Health Insurance Terminology Explained

So you have health insurance. But do you know what you’re actually paying for? If the words premium, deductible, coinsurance, and co-pay sound like gibberish, keep scrolling. I’ll break down the most common health insurance terminology you’ll come across—without the jargon.

Trying to understand your health plan can be as painful as hemorrhoids

UNDERSTANDING THE COSTS BEHIND YOUR HEALTH PLAN

Before diving into the alphabet soup of plan types, it helps to understand the basic costs that make up any health insurance plan. These are the numbers you’ll see most often—and the ones that most affect your wallet.

WHAT IS AN INSURANCE PREMIUM?

Your premium is what you pay each month just to have medical insurance—basically, your membership fee. As mentioned in my previous post, if you get your insurance through your employer, they usually cover a large share of your premium (often 70%-80%). You pay the rest through your paycheck.

WHAT IS A CO-PAY?

When you actually use your insurance—say, for a doctor visit—you’ll usually pay a small fixed amount at the time of service. That’s your co-pay.

Co-pays vary by service: maybe $25 for urgent care and $50 to see a specialist. Not all visits to the doctor require co-pays, though. Preventive services like annual checkups or vaccines are often covered 100%, meaning you pay nothing out of pocket. Co-pay amounts would be listed in your plan details or Summary of Benefits.

WHAT IS A HEALTH INSURANCE DEDUCTIBLE?

Your deductible is the amount you pay out of pocket per plan year before insurance starts to share costs for certain services, such as MRIs, CT scans, or surgery. Think of it as your yearly “threshold” before coverage kicks in.

For example, if you have a $2,000 deductible, you would pay the first $2,000 of medical expenses yourself. After that, your insurance starts to help pay for covered services.

Most plans have both individual and family deductibles. The individual deductible is what each person on the plan is responsible for, while family deductibles are shared across all members. Once the family deductible is met, coverage kicks in for everyone—even if some haven’t met their individual deductibles yet.

For example, let’s say you, your spouse, and child are on a plan that has a $2,000 individual deductible and a $4,000 family deductible. Your spouse incurs $2,000 in medical expenses, meeting her individual deductible. This means insurance would start covering costs for her. Next, your child also incurs $2,000 in medical expenses. Since the family $4,000 deductible has been met, insurance kicks in immediately for everyone, including you, even if you haven’t met your individual deductible yet.

WHAT IS COINSURANCE?

After you’ve met your deductible, insurance won’t necessarily start covering 100% of costs. Instead, many plans split the costs with you because, you know, those dastardly insurance companies think sharing is caring (eye roll). This cost-sharing percentage is called coinsurance.

For example, let’s say you receive a $10,000 bill for a hospital stay and your coinsurance is 20%. You would be responsible for paying $2,000, and your insurance would pay the remainder.

WHAT IS AN OUT-OF-POCKET MAXIMUM?

Here’s the good news: there is a cap on how much you’ll ever pay in a plan year. Your copays, deductibles, and coinsurance all accumulate toward your out-of-pocket maximum. Once you hit your out-of-pocket maximum, insurance pays 100% of covered costs for the rest of the year.

WHAT DOES IN-NETWORK AND OUT-OF-NETWORK REFER TO?

A doctor, hospital, or facility that is in-network is one that is contracted with the insurance company to provide service at negotiated rates. In-network providers will have lower costs. Out-of-network providers are not contracted with the benefits provider and will have higher costs.

INSURANCE PLAN TYPES | PPO vs. HMO vs. EPO vs. POS

Now that you know what the key costs mean, let’s look at the four main types of health plans and how they affect your wallet and flexibility. You may have heard of PPO and HMO plans, but there are also EPO and POS plans. Each plan has a different level of costs and flexibility in seeing doctors.

PPO (Preferred Provider Organization) plans tend to cost the most because they offer the most flexibility. You can see any provider you want without a referral. You don’t need to select a primary care physician (PCP). If you want to see a dermatologist, you can go straight to one without seeing a PCP first. You can choose doctors who are in-network or out-of-network; however, you’ll pay more with out-of-network providers.

HMO (Health Maintenance Organization) plans are on the opposite end of the spectrum from PPO plans. HMO plans tend to have the lowest monthly premiums but the least amount of flexibility. You can only see in-network providers, except in the case of emergencies. There is no out-of-network coverage. Additionally, you’ll need to choose a PCP, who will be your main health care contact. Your PCP will provide you with referrals before you see any specialist.

EPO (Exclusive Provider Organization) plans cost more than an HMO but less than a PPO. You can think of EPOs as a more flexible version of HMOs. Similar to an HMOs, you must use in-network providers, except in the case of emergencies. There is no out-of-network coverage. EPOs, however, have larger networks of providers, and usually, you can see any doctor you want as long as they’re in-network. Many EPO plans don’t require you to choose a PCP.

