How to make sense of variation in health care pricing

Understanding premiums and how to keep them downSharing medical expenses with your insurerControlling what you spend on medical expensesSetting aside pretax dollars for health care expensesThinking ahead with reasonable and customary fees

This post explains how your money is spent in a health insurance plan and shows you various ways to limit some of your health insurance costs.

Any reference on this website to charges that are applied to a deductible or reimbursed by an insurance plan pertain to covered charges only — expenses that are specifically included in your health insurance plan. Covered charges generally don’t include expenses for nonmedical items related to an illness or injury or for items that the plan explicitly excludes. See your plan’s policy, contract, and/or plan document for what your plan covers.

A premium is what you or your employer pays on a monthly, biweekly, or quarterly basis for the coverage that a health insurance plan provides. The first premium you or your employer pays indicates that you accept the contract for health insurance coverage, and your coverage starts. The rest of your premiums keep the coverage in effect.

Your premium stays the same, whether you use the plan or not.

Insurance companies normally calculate group premiums a year at a time. Insurers increase or decrease premiums from time to time, basing the changes on how the group used a plan’s services, as well as on related administrative costs incurred during a previous period.

When you’re checking out an insurance plan, ask about any rate increases the plan imposed over the past five years and whether these increases applied to all of a company’s plans or just to certain plans.

You can lower your premiums in several ways. One way is to accept a higher deductible. Another way is to carefully choose the length of your hospital elimination period (the number of days you have to be hospitalized before the plan pays benefits).

Generally, the larger the group, the lower the cost. A large group contract means a higher volume of business to an insurer. Insurers can often administer contracts for large groups at a lower cost than contracts for individual policies because they can spread out the risk of providing coverage for one or more high-risk members. Insurance companies determine how much to charge for a group by looking at the claims experience of the entire group during an earlier period. They then charge an average, fixed premium for each group member for the next period of coverage.

With fewer members, small groups have less ability to dis­tribute risk. If the insurer covers a small group, the expense of carrying just one high-risk individual may outweigh the cost of carrying the remaining low-risk members. To protect themselves, insurers may charge higher premiums and limit coverage for the group.

Individual policy (usually a fee-for-service plan) premiums are often higher than a group policy because individuals don’t have members among whom to spread the risk. Insurance companies calculate premiums for individual policies based on traits, such as overall health, occupation, gender, and age, of the applicant (and family members)

Table 2-1 shows a general, relative premium cost for various types of plans. Actual costs may vary greatly.

Table 2-1: Relative Cost of Premiums

(Highest to Lowest)

COBRA (short-term coverage only)

Individual plan (fee-for-service)

Small group PPO

Small group HMO

Large group PPO

Large group HMO

A copayment is a fixed dollar amount that you pay each time you use a medical service — perhaps $50 for a hospital visit, $25 for an emergency room treatment, or $5 or $10 for a doctor’s visit. Health plans may also require copayments for prescriptions. The amounts of the copayments vary from plan to plan, so understanding what your plan charges is critical. (Some plans use the terms copayment and coinsurance inter­changeably.)

A deductible is the amount of covered charges you must pay before the plan begins to pay benefits. Expenses applied toward the deductible are eligible only if they are expenses that the plan covers. Typically, a new deductible starts over at the beginning of each calendar year.

Some plans impose a per cause deductible, where you must meet a separate deductible for each condition. Others have more than one deductible — one for general medical expenses, another for inpatient hospital expenses, and another for prescriptions.

Coinsurance is a fixed percentage that you pay after you pay the deductible. An 80/20 coinsurance rate, for example, means that the insurance company pays 80 percent of the covered charges, and you pay 20 percent, after you’ve paid your deductible in full. HMOs usually don’t have large deductibles or coinsurance.

Deductibles and coinsurance are a way to help keep the pre­miums for major medical policies affordable. Generally, pre­miums decrease as deductibles increase.

You can save money by keeping your deductible as large as possible, perhaps as high as the amount of medical costs you can afford in a year.

In a large family situation, health insurance plans may not require that every person meet his or her own deductible. Instead, health insurance plans usually require that only two or three family members must each meet a calendar-year deductible.

Usually members of a small family — two or three people ­ must each meet the entire individual deductible. Check for your own plan’s specific provision.

Another alternative is a family deductible, or aggregate maxi­mum, which is a way for a family to meet a deductible with­out each member having to meet the full deductible individually. Here’s how it works: Suppose the plan’s deductible is $500. One family member must meet the $500 deductible all by himself or herself. The insurance company begins to pay benefits for this person. After the first person meets the $500 deductible, you can combine the expenses of the remaining family members to meet a second $500 deductible. The insurance then begins to pays benefits for the rest of the family.

Some insurance plans have provisions that limit the amount of money you pay for medical costs during the course of a year. Terminology for these provisions may vary from plan to plan, but you may see them called cap, benefit limit, stop-loss, catastrophic limit, or maximum out-of-pocket. Look for these provisions in the plans you consider. Be sure that you clearly understand how these provisions set your dollar lim­its, as well as the insurance company’s dollar limits.

Out-of-pocket refers to the money that you, the insured, pay for deductibles and coinsurance. If you or a covered depend­ent has a serious illness or injury, hospital expenses can eas­ily run into the thousands of dollars. One way insurance companies help you contain such potential costs is to limit your responsibility for them with an out-of-pocket maximum provision, sometimes referred to as a stop-loss provision or a catastrophic limit.

A maximum out-of-pocket provision sets a limit for the amount of your deductible plus coinsurance that you pay for a specific period — usually a year. After you reach this limit, the insurer pays 100 percent of the remaining covered charges during that period.

The lower your out-of-pocket limit, the higher the premium may be.

If you plan on purchasing family coverage, check your pol­icy to make sure that it has an annual, aggregate, stop-loss amount.

You may face separate limits for both medical-surgical expenses and inpatient care for mental conditions.

Some health insurance policies set a lifetime limit for med­ical care expenses, which is the maximum amount an insurer will pay during the your lifetime. A good lifetime maximum is $5 million. Other plans have no lifetime limit.

As a rule, the higher the lifetime maximum, the better. As usual, you pay for this benefit increase through your premiums.