The ABCs of Health Insurance

When you start your first full-time job after graduation, it is highly likely that your employer will offer health insurance. Health insurance introduces a whole new slew of terms into your life that don’t make their way into sitcoms, dating apps or TikTok and can be confusing. However, health insurance is an important benefit to understand.

To get you started, College Vested breaks down some of the most important terms related to employer-sponsored health insurance.

A few threshold terms – health insurance and health insurance premium.

Health Insurance: Essentially, the concept behind employer-sponsored health insurance is that every month, you contribute money into a pool of money along with your fellow employees and your employer that is then used to pay all of or part of the healthcare costs incurred by you, your fellow employees and covered family members.

TIP: Not every healthcare cost is covered. For example, if you don’t like the shape of your nose and want to have it surgically altered, the employer-sponsored health insurance probably won’t cover it. But if you break an arm, the insurance is likely to cover a major portion of or all of the cost of the care associated with treating your arm. Typically, whether something is covered depends on whether it is “medically necessary,” meaning that it is truly needed for your health.

PRO TIP: “If you are under the age of twenty-six and are covered under your parent’s insurance, you may wish to continue that coverage until you turn twenty-six,” WTW Strategic Benefits Consultant Ron Krupa, CEBS, said. “When making the decision, some of the questions you should ask are:

• How independent do you want to be?
• Are your doctors considered in-network? This is important because you’ll pay less for in-network doctors than out-of-network doctors.
• How much will you pay for coverage under your employer plan versus the cost of having you on your parent’s plan? If you have siblings who are still on your parent’s plan, the premiums for staying on your parent’s plan may be zero because many plans have the same premium for covering one child as for covering more than one child.
• What is the cost when you get care? These would include the deductible and copayments/coinsurance, so compare those values.
• What is the cost of prescription drugs, especially if you are taking any ongoing medications? Compare the cost of those prescriptions under each plan.”

PRO TIP: “Many young adults stay on their parents’ coverage until their 26th birthdays,” Gallagher Division Senior Vice President, Compliance Counsel Janet Downs, J.D. said. “Once that coverage is lost, you must choose whether to purchase insurance of your own. In the year before you turn 26, discuss the options with your parents and consider taking the opportunity to enroll in your employer’s plan during the annual enrollment prior to your 26th birthday.”

Health Insurance Premium: The amount of money you contribute (usually on a monthly basis) toward the pool of money used to pay for your share is called your “health insurance premium.” The premium is generally deducted from your paycheck. So, if you receive two paychecks per month, you will likely have deductions from both paychecks. Note that employers typically pay most of the true monthly premium, perhaps as much as 80%.

PRO TIP: “While health insurance might be hard to understand and seems expensive, ask anyone who has made a surprise visit to the emergency room without insurance,” Downs said. “The costs can be extremely high and even result in bankruptcy. Although paying the premiums reduces your take home pay, the benefit of insurance is that you are paying those smaller incremental amounts to avoid large, catastrophic expenses down the road. Think about it like this – you just purchased your first new car – are you going to drive it around a big city without auto insurance just because it’s new? No! Something you didn’t anticipate might occur, like a wreck, and without insurance, you are responsible for the cost. Just because you are healthy, doesn’t mean an accident can’t occur. It’s better to insure yourself to help avoid financial catastrophe from an accident.”

Notes about the most common types of health insurance coverage.

There are different types of health insurance coverage. The types typically refer to the way that the benefits are paid for under the applicable plan. However, there are some common types that most employers offer. We highlight three of those.

Preferred Provider Organization (PPO): One of the most common types of health insurance is called a PPO, which stands for “Preferred Provider Organization.” A PPO plan has a network of providers (doctors, hospitals, clinics, etc.) who have contracts with the plan to provide services at specific rates to plan members. Generally, that’s a good thing because it limits how much a provider (e.g., a doctor) or a facility (e.g., a pharmacy) can charge you for a particular service or device. If you use a provider outside of the network, you generally have to pay a greater share of or all of the cost of the services provided.

High Deductible Health Plan (HDHP): HDHPs have higher deductibles than other types of health plans, which means that someone covered under an HDHP must pay more out of pocket before the health plan will cover healthcare costs. (See below for the definition of a deductible.) However, these types of plans typically have lower monthly premiums than other types of plans, such as PPOs.

PRO TIP: “If your employer offers multiple medical plans, choosing an HDHP typically would be more cost effective, particularly if you are healthy,” Hilb Group Managing Director Paul Lambert said. “This is primarily due to lower employee contribution requirements. When you make a payroll contribution to a medical plan, that is spent money regardless of whether you use it or not. Typically, there is an annual contribution difference between the richer plan design and the HDHP plan that would be more than the cost of a couple of office visits and generic prescriptions that you might incur under a high deductible plan.”

