Glossary of Insurance Terms

I. Health Insurance Terms

Understanding health insurance terminology is crucial for navigating the complexities of healthcare coverage. These terms define how plans operate, what costs members are responsible for, and how to access care.

1. Deductible

A Deductible is a fixed dollar amount that an insured individual must pay out of their own pocket for covered healthcare services before their health insurance plan begins to contribute to the costs. This amount is typically set on an annual basis, meaning it resets at the beginning of each plan year. For instance, if a health plan has a $1,000 annual deductible, the member is responsible for the first $1,000 of their covered medical expenses during that year. Only after this $1,000 threshold is met will the insurance company start paying its share of subsequent covered services. It’s important to note that some services, particularly preventive care like annual check-ups or certain screenings, may be covered by the plan even before the deductible is met, often at no cost to the member, as mandated by laws like the Affordable Care Act. However, for most other services, such as specialist visits, hospital stays, or non-preventive prescription drugs, the deductible must be satisfied first. For example, if a patient with a $2,000 deductible undergoes a surgical procedure costing $5,000, they would pay the initial $2,000, and then the insurance plan would start sharing costs for the remaining $3,000, typically through coinsurance.

2. Coinsurance

Coinsurance represents the share of costs for covered healthcare services that an insured individual is required to pay after they have met their annual deductible. It is typically expressed as a percentage. For example, a common coinsurance arrangement is 80/20, where the insurance plan pays 80% of the allowed amount for a covered service, and the insured member pays the remaining 20%. If a patient has a plan with a $1,000 deductible and 20% coinsurance, and they incur a $500 medical bill after already meeting their deductible, the insurance plan would pay $400 (80% of $500), and the patient would pay $100 (20% of $500). Coinsurance applies to most types of services, including doctor visits, hospital stays, and prescription drugs, once the deductible is satisfied. The specific coinsurance percentage can vary significantly between different health plans. Understanding this percentage is vital for predicting out-of-pocket expenses, as it directly impacts the member’s financial responsibility for healthcare services received after the deductible phase. These payments typically count towards the plan’s out-of-pocket maximum.

3. Copayment (Copay)

A Copayment, often shortened to “copay,” is a fixed, predetermined dollar amount that an insured individual pays for specific covered healthcare services at the time the service is received. Unlike deductibles or coinsurance, copayments are typically applied per visit or per service, regardless of the total cost of that service. For instance, a health plan might require a $30 copay for a visit to a primary care physician or a $50 copay for a specialist visit. Similarly, prescription drug coverage often involves copays, which can vary based on the drug’s tier (e.g., $10 for a generic drug, $40 for a preferred brand-name drug). Copayments are generally not subject to the plan’s deductible; they are paid even if the deductible has not yet been met for the year. However, copayments usually count towards the individual’s annual out-of-pocket maximum. For example, if a patient with a $25 doctor visit copay sees their physician, they pay $25 at the time of service. The remaining cost of the visit is then processed by the insurance company according to the plan’s terms, which might involve the deductible or coinsurance if applicable for services beyond the basic visit fee.

4. Out-of-Pocket Maximum (OOPM)

The Out-of-Pocket Maximum (OOPM), also known as the out-of-pocket limit, is the absolute most an insured individual will have to pay for covered healthcare services during a policy period, typically one year. This limit includes amounts paid towards the deductible, coinsurance, and copayments for in-network services. Once this maximum is reached, the health insurance plan will typically pay 100% of the allowed amount for all covered in-network services for the remainder of the plan year. For example, if a plan has a $1,000 deductible, 20% coinsurance, and a $6,000 out-of-pocket maximum, and a patient incurs $30,000 in medical bills: they would first pay the $1,000 deductible. Then, they would pay 20% coinsurance on the next $25,000 of allowed charges (which is $5,000). At this point, the patient has paid $1,000 (deductible) + $5,000 (coinsurance) = $6,000. Since this meets the out-of-pocket maximum, the insurance plan would cover the remaining $4,000 of that $25,000 portion, and 100% of any further covered in-network services for the rest of the year. Monthly premiums, out-of-network care costs, and charges for services not covered by the plan typically do not count towards the OOPM.

5. Premium

A Premium is the recurring amount of money an individual or employer must pay to a health insurance company to maintain active health coverage. Premiums are typically paid on a monthly basis, but can also be paid quarterly or annually. The amount of the premium is determined by several factors, including the type of plan selected (e.g., HMO, PPO), the level of benefits (e.g., deductible, coinsurance, out-of-pocket maximum), the age and health status of the insured (in some markets, though limited by the ACA for individual and small group plans), geographic location, and whether the plan covers an individual or a family. For example, a younger, healthier individual might pay a lower monthly premium for a high-deductible health plan, say $300 per month, while a family opting for a plan with a lower deductible and more comprehensive benefits might pay a premium of $1,200 per month. Failure to pay premiums can lead to a lapse in coverage, meaning the insurance company will no longer pay for healthcare services. It’s important to distinguish premiums from other out-of-pocket costs like deductibles, copayments, and coinsurance, as premiums are the ongoing cost of having insurance, not the cost of using healthcare services.

6. Network (In-Network vs. Out-of-Network)

A health insurance Network is a group of doctors, hospitals, pharmacies, and other healthcare providers that have contracted with an insurance company or plan to provide services to its members at pre-negotiated, often discounted, rates. In-network providers are those within this contracted group. When members receive care from in-network providers, they typically pay less out-of-pocket due to these negotiated rates and the plan’s cost-sharing structure (e.g., lower copays or coinsurance). For example, a visit to an in-network specialist might have a $50 copay. Conversely, Out-of-network providers do not have a contract with the insurance plan. If a member seeks care from an out-of-network provider, the plan may cover a smaller portion of the cost, or not cover it at all, leading to significantly higher out-of-pocket expenses for the member. For instance, the same specialist visit, if out-of-network, might require the member to pay 50% of the charges after a separate, higher out-of-network deductible. Some plan types, like HMOs and EPOs, generally do not cover out-of-network care except in emergencies, while PPOs and POS plans may offer some out-of-network coverage but at a higher cost to the member.

7. Allowed Amount (Negotiated Rate)

The Allowed Amount, also referred to as the “eligible expense,” “payment allowance,” or “negotiated rate,” is the maximum amount an insurance plan will pay for a covered healthcare service from an in-network provider. This amount is pre-negotiated between the insurance company and the providers in its network. For example, a doctor might typically bill $150 for a specific office visit (this is the “billed amount”). However, if the insurance plan’s allowed amount for that service is $100, in-network providers have agreed to accept this $100 as full payment. The insurance company will then pay its share of this $100 (e.g., 80% after deductible), and the patient will pay their share (e.g., 20% coinsurance plus any remaining deductible). If a patient sees an out-of-network provider who charges more than the allowed amount, the patient may be responsible for the difference, a practice known as balance billing, in addition to their usual cost-sharing. Understanding the allowed amount is crucial because all cost-sharing (deductibles, coinsurance) is based on this figure, not the provider’s billed charges.

8. Balance Billing

Balance Billing occurs when a healthcare provider bills a patient for the difference between the provider’s actual charge and the amount the patient’s insurance plan has paid, plus any copayments, coinsurance, and deductibles the patient owes. This situation typically arises when a patient receives care from an out-of-network provider who has not agreed to accept the insurance plan’s allowed amount as full payment. For example, if an out-of-network doctor charges $200 for a service, and the insurance plan’s allowed amount for that service is $120, the plan might pay its portion (e.g., 60% of $120, which is $72, assuming the deductible is met). The provider could then bill the patient for the remaining $128 ($200 total charge – $72 plan payment). In contrast, in-network providers generally agree to accept the plan’s allowed amount and cannot balance bill patients for covered services beyond the agreed-upon copayments, coinsurance, and deductibles. The No Surprises Act offers some federal protections against balance billing in emergency situations and for certain non-emergency services at in-network facilities when an out-of-network provider is involved without the patient’s informed consent.

