How Insurance Works:

A layperson's understanding written for other laypersons who are tired of not understanding insurance.

* Disclaimer: I am not an insurance expert. This is the most accurate information I have as a practitioner billing insurance and a patient who purchases insurance as of April 2025. I am not liable for any outcomes based on your use of this information. Do your own research. Make your own decisions. I am not liable for any shenanigans enacted by insurance companies.

Contracts:

• Patient Contracts: You have a contract with your insurance company, regardless of whether you have insurance through your employer, the public exchange, the government, or a health share program like Medishare. If you have insurance through your employer, you are also bound by the contracts between your employer and your insurance companies. That means your employer may have access to your medical information and may be required to give information about you to your insurance company. Your employer has the power prior to offering you insurance coverage to decide which plans they will offer their employees and can elect to cover or deny some individual services. Any insurance company (whether through your employer, the exchange, the government, or alternate coverage programs) that has contracts with the government may be bound by those contracts to give the government some of or all of your medical information. If you have insurance through the government, the government has access to and decision-making power over your medical care.

• Provider Contracts: Contracts are dictated by the insurance companies. Your provider has very little control or power regarding what a contract states. Thus, your providers are bound to follow any and all rules dictated by the contract they sign. Some contracts include clauses limiting care or requiring disclosure of your medical information to justify billing for services. For example, some insurance companies limit (or attempt to limit via diagnosis requirements) therapy sessions to 45 minutes or less. Contracts often include non-disclosure clauses preventing providers from discussing with anyone outside of the company they work for their rates of reimbursement. Such non-disclosure clauses prevent providers from being able to negotiate higher rates with other insurance companies. This is one way insurance companies attempt to control their competition. Contracts may also include clauses about what information about your care must be disclosed to the insurance company. Every single insurance company requires disclosure of your diagnosis (no diagnosis means no pay), services rendered, dates of service, location of service, and provider NPI. So, if you have used your insurance benefits, you have a diagnosis. If any provider has failed to provide you with your diagnosis, they have not provided you informed consent.

• Insurance Company Contracts: Your insurance company also has contracts with 3rd party organizations and companies. This means that they may contract out some of their business to 3rd parties. For example, some insurance companies use 3rd parties to audit patient medical files. That means your medical information not only goes to your insurance company but also whatever company they have contracted to do the audit for them. Providers have little power to refuse to provide your medical information to 3rd parties working on behalf of your insurance company because of the contract you signed with your insurance company and the provider contract requirements.

Networks:

• In-network: Using your insurance benefits with “participating” providers who have a contract with your insurance company, otherwise known as being credentialed. Credentialing in the professional world means to have a degree, license, or certification. In the insurance world, being credentialed means a provider has a contract with an insurance company.

• Out of Network (OON): Using your insurance benefits for services and/or providers that are not in network, in other words Out of Network (OON). OON services are healthcare services not included in your contract with the insurance company. OON providers have no contracts with your insurance company and are thus not bound by anything in insurance company contracts. Out of network providers are also not bound by any contracts your insurance company signs with any 3rd party or the government. Out of network providers provide you the information you request to seek reimbursement. Your contract with your insurance company dictates what information you must provide the insurance company for reimbursement. In addition, your contract with your insurance company may permit your insurance company to audit their reimbursements to you, in which case you would be required to provide additional information the insurance company (or a 3rd party they have contracted to do the audit) demands. Both in network and OON providers are bound by federal and state laws regarding insurance fraud, scope of practice, and quality of care.

Costs:

• Negotiated Rate (NR): a discounted rate insurance companies establish for services that is lower than the market rate for those services. While the name implies there is a process of negotiation, there is typically no consultation with your healthcare providers. Your insurance company does a “market analysis” to determine the lowest rate they can possibly justify (in some cases a rate far below what is justifiable) paying your healthcare provider for a specific service. Providers can appeal for a higher rate, but there is no conversation or explanation provided by the insurance companies regarding their determination of rates. Even when requested by your provider, your insurance company can refuse to provide the market analysis they did to determine their rates. Rates are often not specific to any individual provider. Thus, providers who have gone above and beyond to provide top-notch, high-quality care are not recognized as providing a higher level of care. Some insurance companies have “preferred providers” within their in-network roster of participating providers. Those “preferred providers” have additional requirements to and benefits from the insurance company. In most cases, preferred providers are included within PPO plans. When using OON benefits, your healthcare providers are not bound by the rates established by your insurance company. Your reimbursement amount is impacted by the rates they establish.

Out of Pocket Costs: Things you pay for out of your pocket.

• Premiums (P): The amount you pay monthly for the privilege of using the insurance. Premiums are not service dependent. You pay premiums whether or not you ever use the insurance. You do not pay additional premiums for deciding to use OON services or OON providers. They are either covered for reimbursement or not. However, a plan that reimburses for OON services or providers may charge higher premiums. If you are using insurance through your employer, your premium is often taken out of your paycheck. Some employers cover part or all of the costs of premiums.