Health Maintenance Organization (HMO): HMOs typically only cover expenses associated with providers who have contracts with the health plan, except in emergency situations. This generally means that if you obtain health care from an individual who is not “in-network” with your health plan and it’s not emergency, the health plan will not pay any part of the cost of your care. (See below for the definition of “in-network.”)

In addition to core health insurance plans, there are a few additional benefits you may also be eligible for.

Flexible Spending Account (FSA): An FSA is an arrangement through which your employer allows you to pay for many out-of-pocket medical expenses with tax-free dollars. Monies will be deducted from your pay and set aside before taxes are calculated on your earning. You can use FSA funds to pay for insurance copayments and deductibles, qualified prescription drugs, insulin and medical devices.

You can decide how much money to put in an FSA, up to a limit set by your employer. However, there’s a catch. If money is left at the end of the year in your FSA, your employer can offer one of two options (not both):

• You get two-and-a-half more months to spend the leftover money.
• You can carryover up to $500 to spend during the next plan year.

Note that you do not get the unspent money left in your account back if you do not spend it. The money is forfeited to your employer, who can then use the money for health plan expenses.

PRO TIP: “A flexible spending account is not insurance,” Krupa said. “It is a tax favored account that allows you to save money on a before tax basis that you can then use to cover your portion of the health care costs. By using a flexible spending account, you save on income taxes by deferring some money before your income taxes are calculated, and when you use that money towards the cost of health care, you do not owe taxes on that money.”

Health Reimbursement Arrangement (HRA): An HRA is an employer-funded account that reimburses employees for healthcare expenses not otherwise covered by a health plan up to a certain dollar limit. Employees do not contribute to HRAs. Only employer funds are used. Unlike FSAs, however, HRA amounts remaining at the end of a plan year may roll over to the next plan year.

Health Savings Account (HSA): An HSA is a type of savings account that allows you to put money into the account on a pre-tax basis. That means that you don’t pay taxes on the money you put into the account. However, you may only contribute money to an HSA if you are enrolled in an HDHP (see above).

PRO TIP: In many instances, an HDHP allows you to establish an HSA,” Lambert said. “This is a special bank account that you would own where you can set aside money that won’t be taxed when set it aside nor when you use it to pay for health-related expenses. The value of this account is that you can set money aside (up to $3,850 if you have single coverage in 2023) to be used for health-related expenses not only in the current year, but also in future years. If you don’t use it, it can grow (based on the investment options that you have) on a tax favored basis until you withdraw it to cover health related expenses.

PRO TIP: “HSAs are the only triple tax advantaged savings vehicle in the U.S.,” Krupa said. “You can contribute to the account with before-tax dollars (which reduces the amount of taxes you pay), you can invest the money in your account and are not taxed on any growth, and you can withdraw funds without paying taxes when you pay for qualified medical expenses. As with saving for retirement, the earlier you begin to save, through compound interest the more you will have at retirement. If you can save in an HSA and not pay for health care with those funds, they will grow and help cover your health care expenses when you retire.”

PRO TIP: “Another good thing about setting money aside into an HSA is that you can use those funds to pay for dental and vision care too,” Lambert said.

PRO TIP: “Often employers will provide a contribution to help fund an HSA, but even if they don’t you should open an account if you are eligible,” Lambert said.

Health insurance generates a lot a jargon, and it’s important to understand some key terms when deciding which health insurance coverage to select.

It’s clear that understanding certain terms can help you decide which type of health insurance to choose. For example, one type of health insurance coverage is called a High Deductible Health Plan, but other types of health insurance also have deductibles. Coverage is also subject to coinsurance and copayment requirements, and it’s important to know when you can change your coverage options. Some key terms to help you understand those concepts are included below.

Deductible: The amount you must pay out of your pocket before your health insurance begins to cover most healthcare costs. For example, if a plan has a $2,000 individual deductible, you must pay for the first $2,000 of your healthcare costs in a plan year with your own funds before health insurance begins to pay.

Coinsurance: Instead of a fixed cost, sometimes you pay a percentage of the cost of covered healthcare services. When you pay a percentage of the cost, that is called coinsurance. “Coinsurance is the percentage that you or your employer’s plan will pay for covered services,” Downs said. “For example, you go to the doctor after you’ve satisfied your deductible, and the visit costs $500. Assuming the plan’s coinsurance for in-network out-patient doctor’s visits is 80%, that means your plan will pay $400 to the doctor, and you will be responsible for the remaining 20%, or $100.”

PRO TIP: “The amounts you spend in coinsurance accumulate to satisfy your annual out-of-pocket maximum,” Downs said. “Typically, a plan defines its coinsurance percentage for ‘in-network’ (i.e., the providers or groups of providers the plan contracts with for lower costs) and ‘out-of-network’ (i.e., the providers with which the plan does not have a contract). The plan’s percentage is typically higher for in-network providers, so you benefit from using in-network providers. If the provider was out-of-network, the plan’s percentage might be 60%; the plan would only pay $300, and you would be responsible for $200.”