9. Preauthorization (Prior Authorization)

Preauthorization, also known as prior authorization or precertification, is a requirement from a health insurance plan that a member or their healthcare provider must obtain approval from the plan before certain medical services, treatments, prescription drugs, or medical equipment will be covered. Without this prior approval, the plan may deny coverage or pay a reduced amount for the service, leaving the patient responsible for a larger portion of the cost, or even the entire cost. For example, a plan might require preauthorization for an expensive imaging test like an MRI, a non-emergency surgery, or a high-cost specialty medication. The process involves the provider submitting clinical information to the insurer to demonstrate that the requested service is medically necessary and meets the plan’s coverage criteria. If a patient undergoes a procedure requiring preauthorization without obtaining it, and the claim is subsequently denied, they may have to appeal the decision or bear the full cost. For instance, if a plan denies preauthorization for a specific brand-name drug because a generic equivalent is available and deemed effective, the patient might have to try the generic first or appeal the decision with supporting documentation from their doctor.

10. Formulary (Prescription Drug List)

A Formulary, also called a drug list, is a comprehensive list of prescription medications, both generic and brand-name, that are covered by a health insurance plan, particularly by its prescription drug benefit component. Health plans, often with the help of Pharmacy Benefit Managers (PBMs), develop formularies based on drug efficacy, safety, and cost-effectiveness. Drugs on the formulary are typically organized into tiers, and the tier a medication falls into determines the member’s copayment or coinsurance amount. For example, Tier 1 might include generic drugs with the lowest copay (e.g., $10), Tier 2 might be preferred brand-name drugs with a higher copay (e.g., $40), Tier 3 could be non-preferred brand-name drugs with an even higher copay (e.g., $75), and Tier 4 or a specialty tier might cover very high-cost drugs, often with a percentage-based coinsurance. If a prescribed medication is not on the plan’s formulary (a non-formulary drug), it may not be covered at all, or the patient might have to pay the full cost unless an exception is granted. Patients should review their plan’s formulary to ensure their necessary medications are covered and understand the associated costs.

11. Health Maintenance Organization (HMO)

A Health Maintenance Organization (HMO) is a type of health insurance plan that typically offers a more restricted provider network compared to other plan types like PPOs, but often with lower premiums and out-of-pocket costs. HMO members are generally required to choose a Primary Care Physician (PCP) from within the HMO’s network. This PCP acts as a gatekeeper, managing the member’s overall care and providing referrals to in-network specialists when necessary. Care received from out-of-network providers is usually not covered, except in cases of emergency. For example, if a patient in an HMO needs to see a dermatologist, they would first visit their PCP, who would then issue a referral if deemed medically necessary. The patient would then see an in-network dermatologist. If they visited an out-of-network dermatologist without a referral (and it wasn’t an emergency), the HMO would likely not cover the service, and the patient would be responsible for the full cost. HMOs emphasize preventive care and aim to manage healthcare costs by coordinating care through the PCP and utilizing a defined network of providers.

12. Preferred Provider Organization (PPO)

A Preferred Provider Organization (PPO) is a type of health insurance plan that offers more flexibility in choosing healthcare providers compared to an HMO, but typically comes with higher monthly premiums. PPOs have a network of “preferred” providers (doctors, hospitals, etc.) with whom they have negotiated discounted rates. Members receive the highest level of coverage and pay lower out-of-pocket costs when they use these in-network providers. A key feature of PPOs is that members can also receive care from out-of-network providers, although this usually results in higher deductibles, copayments, and coinsurance, and the member might be responsible for the difference between the provider’s charge and the plan’s allowed amount (balance billing). Unlike HMOs, PPOs generally do not require members to choose a Primary Care Physician (PCP), and referrals are typically not needed to see specialists. For example, a PPO member wanting to see a cardiologist can schedule an appointment directly without first consulting a PCP. If they choose an in-network cardiologist, their costs will be lower than if they choose one outside the network.

13. Point of Service (POS) Plan

A Point of Service (POS) plan is a type of managed care health insurance plan that blends features of both Health Maintenance Organizations (HMOs) and Preferred Provider Organizations (PPOs). Like an HMO, POS plans often require members to choose an in-network Primary Care Physician (PCP) who manages their care and provides referrals to specialists. However, like a PPO, POS plans offer the flexibility to receive care from out-of-network providers, though doing so typically involves higher out-of-pocket costs (higher deductibles, copayments, or coinsurance) and may require the member to pay upfront and file claims for reimbursement. For example, if a POS plan member needs to see a specialist, they would ideally get a referral from their PCP to see an in-network specialist for the lowest costs. However, they could choose to see an out-of-network specialist without a referral (depending on the specific plan rules), but they would pay a larger share of the bill. POS plans aim to offer a balance between the cost savings of an HMO and the provider choice of a PPO.

14. Exclusive Provider Organization (EPO) Plan

An Exclusive Provider Organization (EPO) plan is a type of health insurance plan that, like an HMO, generally requires members to use doctors, specialists, or hospitals within the plan’s network for services to be covered. Out-of-network care is typically not covered, except in emergency situations. However, unlike many HMOs, EPO plans usually do not require members to choose a Primary Care Physician (PCP), and referrals are often not needed to see in-network specialists. This provides more direct access to specialists compared to a traditional HMO. For example, an EPO member experiencing knee pain could directly schedule an appointment with an in-network orthopedic specialist without needing a referral from a PCP. If they chose to see an orthopedic specialist outside the EPO network for non-emergency care, the EPO plan would likely not cover any of the costs. EPOs tend to have lower premiums than PPOs but may have a more limited network of providers than some PPO plans. They offer a middle ground, providing some freedom in specialist choice within the network while maintaining cost controls by not covering out-of-network care.

15. High-Deductible Health Plan (HDHP)

A High-Deductible Health Plan (HDHP) is a type of health insurance plan characterized by a higher deductible than traditional insurance plans. In exchange for this higher deductible, HDHPs typically have lower monthly premiums. For 2024, the IRS defines an HDHP as a plan with a minimum deductible of $1,600 for self-only coverage and $3,200 for family coverage. Once the deductible is met, the plan begins to pay for covered services, often through coinsurance, until the out-of-pocket maximum is reached. HDHPs are often paired with a Health Savings Account (HSA), a tax-advantaged savings account that allows individuals to set aside money pre-tax to pay for qualified medical expenses not covered by the HDHP, including the deductible. For example, an individual with an HDHP that has a $3,000 deductible might contribute funds to their HSA throughout the year. If they incur a $2,000 medical bill, they can use their HSA funds to pay it. Preventive care services are typically covered by HDHPs before the deductible is met, often at no cost. These plans are designed to make consumers more cost-conscious about their healthcare spending.

16. Health Savings Account (HSA)

A Health Savings Account (HSA) is a tax-advantaged medical savings account available to individuals enrolled in a High-Deductible Health Plan (HDHP). Funds contributed to an HSA are not subject to federal income tax at the time of deposit (pre-tax or tax-deductible contributions), can grow tax-free through interest or investments, and withdrawals are tax-free when used for qualified medical expenses. Qualified medical expenses include deductibles, copayments, coinsurance, and other medical costs not covered by the HDHP, such as dental and vision care. For example, if an individual with an HSA-compatible HDHP has a $500 doctor bill that applies to their deductible, they can withdraw $500 from their HSA tax-free to pay it. Unlike Flexible Spending Accounts (FSAs), HSA funds roll over year after year if not spent and are portable, meaning the account stays with the individual even if they change employers or health plans. There are annual limits on how much can be contributed to an HSA, set by the IRS. HSAs are designed to help individuals save for current and future healthcare costs.

