Basic Health Insurance Terminology

Many of the terms you come across when dealing with health insurance are unfamiliar. While these terms can be confusing, the better you understand them, the better prepared you will be to successfully acquire coverage and access to the right treatments for you. “Speaking the language” also helps avoid misunderstandings and minimize extra steps or going back and forth with the insurance company. Here are some key insurance terms and definitions. Understanding the meanings of these concepts will help equip you to better address any barriers and make smart decisions that will benefit you and your family.

The definitions in this section were developed by the Juvenile Diabetes Research Foundation (JDRF) based on various insurance references and represent common or general use of the term.

Pharmacy Benefit Manager

pharmacy benefits manager is an outside manager of prescription drug programs. The pharmacy benefits manager’s role is to negotiate and manage prescription services for their clients, including commercial health insurance plans, self-insured employer plans, Medicare Part D plans, the Federal Employees Health Benefits Program, and state government employee plans. Pharmacy benefit managers are primarily responsible for developing and maintaining the formulary, contracting pharmacies, negotiating discounts and rebates with manufacturers, and processing and paying prescription drug claims.


care Outpatient care is a medical service provided that does not require an overnight stay in a facility (less than 24 hours in the facility). This can include routine services like checkups or clinic visits. It can include minor surgical procedures, as long as you are allowed to leave the hospital or facility the same day.

Inpatient Care Inpatient

care generally refers to any medical service that requires admission to a hospital or medical facility. Hospital care tends to target more serious ailments and trauma that require one or more days of hospital stay. Health insurance companies generally require you to be formally admitted to a hospital for a service to be considered inpatient. This means that a doctor has to write a note to give the admission order.

Prior Authorization Prior

Authorization is a term used by health insurance companies to describe a process for obtaining certain health care services. Before a health insurance company agrees to cover some services, it may require patients to seek approval or permission. Many plans have specific forms that you must complete for the prior authorization request to be processed.

Amount billed or charges billed

Suppliers set charges for the various drugs, items, and services they provide. In the same way, that a retailer sets prices for items sold in its store. This amount is the provider’s “billed amount” or “billed charge”. And represents what you would pay if you did not have insurance. When you have insurance, the insurer negotiates a discount on the amount of charge billed by the provider. Which can protect you from what you would otherwise have to pay. In the explanation of the benefits you receive from the insurance company, you will see the amount of charge billed by the provider. Generally followed by the amount or charge allowed that the insurer (and you) pay.

Allowable Amount or Allowable Charges

When insurance companies contract with a doctor, hospital, pharmacy, or medical equipment supplier to be included in the plan’s network. They agree to specific amounts that will be paid for the items or services provided by those providers. This contracted rate generally called the “allowable amount” or “allowable charges,” can be significantly lower. Then what providers would charge if you didn’t have the insurance company negotiating these discounts in your favor. You will usually see a note of what the allowed amount or allowable charge is in the explanation of benefits you receive from the insurance company. And it usually comes after the amount billed by the provider (which is the non-negotiated rate).


A copayment is a fixed amount, found in the policy documents, that you must pay for certain medical services or medications. The amount may vary depending on the type of service. For example, you may have a copayment of $ 30 for a doctor’s visit, $ 20 for one type of prescription, and $ 50 for another type of prescription.


For deductible plans, coinsurance is the percentage that you, as a patient, must pay for a medical service after you have met the deductible. To calculate the coinsurance for a service, you will need to know how much in total you will be charged for the service. Then you calculate the percentage of that total cost to determine how much you are responsible for paying. For example, if the plan has a 20 percent coinsurance and you’ve met the deductible, a medical service that costs $ 1,000 will require you to pay $ 200. Costs can vary by hospital or facility and location, so it is important to know if the policy has coinsurance. If so, you should be prepared to pay the required amount. Coinsurance has become increasingly common in recent years.

Out-of-pocket costs

If you have health insurance, you pay a fixed amount each month called a premium. Any additional costs that are not covered by insurance when you visit the doctor, hospital, or pharmacy are out-of-pocket costs. Examples of out-of-pocket costs include copays, coinsurance, and deductibles.

Maximum Out-of-Pocket Cost There

maybe limits on the amount a patient is responsible for paying out-of-pocket, determined by each insurer. A maximum out-of-pocket cost is a total amount you will pay before health insurance begins to pay 100 percent of the cost for in-network services. This limit never includes the monthly premium or the services the plan doesn’t cover. Insurance plans count all in-network copays, deductibles, and coinsurance toward this limit.

Health Savings Account

A health savings account is a special type of savings account. That is designed to generally be combined with a high deductible health plan. To help you save for medical expenses that the plan’s high deductible health insurance does not cover. With this type of account, you (along with your employer. In some cases) can make contributions up to a maximum of $ 3,400 for an individual. Or $ 6,750 for a family in 2017 (the contribution limit changes each year) and an additional $ 1,000 for adults over 55 years old. You can spend funds saved in a health savings account only on qualified medical expenses. Any money in health savings account at the end of the year can stay in the account, which means if you don’t spend it, you can accumulate tax-free savings over time to use for health care expenses. 

Flexible spending account

A flexible spending account is a special type of account used to pay for health care expenses. With this type of account, you (along with your employer, in some cases) can make contributions up to a maximum of $ 2,650 in 2018 (the contribution limit changes each year). You decide how much you will contribute at the beginning of the year and you cannot change it thereafter. The money in a flexible spending account is loaded in advance. Which means that you can use the full amount immediately. At the beginning of the year, even if the full amount has not yet been withheld from your paycheck. You must use the funds in the flexible spending account during the calendar year.  Or you will lose the funds. You can only use the funds in IRS (Internal Revenue Service) defined allowable expenses, so be sure to verify that your expenses qualify.


The annual deductible is the amount you must pay for medical services before the health insurance plan begins to pay. For example, if your deductible is $ 1,000, the plan will pay nothing in a given year until you’ve spent $ 1,000 on covered services, devices, or drugs. Depending on the plan, different types of services are included in the expenses that count towards the deductible amount. Also, some services, including preventive services, may be covered before you spend the deductible amount. Be sure to check the plan for those specific details before scheduling appointments.

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