Cost Share Costs: fees that are service based of which your insurance covers a portion.

• Deductible (Ded): Your deductible is the amount you must pay for services rendered prior to insurance covering any of the cost, unless the service is deemed a copay applicable service (which will be explained next). In-network providers may only charge the negotiated rate set by your insurance company. OON providers are not bound by negotiated rates for services. Your deductible may be higher when using OON benefits. The reason for the increased deductible when using OON benefits is to encourage you to use in network providers. In network providers have very little power to determine what they get paid. Thus, by encouraging patients to use in network providers, insurance companies increase their power to determine rates for services. In essence, they have more control over the market rate of services.

• Copay (CP): A set amount your insurance company requires you to pay for specific services. Often, copays are for frequently used benefits like appointments with your primary care doctor, chiropractor, therapist, emergency room, urgent care, etc. Copays are often much lower rates for services than the negotiated rate. You could have a copay that is not tied to your deductible at all. In that case, copays don’t count towards your deductible at all. Copays may apply towards your deductible and be charged until you meet your deductible, in which case your coinsurance (discussed next) kicks in. Your copay could not be tied to coinsurance at all, and you may have to pay your copay until you meet your out-of-pocket maximum (discussed soon). Your copay could not be tied to your deductible, coinsurance, or out-of-pocket maximum. In that case you would pay your copay for designated services for the entire length of the contract. An OON provider is not bound by copay amounts. If you have a copay and are using OON benefits, the insurance company will determine your reimbursement rate (negotiated rate) minus your copay if a copay would apply to that service with an in-network provider.

• Coinsurance (COIN): A percentage of the negotiated rate of a service. Insurance companies may have a 90/10, 80/20, 70/30, or 60/40 split, with you paying the lesser percentage. For example, if your insurance has a coinsurance split of 90/10 and your negotiated rate for a service is $120, you pay $12 and insurance pays the remaining $108. Some healthcare plans utilize copays and coinsurance. In this case, a few different scenarios could apply. Some designated services established by your insurance company may only require a copay and coinsurance never applies. You could have a copay until you meet your deductible and then your coinsurance kicks in until you meet your out-of-pocket maximum. You could have a plan that requires both a copay and as well as a coinsurance amount for services until you meet your deductible or out-of-pocket maximum. Insurance companies often require patients pay a higher percentage for OON services and/or providers.

• Out-of-Pocket Maximum (OOPM): This can be an annual or lifetime cap of how much you have to pay out of pocket for medical services. Premiums do not apply toward your OOPM. If you have an annual OOPM, you will be required to pay deductibles, copays, and or coinsurance until you reach your OOPM cap. The tally towards your OOPM cap restarts at the beginning of each new contract. A lifetime OOPM is a cap that is attached to a specific plan. As long as you maintain that plan, which may require signing a new contract at a specific length of contract limit, you would not be required to pay deductibles, copays, or coinsurance once you have hit your OOPM. Your tally never starts over once you have hit the OOPM as long as you maintain that plan. Insurance companies often have a separate and higher OOPM for OON services and/or providers.

  • Short-hand formulas to better understand possible was deductibles, copays, and coinsurances can (CP) apply:

    • CP < NR

    • CP until DED

    • CP until OOPM

    • CP for length of contract

    • COIN = % of NR

    • COIN until DED

    • COIN until OOPM

    • COIN for length of contract

    • CP + COIN until DED

    • CP + COIN until OOPM

    • CP until DED + COIN until OOPM= CP + COIN, CP ends at DED, COIN continues until OOPM

    • COIN until DED + CP until OOPM = COIN + CP, COIN ends at DED, CP continues until OOPM

    • CP only until DED, then COIN only until OOPM

Types of Plans:

Managed Care:

• Preferred Provider Organization (PPO): PPO plans are insurance plans with a network of specific participating providers (Preferred Providers) credentialed with your insurance company. PPO plans often have higher premiums, a larger group of providers to choose from, don’t require referrals for specialty care, and cover more services compared to other plans. PPOs will also often reimburse for services provided by OON providers. PPOs typically have an OOPM.

• Health Maintenance Organization (HMO): HMO plans typically offer lower premiums, deductibles, and copays than other insurance companies. They typically limit your choice of providers and require referrals from your primary care physician to have services provided by a specialist covered by your insurance. HMOs often require coverage to be confirmed prior to utilization of services. HMOs focus on preventative care often covering the entire cost of preventative services like annual wellness visits. HMOs may not reimburse for services provided by OON providers. HMOs typically have an OOPM.

  • Staff Model HMOs: Providers are employed directly by the HMO and only see patients enrolled in the HMO.