17. Flexible Spending Account (FSA)

A Flexible Spending Account (FSA), also known as a flexible spending arrangement, is a special account an individual can put money into that is used to pay for certain out-of-pocket healthcare costs. FSAs are typically offered through employer-sponsored benefit plans. Contributions to an FSA are made with pre-tax dollars, meaning they are deducted from an employee’s salary before federal income and payroll taxes are calculated, thus reducing taxable income. These funds can then be used to pay for qualified medical expenses not covered by insurance, such as deductibles, copayments, coinsurance, prescription drugs, and sometimes dental and vision expenses. For example, an employee might contribute $1,000 to their FSA at the beginning of the year. If they have a $50 copay for a doctor’s visit, they can submit a claim for reimbursement from their FSA. A key feature of FSAs is the “use-it-or-lose-it” rule: funds not used by the end of the plan year (or a grace period, if offered by the employer) are generally forfeited. The IRS sets annual contribution limits for FSAs; for 2024, the limit was $3,200.

18. Explanation of Benefits (EOB)

An Explanation of Benefits (EOB) is a statement sent by a health insurance company to a member after they receive healthcare services or a claim is processed. It is not a bill. The EOB details what medical treatments and/or services were billed to the insurer, the amount the insurer paid, and the member’s financial responsibility, such as any remaining deductible, coinsurance, or copayment amounts. For example, after a doctor’s visit, a patient might receive an EOB showing: the doctor’s billed charge (e.g., $200), the allowed amount by the insurance plan (e.g., $150), the amount the insurer paid (e.g., $120, assuming 80% coinsurance after deductible met), and the patient’s responsibility (e.g., $30). The EOB also typically includes information like the provider’s name, date of service, service codes, and any amounts applied to the deductible or out-of-pocket maximum. Patients should carefully review their EOBs and compare them to the bills received from providers to ensure accuracy and understand their payment obligations. Discrepancies or services not recognized should be questioned with the insurer or provider.

19. Summary of Benefits and Coverage (SBC)

A Summary of Benefits and Coverage (SBC) is a standardized document required by the Affordable Care Act (ACA) that health insurance companies and group health plans must provide to help individuals understand and compare health insurance plans. The SBC uses plain language and a consistent format to summarize key features of a plan, such as covered benefits, cost-sharing (deductibles, copayments, coinsurance, out-of-pocket maximums), and coverage limitations and exceptions. It also includes standardized coverage examples for common medical scenarios, like managing type 2 diabetes or having a baby, to illustrate how the plan would cover costs in those situations. For instance, the SBC for “Plan X” would clearly list its annual deductible as $1,500, primary care copay as $30, and specialist copay as $60, alongside its out-of-pocket maximum. This allows consumers to easily compare “Plan X” with “Plan Y” on an “apples-to-apples” basis when making enrollment decisions. SBCs must be provided when shopping for coverage, at enrollment, at renewal, and upon request.

20. Medically Necessary

Medically Necessary refers to healthcare services or supplies that are needed to diagnose or treat an illness, injury, condition, disease, or its symptoms, and that meet accepted standards of medical practice. Insurance plans typically only cover services they deem medically necessary. The determination of medical necessity is usually made by the insurance company, often based on clinical guidelines, evidence-based medicine, and the treating provider’s recommendation. For example, if a patient has persistent back pain, their doctor might recommend an MRI. The insurance company will review the request to determine if the MRI is medically necessary based on the patient’s symptoms, prior treatments, and established medical guidelines for diagnosing back pain. If the insurer deems it medically necessary, the MRI will be a covered service (subject to plan cost-sharing). However, if the insurer determines a less expensive test like an X-ray is sufficient, or if the MRI is requested for reasons not supported by medical evidence (e.g., routine screening without symptoms for a low-risk individual), they might deny coverage for the MRI as not medically necessary. Patients can appeal such decisions.

21. Preventive Care vs. Diagnostic Care

Preventive Care consists of routine health services, screenings, check-ups, and patient counseling to prevent illnesses, disease, or other health problems before they occur or to detect them at an early stage when treatment is likely to be more effective. Examples include immunizations, annual physicals for adults when no symptoms are present, cancer screenings like mammograms and colonoscopies for appropriate age groups, and well-child visits. Under the Affordable Care Act, many preventive services are covered by health plans without cost-sharing (no copay, deductible, or coinsurance) if received from an in-network provider. Diagnostic Care, on the other hand, involves services like tests and procedures ordered by a doctor to diagnose or monitor a specific medical condition, symptom, or injury that a patient is already experiencing. For example, if during a routine preventive physical (preventive care), a patient mentions new chest pain, any tests ordered to investigate the cause of that pain (like an EKG or blood tests) would be considered diagnostic care. Diagnostic care is typically subject to the plan’s deductible, copayments, and coinsurance. A single visit can include both preventive and diagnostic components, leading to some patient cost-sharing even if part of the visit was for preventive purposes.

22. Claim

A Claim is a formal request for payment submitted to a health insurance company by either the member (patient) or their healthcare provider for services received that are believed to be covered under the terms of the insurance policy. After a medical service is provided, such as a doctor’s visit, lab test, or hospital stay, a claim is generated that itemizes the services rendered and their costs. For example, if a patient sees their doctor for an illness, the doctor’s office will typically submit a claim to the patient’s insurance company detailing the services performed (e.g., office visit code, any tests run) and the associated charges. The insurance company then processes this claim, determining which services are covered, the allowed amount for those services, and the respective payment responsibilities of the insurer and the patient based on the plan’s deductible, copayments, coinsurance, and out-of-pocket maximum. The outcome of this process is communicated to the member through an Explanation of Benefits (EOB). If a claim is denied, the member or provider has the right to appeal the decision.

23. Grievance

A Grievance is a formal complaint that a member communicates to their health insurer or plan regarding dissatisfaction with aspects of their care or the plan’s services, not related to a denied claim for benefits. Grievances typically address issues such as the quality of care received from a network provider, long wait times for appointments, problems with customer service, or difficulties accessing providers or information. For example, if a patient feels that their in-network doctor was unprofessional or did not provide adequate care, they could file a grievance with their health plan. Similarly, if a member consistently experiences excessively long hold times when calling the plan’s customer service line, this could also be grounds for a grievance. The process for filing a grievance is usually outlined in the plan documents. Health plans are required to have procedures in place to review and resolve grievances in a timely manner. This is distinct from an appeal, which is a request to reconsider a decision to deny coverage or payment for a service.

24. Appeal

An Appeal is a formal request made by a member or their authorized representative to their health insurance plan to reconsider a decision to deny coverage or payment for a healthcare service, treatment, or prescription drug. If a health plan denies a claim or refuses to preauthorize a service, stating it’s not covered, not medically necessary, or experimental, the member has the right to appeal this “adverse benefit determination.” For example, if a plan denies coverage for a specific surgical procedure deeming it “not medically necessary,” the patient, often with the support of their doctor, can file an appeal. This typically involves submitting a written request, along with supporting medical records, a letter of medical necessity from the provider, and any other relevant documentation, to the plan’s appeals department within a specified timeframe (e.g., 60 days from the denial notice). Plans have internal review processes for appeals, and if the internal appeal is unsuccessful, members may have the right to an external review by an independent third party.

25. Coordination of Benefits (COB)

Coordination of Benefits (COB) is a process used by insurance companies when a person is covered by more than one health insurance plan to determine how much each plan will pay for a medical claim. The goal of COB is to prevent overpayment or duplication of benefits, ensuring that the total amount paid by all plans does not exceed 100% of the allowed charges for the service. One plan is designated as the “primary” payer, which pays its benefits first as if no other coverage exists. The other plan(s) are “secondary” payers, which cover remaining eligible costs up to their limits after the primary plan has paid. For example, if a child is covered under both parents’ employer-sponsored health plans, the “birthday rule” is often used to determine primary coverage: the plan of the parent whose birthday occurs earlier in the calendar year is primary. If the primary plan pays 80% of a $100 claim ($80), the secondary plan might cover the remaining $20, depending on its own benefits and COB provisions.

