6 Health Insurance Terms You Need to Know When Open Enrollment Begins

Many people will soon be choosing their health insurance plans for 2024: November is a common workplace open enrollment month, and the public market opens on November 1.

But choosing a health plan can be difficult.

In fact, a 2017 study found that many people lose money due to suboptimal choices: 61 percent chose the wrong plan, costing them an average of $372 per year. The report, compiled by economists from Carnegie Mellon University and the Wisconsin School of Business, examines the choices made by almost 24,000 workers at a US firm.

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Health plans have many moving parts, such as premiums and deductibles. Each has financial implications for buyers.

“It’s confusing and people have no idea how much they could potentially have to pay,” Carolyn McClanahan, a certified financial planner and founder of Jacksonville, Fla.-based Life Planning Partners, previously told CNBC. McClanahan is also a physician and member of CNBC’s FA Council.

Getting it wrong can be costly; consumers are generally locked into their health insurance for one year, with limited exceptions.

Here’s a guide to the main cost components of health insurance and how they can affect your bill.

A premium is the amount you pay an insurer each month to participate in a health plan.

It’s perhaps the most transparent and easy-to-understand cost component of a health plan—the equivalent of a sticker price.

The average premium paid by an individual worker was $1,401 a year — or about $117 a month — in 2023, according to a study of employer-sponsored health insurance by the nonprofit Kaiser Family Foundation. Families pay an average of $6,575 a year, or $548 a month.

Your monthly payment may be higher or lower depending on the type of plan you choose, the size of your employer, your geographic location and other factors.

Low premiums don’t necessarily mean good value. You could be on the hook for a big bill later if you go to the doctor or pay for a procedure, depending on the plan.

“When you’re shopping for health insurance, people naturally shop like they do most products — based on price,” Karen Politz, co-director of KFF’s Patient and Consumer Protection Program, previously told CNBC.

“If you’re shopping for tennis shoes or rice, you know what you’re getting” for the price, she said. “But people really shouldn’t just shop around because health insurance is not a commodity.

“Plans can be quite different” from each other, she added.

Many workers also owe a copay — a flat dollar fee — when they see a doctor. “Co-payment” is a form of cost-sharing with health insurers.

The average patient pays $26 for each primary care physician visit and $44 for a specialty physician visit, according to KFF.

Patients may owe additional cost sharing such as coinsurance, a percentage of health care costs that the consumer shares with the insurer. This cost sharing usually begins after you’ve paid your annual deductible (a concept explained in more detail below).

The average coinsurance rate for consumers is 19 percent for primary care and 20 percent for specialty care, according to KFF data. (The insurer will pay the remaining 81% and 80% of the bill, respectively.)

As an example: If a specialty service costs $1,000, the average patient will pay 20% — or $200 — and the insurer will pay the rest.

Copayments and coinsurance may vary by service, with separate classifications for office visits, hospitalizations or prescription drugs, according to KFF. Rates and coverage may also differ for in-network and out-of-network providers.

Deductibles are another common form of cost sharing.

This is the annual amount the consumer must pay out of pocket before the health insurer starts paying for the services.

Ninety percent of workers with single coverage have a deductible in 2023, according to KFF. Their average total annual deductible is $1,735.

Deductibles are associated with other forms of cost sharing.

Here’s an example based on a $1,000 hospital bill. A patient with a $500 deductible pays the first $500 out of pocket. This patient also has a 20% coinsurance and therefore pays another $100 (or 20% of the remaining $500 tab). This person would pay a total of $600 out of pocket for this hospital visit.

Health plans may have more than one deductible — perhaps one for general medical care and another for pharmacy benefits, for example, Pollitz said.

Family plans can also estimate deductibles in two ways: by combining the total annual out-of-pocket costs of all family members and/or by subjecting each family member to a separate annual deductible before the plan covers that member’s costs.