  • Group Model: Providers have contracts with the HMO but are not employed by the HMO.

  • Network Model: HMO is contracted with multiple providers and provider groups. Providers are not employed by the HMO and may see patients with other insurance or no insurance as well.

• Exclusive Provider Organizations (EPO): Similar to PPOs in that they have a larger group of participating providers to choose from, don’t require referrals within their network of participating providers, and cover more services than other types of plans. However, EPOs do not typically reimburse for OON services or services provided by OON providers unless it is a true emergency.

• High-Deductible Health Plans (HDHP): Act like PPOS plans with higher deductibles but lower monthly premiums. They are typically paired with HSAs. They typically have a OOPM much higher than typical PPOs and HMOs.

• Point of Service (POS): Plans that combine the benefits of HMOs and PPOs by allowing for coverage for in-network and OON providers. You must choose a PCP to make referrals to specialists. Copayments are often lower and there are typically no deductibles for in-network services. You will pay more for OON providers and/or services.

Spending Accounts:

• Health Reimbursement Account (HRA): An account set up by your employer to reimburse you for qualified medical services up to a limit. You cannot contribute to HRAs. Funds may or may not roll over to the next year.

• Health Savings Account (HSA): Accounts that allow you to put money from our income aside prior to taxes to cover the cost of medical services. Some employers offer (and may even contribute) to HSA funds on an annual, quarterly, or monthly basis, or per pay period. HSAs are most often offered by employers when combined with HDHPs. You can contribute to HSAs, and you can obtain an HSA without an employer. Funds roll over to the next year and are never forfeited.

• Flexible Savings Account (FSA): Accounts sponsored by an employer that allow you to put money from income aside prior to taxes to cover costs of medical services. Some employers contribute to FSA funds. Funds are often forfeited at the end of the year, with some employers offering a grace period for a limited amount of funds to roll over.

Traditional Insurance:

• Indemnity Plans: The most flexible insurance plans as there is no provider off limits, but you pay more upfront for services than other plans. You pay a fee for services and are reimbursed by the insurance company for a portion of the cost. Deductibles typically must be met prior to reimbursement by the insurance company.

Government Health Insurance:

• Medicare: A federal government program that covers the cost of services for people with certain disabilities or who are 65 and older. The government determines what services and providers will be covered. Determination regarding what services will be covered can change and be dependent on a case-by-case basis. Providers must meet legal requirements beyond that of managed care plans and be credentialed with the government to be an in-network provider.

• Medicaid: A government program that works in cooperation between the federal and state governments that covers the cost of services for low-income individuals and families. The government determines what services and providers will be covered. Determination regarding what services will be covered can change and be dependent on a case-by-case basis. Providers must meet legal requirements beyond that of managed care plans and be credentialed with the government to be an in-network provider.

• Children’s Health Insurance Program (CHIP): A state-run government program that covers the cost of services for children in families who do not qualify for Medicaid. Each state has their own requirements that determine eligibility and coverage.

• Medicare Advantage: An insurance plan offered by the government but is considered private care in that it is an elective plan with additional contracts, costs, and coverage above and beyond traditional Medicare.

Healthcare Marketplace Plans:

• Some plans are offered by various private companies in compliance with government regulations based on laws that do not apply to private insurance.

• Some plans are not just regulated by the government but also offered through the government and may be subject to additional restrictions.

• Plans offered to individuals who do not have access to insurance through an employer, the government via income-based assistance, or a cost-share program.

• You apply for access to plans through a government website.

• Plans are heavily regulated by the government.

• Rates for services are regulated to match Medicare or Medicaid rates.

• You may qualify for a premium tax credit to lower premiums, deductibles, copayments, and coinsurance.

• Cover specific services predetermined by the government such as prescriptions, ambulatory, emergency, hospitalization, labs, mental healthcare, and substance use disorder care, birth control, breastfeeding, maternity, pregnancy, newborn, rehabilitation, chronic disease management, pediatric add-ons like oral and vision, and fully covered preventative and wellness services.

• Some plans offer additional services such as dental or vision for adults, weight management, diabetes care, abortion, and pain management.

• Deductibles, copays, coinsurance, and OOPM still apply.

Health Share Plans:

• Plans offered by private companies that pool funds by members' monthly fees/contributions (similar to a monthly premium) to cover the costs of members' healthcare medical services.

• Coverage may not begin until a member has contributed a predetermined amount to the overall cost share funds, like a deductible.

• There may be limits on the amount covered of any particular service which require members to pay any leftover amounts, like a copay or coinsurance.

• Services covered are determined by the company offering the plan.

• Plans are often offered by companies, organizations, or groups with shared ethics, values, and morals. Services may not be covered if they are in conflict with the ethics, values, and morals of the groups who have come together to offer the plan.

• Plans are not regulated like insurance plans are by the government.