26. Qualifying Life Event (QLE)

A Qualifying Life Event (QLE) is a change in an individual’s circumstances that allows them to enroll in health insurance or change their existing coverage outside of the regular annual Open Enrollment Period. These events trigger a Special Enrollment Period (SEP). Common QLEs include loss of existing health coverage (e.g., due to job loss, turning 26 and aging off a parent’s plan), changes in household size (e.g., getting married, having a baby, adopting a child, divorce), changes in residence (e.g., moving to a new ZIP code or county where different plans are available), or changes in eligibility for financial assistance. For example, if someone gets married, this is a QLE that allows them to enroll in their spouse’s employer-sponsored plan or change their Marketplace plan within a certain timeframe, typically 60 days from the event. Proof of the QLE, such as a marriage certificate or birth certificate, is usually required to enroll during an SEP.

27. Special Enrollment Period (SEP)

A Special Enrollment Period (SEP) is a time outside of the annual Open Enrollment Period during which individuals can sign up for health insurance or change their existing plan if they experience a Qualifying Life Event (QLE). The duration of an SEP is typically 60 days from the date of the QLE, although some SEPs may have different timeframes (e.g., 90 days for loss of Medicaid). For instance, if an individual loses their job-based health coverage on June 15th, this QLE triggers an SEP, allowing them to enroll in a Marketplace plan or another coverage option, generally until August 14th. Other examples of QLEs that initiate an SEP include getting married, having a child, moving to a new coverage area, or gaining U.S. citizenship. If an individual does not enroll during their SEP after a QLE, they usually have to wait until the next Open Enrollment Period to get coverage, unless they experience another QLE. It’s crucial to act within the SEP window to avoid gaps in coverage.

28. Inpatient vs. Outpatient Care

Inpatient Care refers to medical services that require admission into a hospital or other medical facility for at least one overnight stay. This type of care is typically for more serious illnesses, injuries, or surgeries that necessitate continuous monitoring and treatment by medical staff. For example, a major surgery like a heart bypass, recovery from a severe accident, or treatment for a serious infection like pneumonia would usually require inpatient care. Outpatient Care, also known as ambulatory care, refers to medical services or treatments that do not require an overnight stay in a hospital or facility. Patients receive these services and return home the same day. Examples of outpatient care include routine doctor’s office visits, lab tests, X-rays, minor surgeries performed at an ambulatory surgical center, emergency room visits that don’t result in admission, and physical therapy sessions. Health insurance plans often have different cost-sharing structures (deductibles, copays, coinsurance) for inpatient versus outpatient services.

29. Emergency Medical Condition

An Emergency Medical Condition is an illness, injury, symptom (including severe pain), or condition that is so serious that a prudent layperson—someone with an average knowledge of health and medicine—could reasonably expect that the absence of immediate medical attention would result in:

• 1. Placing the health of the individual (or, with respect to a pregnant woman, the health of the woman or her unborn child) in serious jeopardy.
• 2. Serious impairment to bodily functions.
• 3. Serious dysfunction of any bodily organ or part.

For example, symptoms like severe chest pain, difficulty breathing, uncontrolled bleeding, sudden paralysis, or a suspected stroke would likely be considered emergency medical conditions. Health plans, including HMOs and EPOs that typically restrict coverage to in-network providers, are generally required to cover emergency services at in-network rates, even if care is received at an out-of-network hospital, and without requiring prior authorization. However, what constitutes an “emergency” can sometimes be subject to review by the insurance company after the fact.

30. Urgent Care

Urgent Care refers to medical attention for an illness, injury, or condition that is serious enough to require prompt attention but is not severe enough to pose an immediate threat to life or limb, thus not warranting an emergency room visit. Urgent care centers treat conditions that need care sooner than a scheduled primary care physician visit but are less critical than emergencies. Examples of conditions often treated at urgent care facilities include minor cuts or burns, sprains and strains, fevers, flu-like symptoms, ear infections, or urinary tract infections. For instance, if a child sprains their ankle playing sports on a weekend when their pediatrician’s office is closed, an urgent care center would be an appropriate place to seek evaluation and treatment. Health plans typically have different cost-sharing for urgent care visits compared to emergency room visits or regular doctor’s office visits, often with a copayment that is higher than a PCP visit but lower than an ER visit. Using urgent care for non-life-threatening conditions can be more cost-effective and time-efficient than going to an ER.

II. Vision Insurance Terms

Vision insurance helps cover the costs of routine eye care, prescription eyewear, and sometimes other vision-related services. Understanding these terms can help individuals maximize their benefits and manage eye care expenses.

31. Frame Allowance

A Frame Allowance in vision insurance is a specific dollar amount that the plan will contribute towards the cost of eyeglass frames. When a member selects frames, the insurance plan covers the cost up to this allowance. If the chosen frames cost more than the allowance, the member is responsible for paying the difference out-of-pocket. For example, if a vision plan offers a $150 frame allowance, and the member chooses frames priced at $200, the plan pays $150, and the member pays the remaining $50. Some plans may offer an additional allowance or a higher allowance for specific “featured frame brands”. For instance, VSP’s Standard Plan might provide a $150 allowance for any brand, but an extra $20 (totaling $170) if a featured brand is selected. This benefit is typically available on a set frequency, such as once every 12 or 24 months, depending on the plan. Understanding the frame allowance helps members budget for new eyeglasses and can influence their choice of frames to minimize out-of-pocket expenses.

32. Lens Enhancements (Add-ons)

Lens Enhancements, also known as lens add-ons or options, are special features or treatments applied to eyeglass lenses to improve vision, comfort, durability, or appearance beyond what standard lenses offer. Vision insurance plans may offer coverage or discounts for these enhancements. Common examples include:

• Anti-reflective (AR) coating: Reduces glare and reflections, improving visual clarity and night vision.
• Scratch-resistant coating: Protects lenses from scratches, extending their lifespan.
• Polycarbonate lenses: Lighter, thinner, and more impact-resistant than standard plastic lenses, often recommended for children and active individuals.
• High-index lenses: Thinner and lighter lenses for strong prescriptions.
• Photochromic lenses (e.g., Transitions®): Lenses that darken in sunlight and lighten indoors.
• Progressive lenses (no-line bifocals/trifocals): Provide a seamless transition between different prescription strengths for distance, intermediate, and near vision.
• UV coating: Protects eyes from harmful ultraviolet rays.
• Blue light filtration: Reduces exposure to blue light from digital screens.

For example, a plan like EyeMed might offer fixed pricing or discounts on premium anti-reflective coatings or progressive lenses. VSP members might save up to 30% on lens enhancements like anti-glare coatings when purchased through a VSP doctor. The specific coverage and cost for lens enhancements vary by plan.

33. Copay (Vision)

A Copay in vision insurance is a fixed dollar amount that a member pays out-of-pocket for specific covered vision care services or materials at the time they are received. This amount is predetermined by the vision plan. For instance, a plan might require a $10 copay for a routine eye examination or a $25 copay for eyeglass lenses. If a VSP Individual Vision Plan has a $15 copay for a comprehensive eye exam, the member pays $15 to the VSP network doctor at the time of the exam, and the plan covers the remainder of the doctor’s charge for the exam. Similarly, if the plan has a $25 materials copay for lenses, that amount would be paid when purchasing new lenses. Copays are generally due at the time of service and are separate from the plan’s premium. The specific copay amounts for different services (like exams, frames, lenses, contact lens fittings) will be outlined in the plan’s benefit summary.

34. Network (Vision – e.g., VSP, EyeMed)

A vision insurance Network refers to a group of eye care professionals (optometrists, ophthalmologists) and eyewear retailers that have contracted with a vision insurance company (like VSP or EyeMed) to provide services and materials to plan members at pre-negotiated, often discounted, rates. When members use in-network providers, they typically receive the highest level of benefits and pay lower out-of-pocket costs. For example, an eye exam from an in-network VSP doctor might have a $15 copay, and frames might have a $150 allowance. If a member chooses to go to an out-of-network provider (one not contracted with their vision plan), the plan may provide limited or no coverage, and the member will likely pay significantly more. For instance, instead of a fixed copay for an exam, the plan might reimburse a set dollar amount (e.g., up to $45 for an out-of-network exam), and the member pays the rest. VSP and EyeMed are two of the largest vision care networks in the U.S., each with thousands of private practice and retail locations.