The average deductible can vary widely depending on the type of plan: $1,281 in a Preferred Provider Organization (PPO) plan; $1,200 in a health maintenance organization (HMO) plan; $1,783 in Point of Service (POS) plan; and $2,611 in a high-deductible health plan, according to KFF’s single-coverage data. (Details of plan types are further detailed below.)

Most people also have an “out of pocket maximum”.

This is a limit on the total cost sharing consumers pay during the year — including copayments, coinsurance and deductibles.

“The insurer can’t ask you to pay more at the doctor or the pharmacy or charge you more deductibles,” Politz said. “It is; you have given your pound of flesh.’

About 99 percent of workers with single coverage are in an out-of-pocket maximum plan in 2023, according to KFF.

The range can be large. For example, 13 percent of workers with single coverage have an out-of-pocket maximum of less than $2,000, but 21 percent have an out-of-pocket maximum of $6,000 or more, according to KFF data.

Out-of-pocket maximums for health plans purchased through the Affordable Care Act marketplace cannot exceed $9,100 for individuals or $18,200 for a family in 2023.

Health insurers treat services and costs differently depending on their “network.”

“In network” refers to doctors and other health care providers who are part of the insurer’s preferred network. Insurers sign contracts and negotiate prices with these network providers. This is not the case with “out-of-network” providers.

Here’s why it matters: Deductibles and out-of-pocket maximums are much higher when consumers seek care outside their insurer’s network — typically about double the in-network amount, McClanahan said.

In addition, sometimes there is no cap at all on the annual cost of out-of-network care.

“Health insurance is really about the network,” Politz said.

“Your financial liability for going off the grid can be really quite dramatic,” she added. “This can expose you to serious medical bills.”

Some plan categories do not allow coverage for out-of-network services, with limited exceptions.

For example, HMO plans are among the least expensive types of insurance, according to Aetna. Among the compromises: Plans require consumers to choose in-network doctors and require referrals from a primary care physician before seeing a specialist.

Similarly, EPO plans also require in-network services for insurance coverage, but typically offer more choices than HMOs.

POS plans require referrals to see a specialist, but allow some out-of-network coverage. PPO plans typically carry higher premiums but have more flexibility, allowing for out-of-network visits and specialists without a referral.

“Cheaper plans have weaker networks,” McClanahan said. “If you don’t like the doctors, you may not get a good selection and have to go out of network.”

Budget is among the most important considerations, Winnie Sun, co-founder and managing director of Sun Group Wealth Partners in Irvine, California, previously told CNBC. She is also a member of CNBC’s FA Council.

For example, would you struggle to pay a $1,000 medical bill if you needed health care? If so, a health plan with a higher monthly premium and lower deductible may be your best bet, Sun said.

Similarly, older Americans or those who need a lot of health care each year — or who expect to have an expensive procedure in the next year — may do well to choose a plan with a higher monthly premium but better co-pays of expenses.

Healthy people, who typically don’t increase their health care costs each year, may find it cheaper overall to have a high-deductible plan, McClanahan said.

Consumers who enroll in a high-deductible plan should use their monthly premium savings to fund a health savings account, advisers said. HSAs are available to consumers who enroll in a high-deductible plan.

“Understand first dollars and potential last dollars when choosing your insurance,” McClanahan said, referring to upfront premiums and back-end cost sharing.

Each health plan has a “summary of benefits and coverage” that presents key cost-sharing information and plan details the same across all health insurance plans, Politz said.

“I would urge people to spend some time with the SBC,” she said. “Don’t wait an hour before the deadline to take a look. The stakes are high.”

Also, if you currently use a doctor or network of providers that you like, make sure those providers are covered by your new insurance plan if you intend to switch, McClanahan said. You can consult an online directory of an insurer’s network or call your doctor or provider to ask if they accept your new insurance.

The same rationale applies to prescription drugs, Sun said: Will the cost of your current prescriptions change under a new health plan?