Copayment: A copayment is a fixed amount you pay for a covered healthcare service. For example, you may pay $20 each time you visit the doctor, or you may pay a $5 copayment for a covered generic prescription drug.

Out-of-Pocket Maximum (OPM): The OPM (also called an out-of-pocket limit) is the maximum amount you can be required to pay out of your own pocket for covered medical expenses in a single plan year. After you meet the OPM based on deductibles, copayments and coinsurance for in-network care and services, your employer-sponsored health plan pays 100% of the costs of covered benefits. However, the OPM does not include your monthly premium, any amounts you spend for health care not covered by the plan (e.g., cosmetic surgery), out-of-network care and services and costs over what the plan permits a provider to charge under the plan’s contract.

In-Network: In-network means that your employer-sponsored plan has a contract with the specific facility, provider or supplier to provide healthcare under a specific cost structure. Your plan must maintain a list of in-network providers and provide you with access to that list. Typically, plans provide internet access to the list of in-network providers, which you can search to find a facility, doctor or other provider. It’s important to make sure that your preferred providers are in-network when choosing a coverage option.

Out-of-Network: If a facility, provider or supplier does not have a contract with your health plan, it is considered to be out-of-network. That means that there’s no agreement with the plan capping the costs you may incur. Typically, plans still cover some of the costs incurred by out-of-network providers, but unless it’s for emergency care, you will have to pay a greater share of the cost (e.g., a higher coinsurance amount) for the care than if you used a provider who was in-network.

Plan Year: A plan year is a 12-month period of benefits coverage under a group health plan. This 12-month period may not be the same as the calendar year. Typically, employers allow employees to change their benefit elections (i.e., which benefits they want coverage under) for each plan year before the plan year begins. This is important if you are hired in the middle of a plan year because you will likely have an opportunity to select different benefits after a few months during what is called annual or open enrollment.

Annual/Open Enrollment: Annual enrollment (often called open enrollment) is a period (typically two or three weeks long) before the beginning of a new plan year during which employees can change their benefits. For example, if you enrolled in the PPO and now wish to change to the HDHP, that would be your opportunity to make a change. Otherwise, federal regulations impose strict rules about situations allowing employees to make changes to deductions from their paychecks related to paying for their health insurance benefits.

PRO TIP: “When you are first eligible for coverage under your employer’s medical plan, you are typically given 30 days or less to choose your coverage,” Lamber said. “If you miss that period, you may be unable to enroll until the company’s next open enrollment period. This could leave you exposed to not having insurance. The same is true at the annual open enrollment period. You need to follow the company’s guidelines as to when to enroll in coverage. Missing it could mean having to wait a year before you can get on to the plan again.”

PRO TIP: “A company’s open enrollment or annual enrollment period offers the best chance to enroll (or waive) each option that is available to you,” Downs said. “If you do not enroll during the company’s open or annual enrollment period, you must experience a life event to enroll midyear. Those midyear enrollment events are limited, and after an event, you are limited in what you can elect. For example, you may be able to enroll in medical insurance, but not life or disability insurance. Your best opportunity to see all the benefits available to you and make the best selection for you is during annual enrollment.”

PRO TIP: “There are certain exceptions that would allow you to cover yourself outside of the open enrollment period,” Lambert said. “This includes things like losing coverage under another plan (think school plan or your parent’s or spouse’s coverage), getting married or divorced and moving to a different zip code. For the complete list go to this website: https://www.healthcare.gov/coverage-outside-open-enrollment/special-enrollment-period/”

Summary of Benefits and Coverage (SBC): The SBC is intended to be an easy-to-read summary that lets you make apples-to-apples comparisons of costs and coverage between health plan options offered by your employer (and outside too). You can compare options based on price, benefits and other features that may be important to you. For example, the federal government requires SBCs to include sample cost calculations showing what your coverage would be if you have Type II Diabetes. You can use that information to compare costs between different plan options.

PRO TIP: “The SBC contains important details about your employer’s health plan options and information about the plan option’s deductible, out-of-pocket maximum, coinsurance and copays and provides detail on what is covered (or not covered) by the plan,” Downs said. “Many times, an employer will offer more than one health plan option. For instance, the employer may offer one plan option with a low deductible and another one with a high deductible. You will receive an SBC for each option for which you are eligible. If you are unsure about which option to choose, comparing the information available on the SBCs can help you make that decision.”

Summing up.

Deciding which health insurance coverage is best for you can be a challenge, but with some studying, you can pick the right insurance for you at this stage of your life. Note that your needs may change over time. For example, that HDHP may be good for now, but if you marry, start up a high-risk sport, develop a chronic illness or have children, it may not be the best coverage for you. Read the materials provided by your employer, chat with your Human Resources or Benefits representatives or your parents, and use the resources provided to learn about the benefits unique to your employment situation.