35. Contact Lens Fitting and Evaluation Fee

A Contact Lens Fitting and Evaluation Fee is a charge by an eye care professional for the additional services required to properly fit contact lenses and assess their suitability for a patient’s eyes and vision needs. This fee is separate from the cost of the comprehensive eye exam (which determines the prescription for glasses) and the cost of the contact lenses themselves. The fitting process involves measuring corneal curvature, selecting appropriate lens types (e.g., soft, rigid gas permeable, toric for astigmatism, multifocal), providing trial lenses, instructing the patient on lens insertion, removal, and care, and conducting follow-up visits to ensure proper fit, comfort, and vision. Vision insurance plans vary in how they cover this fee. Some plans may offer a specific allowance towards the fitting fee (e.g., VSP may cover up to $60 for a contact lens exam/fitting), while others might have a copay for the fitting (e.g., EyeMed may offer a standard contact lens fit with a $0 copay after an initial exam copay, or a 10% discount on premium fittings). For example, as shown in an EyeMed plan, a standard contact lens fit and follow-up might be covered in full after a copay, while a premium fit (for more complex lenses) might have a discount off the retail price, then an allowance applied.

36. Conventional vs. Disposable Contact Lenses

Conventional Contact Lenses are designed for long-term use, typically lasting up to one year before needing replacement. They can be either daily wear (removed each night) or, in some cases, extended wear (worn for a specified number of days continuously). These lenses require regular cleaning and disinfection. Vision plans might offer an allowance towards the purchase of conventional contact lenses, and sometimes a discount on the balance over the allowance (e.g., an EyeMed plan might offer a $150 allowance and 15% off the balance for conventional contacts). Disposable Contact Lenses are designed to be worn for a shorter period and then discarded. This can range from daily disposables (thrown away after a single use), weekly, bi-weekly, monthly, or quarterly disposables. Daily disposables are often considered a healthier option as they reduce the risk of eye infections associated with lens cleaning and buildup. Vision plans often provide an allowance for disposable contact lenses, which may be similar to or different from the allowance for conventional lenses (e.g., an EyeMed plan might offer a $170 allowance for disposable contacts). For example, if a member has a $150 allowance for disposable contacts and a six-month supply costs $200, they would pay $50 out-of-pocket.

37. Medically Necessary Contact Lenses

Medically Necessary Contact Lenses are prescribed by an eye care professional to correct vision problems that cannot be adequately addressed with eyeglasses, or when contact lenses are required for therapeutic reasons due to specific eye conditions. Vision insurance plans often provide a higher level of coverage or a full benefit for medically necessary contacts compared to elective (cosmetic or routine vision correction) contact lenses. For example, EyeMed specifies certain conditions for which contact lenses are deemed medically necessary, such as keratoconus (a condition where the cornea bulges outward), high ametropia (very strong prescriptions, e.g., over -10D or +10D), or significant anisometropia (a large difference in prescription between the two eyes). If a patient is diagnosed with one of these conditions and their eye doctor determines that contact lenses are medically essential for their vision, the plan might cover the lenses in full or provide a significantly larger allowance (e.g., an EyeMed plan might offer “Paid-in-Full” coverage for medically necessary contacts up to a certain retail value, such as $210). Documentation from the eye doctor is usually required to prove medical necessity.

38. Out-of-Network Vision Care Reimbursement

Out-of-Network Vision Care Reimbursement refers to the process by which a vision insurance plan may partially repay a member for vision care services or materials obtained from a provider who is not part of the plan’s contracted network. While vision plans encourage members to use in-network providers for maximum savings and direct billing, most PPO-style plans offer some level of reimbursement for out-of-network care. Typically, the member pays the out-of-network provider in full at the time of service and then submits a claim form along with itemized receipts to the insurance company. The plan will then reimburse the member up to a specified dollar amount for each covered service, which is usually less than the in-network benefit. For example, if an in-network eye exam has a $10 copay, an out-of-network exam might be reimbursed up to $40 or $45, regardless of what the provider charged. Similarly, there would be a set allowance for out-of-network frames (e.g., up to $50) and lenses. The member is responsible for any difference between the provider’s charges and the plan’s reimbursement. VSP, for instance, requires members to complete a claim form and attach itemized receipts detailing the provider, patient, date of service, and services/amounts paid to request reimbursement.

39. Bifocal/Trifocal/Progressive Lenses

Bifocal Lenses are eyeglass lenses that have two distinct optical powers, designed for individuals who need correction for both distance and near vision. A visible line separates the two sections; the top part corrects distance vision, and the bottom part (segment) corrects near vision for tasks like reading. Trifocal Lenses are similar but have three distinct optical powers: for distance, intermediate (e.g., computer distance), and near vision. They typically have two visible lines separating the segments. Progressive Lenses, also known as no-line bifocals or multifocals, provide a gradual transition in lens power from the top (for distance) through an intermediate zone to the bottom (for near vision), without any visible lines. This offers a more natural visual experience and cosmetic appearance. Vision plans often have specific coverage tiers for these lenses. For example, a plan might cover standard single vision, bifocal, and trifocal lenses with a basic copay. For progressive lenses, plans like EyeMed or VSP may have different copay levels or allowances for standard versus premium progressive lens designs. A member might pay a $50 copay for standard progressives, or choose a premium progressive lens and pay a higher fixed copay or a percentage after an allowance.

40. Digital Lenses (High Definition Lenses)

Digital Lenses, also referred to as high-definition (HD) lenses, are eyeglass lenses manufactured using advanced digital surfacing technology. This process allows for more precise and customized lens creation compared to traditional lens manufacturing. The result is often sharper vision, improved clarity (especially in peripheral vision), reduced distortion, and more vibrant color perception. Digital lenses can be particularly beneficial for individuals with complex prescriptions, astigmatism, or those who wear progressive lenses, as the customization can lead to wider fields of vision and smoother transitions between different viewing zones. For example, a patient wearing progressive lenses might find that digital progressives offer a significantly wider intermediate and near viewing area, making computer work and reading more comfortable. Vision plans may offer coverage for digital lenses as a lens enhancement, potentially with an additional copay or as part of a premium lens package. Some plans may require specific measurements taken by the optician to personalize the lens for the wearer’s eyes, frame, and visual needs.

III. Dental Insurance Terms

Dental insurance plans help cover the cost of dental care, from routine preventive services to major procedures. Key terms relate to cost-sharing, coverage limits, and types of services.

41. Annual Maximum

An Annual Maximum in dental insurance is the total dollar amount that the dental plan will pay for a member’s covered dental services within a specific benefit period, which is typically a 12-month cycle (often a calendar year). Once the insurance company has paid out this maximum amount for the year, the member becomes responsible for 100% of the costs for any additional dental services received until the benefit period resets. For example, if a dental plan has a $1,500 annual maximum, and a patient has already received treatments for which the plan paid $1,200, only $300 remains in their annual maximum for the rest of that benefit year. If they then need a crown for which the plan’s share would normally be $500, the plan will only pay the remaining $300, and the patient will be responsible for the other $200 plus their usual coinsurance on the covered portion and any amount exceeding the allowed fee if out-of-network. Importantly, patient payments like deductibles and coinsurance/copayments do not typically count towards exhausting the annual maximum; only the amounts paid by the insurance plan do. However, preventive and diagnostic services may sometimes be excluded from counting against the annual maximum, depending on the plan.

42. Deductible (Dental)

A Deductible in dental insurance is the specific dollar amount a member must pay out-of-pocket for covered dental services before the dental plan begins to pay its share of the costs. This is similar to a health insurance deductible and is usually an annual amount, meaning it resets at the beginning of each benefit year. For example, if a dental plan has a $50 annual deductible, the member must pay the first $50 of their covered dental expenses (excluding, often, preventive services) before the plan starts contributing. If a patient with this plan needs a filling that costs $150 and the plan covers fillings at 80% after the deductible, the patient would first pay the $50 deductible. Then, the plan would cover 80% of the remaining $100 (which is $80), and the patient would pay the other 20% ($20) as coinsurance. So, the patient’s total out-of-pocket for that filling would be $50 (deductible) + $20 (coinsurance) = $70. Many dental plans waive the deductible for preventive services like cleanings and routine exams to encourage regular check-ups.

