usually calculated as a percentage. In the example above, the 20% is your coinsurance. Let’s say the remaining hospital expenses are $20,000 after you’ve met your deductible of $500. Your final bill at 20% coinsurance will then be 20% of $20,000, which equals $4,000.
A copay (i.e. copayment) is a fixed cost for a service anytime you have that service. If you have an in-network copay for an office visit of $15, then you can expect to pay $15 anytime you see a family doctor within the insurance network. (Specialists, or doctors that are more specialized than a general practitioner, will typically have a higher copay than a regular doctor.) If your out-of-network copay is $25, then you’ll pay $25 for visiting a doctor who is not within the insurance network. Co-pays don’t typically go towards meeting the deductible, meaning your in-office copay of $15 will not reduce your individual $500 deductible to $485.
An out-of-pocket maximum is how much you and/or your family will pay during the policy period. This can be a calendar year policy (January through December) or a plan year policy that follows your plan renewal date, say from September through August. The out-of-pocket maximum amount usually includes the deductible and co-insurance amounts that you and/or your family pay throughout the policy year. If you satisfy the out-of-pocket maximum during the policy period, the insurance carrier or plan will then pay 100% of the allowed amount for any additional services. For example, let’s say your individual out-of-pocket maximum is $4,000. In the example above, you would pay $500 for the hospital deductible and then your remaining portion would cap at $3,500 because of your out-of-pocket max.
Understanding basic insurance terminology will help employees make good choices about their medical services. For help with understanding your health insurance policy, please contact our benefits department at email@example.com.