Health Insurance 101: A Starter Course on the Affordable Care Act

PPACA, commonly referred to as the Affordable Care Act, will go into effect officially on January 1, 2014. Here's an overview of what the bill requires.
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Obamacare -- otherwise known as the Patient Protection and Affordable Care Act (PPACA) -- takes a big step when health care exchanges open October 1.

Do you know what that means to you? If not, you're not alone.

A poll from the Kaiser Family Foundation found 42 percent of Americans thought the act had been repealed by Congress or struck down by the U.S. Supreme Court even though it's the law of the land.

As cofounder and CEO of Maxwell Health, a new company working to lower the health care costs of businesses wanting to create and maintain a healthy environment for their employees, I thought it would be useful to try to eliminate some of the confusion around health care by explaining some of the basics when it comes to health insurance.

This is the first in a three-part series that lays out some of the key fundamentals.

Health insurance... why you need it:

First, it's helpful to step back a bit and explain why you need health insurance. Starting in 2014, it's required by law, or you'll face a penalty.

But there's also the financial side of things. If you fall ill unexpectedly, or develop a condition that requires frequent treatment or prescription drugs, these circumstances will be extremely expensive for the average person.

What does it cover?

It's also important to understand what health insurance does and does not cover. This will vary, sometimes greatly, from one insurance plan to the next.

Generally, you can expect an individual or family plan to cover basic preventive care and an annual doctor visit for each member of your family (all are included as a requirement of the new law).

After you've met your deductible, if you have one, quality plans often include hospitalization in the event of an emergency, x-rays and laboratory tests, most immunizations, emergency room services, ambulance services, outpatient surgery, inpatient hospital stays and pregnancy in most states (as long as you become pregnant after policy's effective date).

Once PPACA goes into full effect in January 2014, you can expect your health insurance to cover prescription drugs, hospitalization, pregnancy, newborn care and rehabilitation and mental health services.

What are the basics of PPACA?

PPACA, commonly referred to as the Affordable Care Act, will go into effect officially on January 1, 2014. Here's an overview of what the bill requires:

  • Almost all Americans must be insured in some form. Each person who is required to but doesn't purchase coverage will face a penalty, which is either 1 percent of your annual income, or $95 -- whichever amount is greater. (If you're not sure if you're required to purchase coverage, see the details of the exemptions.)
  • Americans with an income of up to 400 percent of the poverty level who don't receive health benefits through their place of employment (or through Medicare, Medicaid, CHIP or military coverage) will qualify for government subsidie -- a break on premiums in the form of tax credits available.
  • If you want to see how the ACA will affect you and your family's premiums in 2014, use this subsidy calculator from the Kaiser Family Foundation.
  • Insurance companies will be required to cover all applicants and offer the same rates regardless of pre-existing conditions, age or gender.

How much does health insurance cost?

Insurance premium rates are set by the government, and if you're buying individual health insurance (not through an employer) your specific rate will be based on your age and zip code.

Individual premium rates are determined by a process called underwriting, during which an underwriter will use information about the applicant, such as their medical history, age, weight, and several other factors, to determine whether that person is an insurable risk or not. This process is based on probabilities and the law of large numbers.

What are exchanges?

Private health insurance exchanges are new marketplaces put in place in response to the Affordable Care Act that will allow individuals without employer-sponsored insurance to purchase individual insurance in a shopping-like experience. Licensed individuals called navigators will be available to assist individuals using the marketplaces.

Insurance premiums for groups (insurance you get through your employer or an association of similar individuals) are determined through underwriting as well, but larger groups are able to get lower rates.

How about deductibles?

Another commonly misunderstood concept is how deductibles work. More and more employers are opting to enroll employees in IRS-qualified High-Deductible Health Plans, up to 1 in 3 from only 12 percent in 2007. A High-Deductible Health Plan is a relatively new type of health plan, with lower premiums and higher deductibles.

In order to be called this, a HDHP must be qualified by the IRS, which can happen if the plan has a minimum annual family deductible of $2,500 or $1,250 for an individual. There are also restrictions on the maximum out-of-pocket, at $12,500 for a family and $6,250 for an individual. These plans are compatible with Health Savings Accounts (HSA's) and in fact, are requirements for participation in an HSA.

An HDHP might be for you or your family if you're generally healthy and are usually able to anticipate the amount you spend on health care, outside of your premium payment, per month.

The low premium allows you to make room in your budget to be able to put aside money in your HSA, which you can then spend on things like doctor's visits, prescriptions, and any tests or procedures you have to get done. You won't be paying co-pays, if that's something you're used to, but instead will pay the negotiated rate for your doctor or hospital bills, which you can do with the pre-tax/tax-deductible HSA funds.

What is coinsurance?

If you have a coinsurance amount on your policy, it will be in the form of a percentage -- the amount of a medical bill you have to pay after you've met your deductible.

For instance, let's say you have a $5,000 deductible, with a $10,000 out-of-pocket maximum and 20 percent coinsurance. You meet your deductible in October, but in November, you get sick and have to visit your doctor and have a few tests done. The bill for that comes to $1,000, but the negotiated rate is $300.

Since you've already met your deductible and are now in "coinsurance" mode, but haven't yet met that out-of-pocket maximum, you'll be paying 20 percent of that $300 amount (which would be $60). You'll continue to pay 20 percent of any bills you get for accepted claims, until you've spent the rest of that remaining $5,000 of your out-of-pocket maximum.

What are HMOs and PPOs?

The way you go about getting health care may change depending on the type of network your insurance plan is covered under. Two major types are HMOs and PPOs.

A Health Maintenance Organization (HMO) is an organization that coordinates care for insured members by contracting network care providers on a prepaid basis. An HMO requires you to choose a Primary Care Physician (PCP) who coordinates your care by seeing you for preventive care visits and common medical conditions, as well as being responsible for referring you to specialists or for certain procedures outside of the PCP's area of expertise.

A Preferred Provider Organization (PPO) is an organization that selects "preferred" providers, any of whom an insured member can see without referrals or a Primary Care Physician's go-ahead. When you receive care from one of these preferred providers, you'll often pay a co-pay. Payment for other services in-network will count toward your deductible, if you have one.

What if you leave your job?

Finally, if you've recently left a job, it's likely you're currently covered under COBRA (which stands for the Consolidated Omnibus Budget Reconciliation Act). COBRA coverage is more expensive than employer-sponsored insurance because you as the former employee are handling that entire premium amount yourself, instead of the employer contributing to it or paying the entire amount.

It might actually be more cost-effective for you to secure coverage through the public marketplaces, since you may be eligible for tax subsidies that would lower that monthly premium amount.

Do I need to do anything on October 1?

If you don't currently have health insurance through your job or your spouse's job, and you aren't eligible for Medicare or Medicaid, you'll need to enroll in a health plan through a public or private marketplace.

Keep in mind that coverage must begin by January 1, 2014, so it's not absolutely necessary that you start looking October 1, but don't wait too long! If you think this may apply to you, an easy way to start is by filling out the quick and easy questionnaire on which will guide you in the right direction and let you know where to go to find insurance after October 1.

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