43. Coinsurance (Dental)

Coinsurance in dental insurance is the percentage of the cost for covered dental services that the member is responsible for paying after their annual deductible has been met. The dental plan pays the remaining percentage of the allowed amount for the service. For instance, a common coinsurance structure might be 80/20 for basic services, meaning the plan pays 80% and the member pays 20%. If a patient has met their $50 deductible and then undergoes a root canal (a basic or major service, depending on the plan) for which the allowed amount is $800, and their plan covers it at 80%, the insurance would pay $640 (80% of $800). The patient’s coinsurance responsibility would be $160 (20% of $800). Dental plans often have different coinsurance levels for different categories of service: preventive care might be covered at 100% (0% coinsurance), basic care at 80% (20% coinsurance), and major care at 50% (50% coinsurance). Understanding these percentages is key to anticipating out-of-pocket dental expenses.

44. Copayment (Copay) (Dental)

A Copayment (Copay) in dental insurance is a fixed dollar amount that a member pays for specific dental services, typically at the time the service is rendered. This is more common in Dental Health Maintenance Organization (DHMO) plans rather than PPO plans, which usually use deductibles and coinsurance. For example, a DHMO plan might require a $15 copay for a routine cleaning or a $50 copay for a filling, regardless of the dentist’s actual charge for that service. The member pays this set fee, and the plan covers the rest of the negotiated cost for that covered service. Unlike coinsurance, a copay is a fixed amount and not a percentage of the cost. Copayments generally do not count towards an annual deductible (if the plan has one for other services), but they may count towards an annual out-of-pocket maximum, depending on the plan’s structure. For instance, if a patient with a DHMO plan that has a $20 copay for an exam visits their selected primary care dentist, they pay $20, and the plan covers the remaining agreed-upon fee for the exam.

45. In-Network vs. Out-of-Network (Dental)

Similar to health insurance, dental plans, particularly Dental Preferred Provider Organizations (DPPOs), have a network of dentists and specialists who have contracted with the insurance company to provide services to plan members at pre-negotiated, discounted fees. Using an in-network dentist typically results in lower out-of-pocket costs for the member because the fees are controlled and the plan’s coverage levels are often higher. For example, an in-network dentist might have a contracted fee of $80 for a cleaning (covered 100% by the plan), while their usual fee is $120. An out-of-network dentist does not have a contract with the dental plan. While members with a PPO plan can usually see out-of-network dentists, their benefits will likely be lower, and they may be responsible for the difference between the dentist’s full charge and what the plan pays (balance billing). For instance, if the plan covers 80% of the “usual, customary, and reasonable” (UCR) fee for an out-of-network filling, and the UCR is $100 but the dentist charges $150, the plan pays $80. The patient pays $20 (their 20% coinsurance of UCR) plus the $50 difference, totaling $70. Dental HMO (DHMO) plans usually require members to use in-network dentists exclusively, with no coverage for out-of-network care except in emergencies. provides a clear example where a procedure costs a member $300 with an in-network PPO dentist versus $538 with an out-of-network dentist.

46. Waiting Period (Dental)

A Waiting Period in dental insurance is a specific length of time after a member enrolls in a new plan before certain dental services become eligible for coverage. This is a common feature designed to prevent adverse selection, where individuals might enroll only when they need expensive treatment and then drop coverage. Preventive services like exams and cleanings often have no waiting period and are covered from day one. Basic services, such as fillings or simple extractions, might have a waiting period of 3 to 6 months. Major services, like crowns, bridges, dentures, or implants, typically have longer waiting periods, often ranging from 6 to 12 months, or even up to 24 months in some plans. For example, if a plan has a 12-month waiting period for crowns, a new member needing a crown would have to pay the full cost if the procedure is done before that year is up, unless the waiting period is waived. Some plans may waive waiting periods if the member had continuous, comparable dental coverage immediately prior to enrolling in the new plan.

47. Predetermination of Benefits (Pre-treatment Estimate)

A Predetermination of Benefits, also known as a pre-treatment estimate, is a process where a dentist submits a proposed treatment plan to the patient’s dental insurance company before any services (especially major or costly ones) are performed. The insurance company reviews the plan, assesses the patient’s eligibility and current benefits (e.g., remaining annual maximum, met deductible, waiting periods), and provides a written estimate of what the plan is expected to cover and what the patient’s estimated out-of-pocket expenses will be. For example, if a patient needs a bridge, the dentist can send a predetermination request. The insurer might respond that the bridge is a covered service at 50%, the patient has $800 remaining of their $1,500 annual maximum, and their deductible is met. This helps the patient understand their financial responsibility before committing to the treatment. While a predetermination is not an absolute guarantee of payment (as actual payment depends on eligibility and benefits active at the time of service, and whether the annual maximum is exhausted by other claims before this one is processed), it is a highly recommended tool for financial planning and avoiding unexpected bills for procedures like crowns, bridges, implants, or extensive periodontal work.

48. Preventive, Basic, and Major Restorative Services (Classes of Service)

Dental insurance plans typically categorize covered procedures into different classes of service, often referred to as Preventive (Class I), Basic (Class II), and Major (Class III), each with varying levels of coverage (coinsurance percentages) and potentially different deductible applications or waiting periods.

• Preventive (Class I) services generally include routine oral exams, cleanings (prophylaxis), X-rays (e.g., bitewings), and fluoride treatments. These are often covered at the highest percentage, such as 80% to 100%, and the deductible may be waived for these services. For example, a plan might cover two cleanings per year at 100%.
• Basic (Class II) services typically include procedures like fillings, simple tooth extractions, root canals (sometimes classified as major), and periodontal treatments such as scaling and root planing. These are commonly covered at a moderate percentage, for instance, 70% to 80% after the deductible is met.
• Major (Class III) services encompass more complex and often more expensive procedures such as crowns, bridges, dentures, implants, and complex oral surgery. These services usually have the lowest coverage percentage, often around 50%, and may be subject to waiting periods. For example, a dental plan might cover a crown at 50% after a 12-month waiting period and after the annual deductible has been paid.

Understanding how a specific plan classifies these services is crucial for anticipating out-of-pocket costs.

49. Downgrading (Alternate Benefit Provision)

Downgrading, also known as an Alternate Benefit Provision, is a practice by some dental insurance plans where, if there are multiple professionally acceptable treatment options for a dental condition, the plan will provide benefits based on the cost of the least expensive alternative treatment, even if a more expensive treatment was performed. The patient can still choose the more expensive procedure, but they will be responsible for the cost difference between what the plan pays for the downgraded service and the dentist’s fee for the actual service performed. A common example is a “posterior composite downgrade,” where a dentist places a tooth-colored composite filling on a back tooth, but the insurance plan only provides benefits based on the cost of a less expensive amalgam (silver) filling. If the composite filling costs $200 and the plan’s allowance for an amalgam filling is $150, and the plan covers fillings at 80%, it will pay 80% of $150 ($120). The patient would then owe the remaining 20% of the amalgam allowance ($30) plus the $50 difference between the composite and amalgam cost, totaling $80. Other examples include downgrading crowns to large fillings or fixed bridges to removable partial dentures.