POS (Point of Service) plans are a sort of hybrid of PPOs and HMOs. Referrals from a PCP are usually required to see a specialist, just like an HMO. But similar to PPOs, out-of-network provider care is covered, albeit with higher out-of-pocket costs. Monthly premiums for POS plans are usually more than an EPO but less than a PPO.

WHAT IS AN EXPLANATION OF BENEFITS (EOB)?

After you receive medical service, you’ll receive an Explanation of Benefits (EOB) in the mail. Although it may look like a bill, this is different from the bill you’ll be sent by your medical provider.

An EOB details the services performed and the insurance coverage for each. Somewhere at the bottom, it will list how that amount you may be responsible for.

WHAT IS PRE-AUTHORIZATION IN HEALTHCARE?

To control costs, insurance companies may request healthcare providers to get approval from them before administering certain procedures or drugs. Make sure to check with your doctor or insurance company to find out if your medical procedure needs pre-authorization.

My wife was once about to be wheeled into surgery when her surgeon was told her procedure wasn’t pre-authorized. Everything came to an immediate halt. She had to wait an hour while pre-authorization was rushed through. Her doctor was furious, but his hands were tied.

It’s scary to think that the doctor who knows your medical situation best doesn’t have the final say in your care.

WHAT IS A QUALIFYING LIFE EVENT FOR HEALTH INSURANCE?

It’s very important to understand what a qualifying life event (QLE) is. Many people mistakenly assume you can make changes to your insurance plan, such as adding a dependent, at any time. But actually, by law, outside of the annual open enrollment period, the only time you can make changes to a plan is after a QLE.

Qualifying life events are big life-changing situations that could be planned or unexpected. These include, but are not limited to, loss of health insurance coverage, change of marriage status, the birth or adoption of a child, and changes in residence. CLICK HERE for a full list of QLEs.

A valid QLE triggers a special enrollment period, allowing you to make changes to your insurance plan outside of the open enrollment period. That said, it’s important to know you have a limited window after the QLE to make those changes. Depending on the QLE, you may have 30 or 60 days to make changes. Insurance plans through an employer typically have a 30-day deadline. If you miss this window, you’ll need to wait until open enrollment to make any changes.

QUICK CARE vs. URGENT CARE vs. EMERGENCY ROOM

If you’re sick or hurt, do you know where to go? Knowing the difference between quick care, urgent care, and emergency care can save you hundreds of dollars.

Quick care or minute clinics focus on minor illnesses and injuries, such as a cold, rash, pink eye, and sprains. You’ll find these inside some pharmacies, big-box stores, or supermarkets. They can also be standalones.

Urgent care clinics also treat non-emergencies and offer a wider range of services than quick care. These include physical exams, diagnostic testing, and treatment for minor fractures and stitches. Some may also offer X-rays. If you’re ever unsure whether to see a quick care or urgent care specialist, choose urgent care.

Doc, I've got a piercing headache!

Emergency rooms should be saved for emergencies only. Unless you are in danger of losing your life or a limb, go to a quick care or urgent care clinic. If you go to an emergency room without a life-threatening condition, insurance may cover only a small portion—or none at all—leaving you with a very hefty bill.

I once had an employee who went to the emergency room for a bad cold. He ended up having to pay $1,000. Had he gone to quick care, he would’ve just paid a small co-pay.

There is also a myth that going to an emergency room will get you to see a doctor quicker than quick care or urgent care. This is complete bullshit. As you’re getting checked in, once they figure out that what you have is not an emergency, they’ll make you wait—sometimes hours—as they attend to real emergencies. Plus, you’ll still get hit with a huge medical bill.

BE WARY OF STANDALONE EMERGENCY ROOMS

If you really need to go to an emergency room, avoid stand-alone emergency rooms that are not attached to a hospital. Many are not contracted with insurance companies and are just glorified urgent care. They may end up just stabilizing you before putting you in an ambulance to the nearest emergency room.

FINAL THOUGHTS

Health care is one of the most expensive things we’ll pay for, yet few people truly understand the plans they buy. Most never get clear explanations of what any of the plan’s terms mean—they just make decisions blindly and hope for the best.

Understanding basic health insurance terminology helps you choose a plan that actually fits your needs and avoid costly mistakes. And next someone complains about how nobody teaches this stuff, you can be the one to explain it—without needing a translator.

If you found this post helpful, let me know in the comments below.

See you at the finish line!

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Disclaimer: I’m not a licensed financial professional. This blog shares my personal experiences and opinions around money, investing, and early retirement. It’s for informational and educational purposes only—not financial, legal, or tax advice. Always do your own research or consult with a qualified professional before making any financial decisions.