50. Missing Tooth Clause

A Missing Tooth Clause is a provision in some dental insurance policies that excludes coverage for the replacement of a tooth (or teeth) that was lost, extracted, or congenitally missing before the effective date of the current dental coverage. This means if an individual enrolls in a dental plan with this clause, the plan will not pay for procedures like bridges, dentures, or implants intended to replace teeth that were already missing when their coverage began. For example, if someone lost a molar five years ago and then enrolls in a new dental plan that includes a missing tooth clause, that plan would not cover the cost of an implant or bridge to replace that specific molar. The patient would be responsible for the full cost of such a restoration. Some policies may have a waiting period associated with this clause, after which replacement might be covered, or they might offer partial coverage under specific circumstances (e.g., if a bridge replaces both a pre-existing missing tooth and a tooth extracted after coverage started, only the portion for the newly extracted tooth might be covered). It’s crucial for individuals needing to replace previously lost teeth to check for this clause when selecting a dental plan. Some plans, like certain Delta Dental plans, explicitly state they do not have this exclusion.

51. Orthodontic Lifetime Maximum

An Orthodontic Lifetime Maximum is the total cumulative dollar amount that a dental insurance plan will pay towards orthodontic treatment (such as braces or clear aligners) for an eligible individual over the entire duration of their enrollment in that specific plan, or sometimes over their entire lifetime regardless of plan changes with the same carrier. Unlike annual maximums for general dental care which reset each year, the orthodontic lifetime maximum, once reached, is exhausted for that individual under that plan and does not replenish. For example, if a dental plan offers 50% coverage for orthodontics up to a $2,000 lifetime maximum, and the total cost of braces is $5,000, the plan will pay $2,000 (since 50% of $5,000 is $2,500, which exceeds the $2,000 cap). The patient is then responsible for the remaining $3,000. If this patient later needs further orthodontic work under the same plan, no additional benefits would be paid as the lifetime maximum has been met. These maximums are typically applied per person, not per family, and are separate from the plan’s annual maximum for other dental services.

IV. Medicare Insurance Terms

Medicare is a federal health insurance program primarily for individuals aged 65 and older, as well as for certain younger people with disabilities and those with End-Stage Renal Disease. It consists of several parts, each covering different aspects of healthcare.

52. Medicare Part A (Hospital Insurance)

Medicare Part A, often referred to as Hospital Insurance, is a component of Original Medicare that primarily covers inpatient care. This includes stays in a hospital, care in a skilled nursing facility (SNF) following a qualifying hospital stay (not long-term custodial care), hospice care for terminally ill individuals, and some home health care services. Most individuals do not pay a monthly premium for Part A if they or their spouse paid Medicare taxes for at least 10 years (approximately 40 quarters) while working; this is known as “premium-free Part A”. For those who do not qualify for premium-free Part A, it can be purchased by paying a monthly premium. Even with premium-free Part A, beneficiaries are responsible for a deductible for each “benefit period” for hospital and SNF care, as well as coinsurance for extended stays. For example, in 2025, the Part A inpatient hospital deductible is $1,676 per benefit period. For hospital stays, days 1-60 have $0 coinsurance after the deductible is met, days 61-90 incur a daily coinsurance ($419 in 2025), and days 91 and beyond utilize lifetime reserve days with a higher daily coinsurance ($838 in 2025).

53. Medicare Part B (Medical Insurance)

Medicare Part B, or Medical Insurance, is another component of Original Medicare that covers medically necessary outpatient services and supplies. This includes doctors’ services (whether in a hospital, clinic, or office), outpatient hospital care, preventive services (like flu shots and certain screenings), durable medical equipment (DME) such as wheelchairs or walkers, mental health services, ambulance services, and some home health care. Enrollment in Part B is optional for most, and it requires payment of a standard monthly premium, which can be higher for individuals with greater incomes (known as the Income Related Monthly Adjustment Amount or IRMAA). In 2025, the standard Part B premium is $185 per month. Beneficiaries are also responsible for an annual Part B deductible ($257 in 2025) and typically a 20% coinsurance for most Part B covered services after the deductible is met. For example, if a patient has met their Part B deductible and receives a doctor’s service with a Medicare-approved amount of $100, Medicare would pay $80 (80%), and the patient would be responsible for $20 (20%).

54. Medicare Part C (Medicare Advantage)

Medicare Part C, more commonly known as Medicare Advantage (MA), is an alternative way to receive Medicare benefits offered by private insurance companies that are approved by and contract with Medicare. MA plans must provide all the benefits covered under Original Medicare (Part A and Part B), except typically for hospice care, which Original Medicare still covers. Most Medicare Advantage plans also include prescription drug coverage (Part D), and are then referred to as MAPD plans. Many MA plans offer additional benefits not covered by Original Medicare, such as routine vision, dental, and hearing care, as well as fitness program memberships. These plans often operate as Health Maintenance Organizations (HMOs) or Preferred Provider Organizations (PPOs), meaning they usually have provider networks, and members may need to use in-network doctors and hospitals to receive full coverage or lower costs. MA plans have an annual limit on out-of-pocket expenses for Part A and B services, a protection not available with Original Medicare alone. For example, a patient might choose an MA HMO plan with a $0 monthly premium (beyond their Part B premium), fixed copayments for doctor visits (e.g., $20 for a primary care visit), and an annual out-of-pocket maximum of $5,000 for in-network services.

55. Medicare Part D (Prescription Drug Coverage)

Medicare Part D provides outpatient prescription drug coverage to Medicare beneficiaries. This coverage is offered through private insurance companies approved by Medicare, either as a standalone Prescription Drug Plan (PDP) for those with Original Medicare, or as part of a Medicare Advantage plan (MAPD). Beneficiaries pay a monthly premium for their Part D plan, which varies depending on the plan chosen. Plans have a formulary (a list of covered drugs), and drugs are typically categorized into tiers that determine the copayment or coinsurance amount. Most plans also have an annual deductible (no more than $590 in 2025). A significant change for 2025 is the elimination of the “coverage gap” (or “donut hole”) and the implementation of a $2,000 annual out-of-pocket cap on prescription drug spending for covered drugs. Once a beneficiary’s out-of-pocket spending on covered drugs reaches $2,000 in 2025, they will pay $0 for their covered prescriptions for the rest of the year. For example, if a beneficiary’s Part D plan has a $500 deductible and then 25% coinsurance, they pay the first $500, then 25% of drug costs until their total out-of-pocket spending hits $2,000. After that, their covered drugs are $0 for the remainder of the year. Late enrollment penalties may apply if an individual does not enroll in Part D when first eligible and does not have other creditable prescription drug coverage.

56. Medigap (Medicare Supplement Insurance)

Medigap, also known as Medicare Supplement Insurance, is private insurance sold by insurance companies to help fill the “gaps” in Original Medicare (Part A and Part B) coverage. These gaps include costs such as deductibles, copayments, and coinsurance that beneficiaries would otherwise have to pay out-of-pocket. Medigap policies are standardized across most states, identified by letters (e.g., Plan A, Plan G, Plan N), with each letter plan offering a different set of benefits, though premiums can vary by insurer and location. For example, Medigap Plan G is a popular option for newly eligible beneficiaries; it covers the Part A deductible, Part A hospital and hospice coinsurance, Part B coinsurance (typically 20%), Part B excess charges, skilled nursing facility coinsurance, and foreign travel emergencies, but it does not cover the annual Part B deductible. If a beneficiary with Original Medicare and Plan G has a hospital stay, Plan G would cover their Part A deductible ($1,676 in 2025) and any daily hospital coinsurance. Medigap policies only work with Original Medicare; they cannot be used with Medicare Advantage plans. Beneficiaries pay a monthly premium for their Medigap policy in addition to their Part B premium.

57. Benefit Period (Medicare Part A)

A Benefit Period is how Original Medicare Part A measures the use of inpatient hospital and skilled nursing facility (SNF) services. A benefit period begins on the day a beneficiary is admitted to a hospital as an inpatient or to a SNF. It ends when the beneficiary has not received any inpatient hospital care or skilled care in a SNF for 60 consecutive days. If the beneficiary is readmitted to a hospital or SNF after this 60-day break, a new benefit period begins, and they will be responsible for paying the Part A deductible again ($1,676 in 2025). If readmission occurs within 60 days of discharge from a previous inpatient stay, it is considered part of the same benefit period, and a new deductible is not charged, but the count of covered days continues from where it left off. For example, if a patient is hospitalized for 10 days, goes home for 30 days, and is then re-hospitalized, this second admission falls within the same benefit period. However, if they were home for 70 days before re-hospitalization, a new benefit period would start, requiring a new Part A deductible. There is no limit to the number of benefit periods a person can have.

58. Deductible (Medicare Parts A & B)

In Medicare, a Deductible is the amount a beneficiary must pay out-of-pocket for covered services before Medicare begins to pay its share. Medicare Part A (Hospital Insurance) has a deductible that applies to each benefit period for inpatient hospital and skilled nursing facility (SNF) care. For 2025, the Part A inpatient hospital deductible is $1,676 per benefit period. This means if a beneficiary is admitted to the hospital, they pay this amount first. If they are discharged and then readmitted starting a new benefit period (after being out of the hospital/SNF for 60 consecutive days), they would pay the deductible again. Medicare Part B (Medical Insurance) has an annual deductible. For 2025, the Part B annual deductible is $257. This means the beneficiary pays the first $257 of their covered Part B services (like doctor visits, outpatient care, durable medical equipment) each calendar year before Medicare starts paying its share (typically 80%). For example, if a patient’s first doctor visit of the year costs $150, they pay the full $150, which counts towards their $257 Part B deductible. Their next $107 in Part B services would also be paid out-of-pocket to meet the deductible.

59. Coinsurance (Medicare Parts A & B)

Coinsurance in Medicare is the percentage of the Medicare-approved amount for a covered service that a beneficiary pays after they have met their deductible. For Medicare Part A (Hospital Insurance), coinsurance applies for extended inpatient hospital and skilled nursing facility (SNF) stays within a benefit period, after the deductible is met. For an inpatient hospital stay in 2025: days 1-60 have $0 coinsurance; days 61-90 have a coinsurance of $419 per day; days 91 and beyond (up to 60 lifetime reserve days) have a coinsurance of $838 per day. For SNF care, after a qualifying hospital stay, days 1-20 have $0 coinsurance, and days 21-100 have a coinsurance of $209.50 per day in 2025. For Medicare Part B (Medical Insurance), after the annual deductible is met, the beneficiary typically pays 20% of the Medicare-approved amount for most services, and Medicare pays 80%. For example, if a Medicare-approved doctor’s service costs $200 and the Part B deductible has been met, the beneficiary would pay $40 (20% coinsurance), and Medicare would pay $160. There is generally no annual out-of-pocket maximum for Original Medicare Part A and B coinsurance amounts, which is why many people purchase Medigap policies or enroll in Medicare Advantage plans.

60. Copayment (Medicare)

A Copayment (Copay) in the Medicare context is a fixed amount a beneficiary pays for a covered service or prescription drug, typically at the time of service. While Original Medicare (Parts A and B) primarily uses deductibles and coinsurance for cost-sharing, copayments are very common in Medicare Advantage (Part C) plans and Medicare Part D prescription drug plans. For example, a Medicare Advantage plan might require a $10 copay for a primary care visit and a $50 copay for a specialist visit. A Medicare Part D plan might have a $5 copay for a generic drug and a $45 copay for a preferred brand-name drug after the plan’s deductible (if any) is met. Under Original Medicare Part A, there are fixed daily amounts for extended hospital or SNF stays (days 61+ for hospital, days 21+ for SNF) which are sometimes referred to as copayments but are technically daily coinsurance amounts. For certain Part B outpatient hospital services, a copayment may also apply.

61. Enrollment Periods (Initial, General, Special, Open/Annual)

Medicare has specific Enrollment Periods during which individuals can sign up for or make changes to their coverage. Understanding these is critical to avoid penalties and ensure continuous coverage.

• Initial Enrollment Period (IEP): This is a 7-month window for individuals first becoming eligible for Medicare, typically around their 65th birthday (the 3 months before their birth month, the month of their birthday, and the 3 months after). For example, if someone turns 65 in June, their IEP runs from March 1 to September 30.
• General Enrollment Period (GEP): If an individual misses their IEP and is not eligible for a Special Enrollment Period, they can sign up for Medicare Part A and/or Part B during the GEP, which runs from January 1 to March 31 each year. Coverage begins July 1 of that year, and late enrollment penalties may apply.
• Special Enrollment Period (SEP): These periods allow enrollment outside the IEP or GEP due to specific life circumstances, such as losing employer-sponsored health coverage (e.g., upon retirement), moving, or other qualifying events. For instance, if someone is working past 65 and covered by their employer’s group health plan, they typically have an 8-month SEP to enroll in Part B that starts when their employment or employer coverage ends, whichever happens first.
• Medicare Annual Open Enrollment Period (OEP) / Annual Enrollment Period (AEP): This runs from October 15 to December 7 each year. During this time, Medicare beneficiaries can switch between Original Medicare and Medicare Advantage, join, drop, or switch a Medicare Advantage plan, or join, drop, or switch a Medicare Part D prescription drug plan. Changes made become effective January 1 of the following year.

62. Late Enrollment Penalty (Medicare Parts B & D)

A Late Enrollment Penalty is an amount permanently added to an individual’s monthly Medicare premium if they do not sign up for Medicare Part B or Medicare Part D when they are first eligible and do not have other creditable coverage.

• Part B Late Enrollment Penalty: If an individual doesn’t sign up for Part B during their Initial Enrollment Period (IEP) and doesn’t qualify for a Special Enrollment Period (e.g., due to having employer coverage), they may face a penalty. The penalty is an extra 10% of the standard Part B premium for each full 12-month period they were eligible for Part B but didn’t enroll. This penalty is typically paid for as long as they have Part B. For example, if someone delayed Part B enrollment for 2 full years without creditable coverage, their monthly Part B premium would be 20% higher for life.
• Part D Late Enrollment Penalty: If an individual goes without creditable prescription drug coverage for 63 consecutive days or more after their IEP ends, they may owe a Part D late enrollment penalty. This penalty is calculated as 1% of the national base beneficiary premium (e.g., $36.78 in 2025) multiplied by the number of full, uncovered months they were eligible but didn’t have Part D or creditable coverage. This amount is rounded to the nearest $0.10 and added to their monthly Part D premium, usually for as long as they have Part D coverage. For example, if someone went 20 months without creditable drug coverage, their penalty would be 20% of the national base premium, added to their specific Part D plan’s premium each month.

63. Creditable Coverage (for Part D)

Creditable Prescription Drug Coverage refers to prescription drug coverage from a source other than Medicare (e.g., employer or union plan, TRICARE, Veterans Affairs) that is expected to pay, on average, at least as much as Medicare’s standard prescription drug coverage. Having creditable coverage is important because if an individual has it when they first become eligible for Medicare Part D and later loses it, they can generally enroll in a Part D plan without incurring a late enrollment penalty, provided they enroll within 63 days of losing that creditable coverage. For example, if someone continues to work past age 65 and has drug coverage through their employer that is certified as “creditable,” they can delay Part D enrollment. When they retire and lose that employer coverage, they will have a Special Enrollment Period to join a Part D plan without penalty. Employers or unions are required to notify their Medicare-eligible members annually whether their prescription drug coverage is creditable. If an individual does not have creditable drug coverage for 63 consecutive days or more after their Initial Enrollment Period for Part D ends, they may face a lifelong late enrollment penalty if they later decide to enroll in a Part D plan.

64. Formulary (Medicare Part D)

A Formulary in the context of Medicare Part D is the official list of prescription drugs covered by a specific Part D plan (either a standalone Prescription Drug Plan or a Medicare Advantage Prescription Drug plan). Each Part D plan develops its own formulary, which must meet certain standards set by Medicare, but the specific drugs covered can vary from plan to plan. Formularies typically categorize drugs into different “tiers,” with each tier having a different level of cost-sharing (copayment or coinsurance) for the beneficiary. For example, Tier 1 might include low-cost generic drugs with a $5 copay, while Tier 4 might include specialty drugs with a 25% coinsurance. If a doctor prescribes a drug that is not on the plan’s formulary, the beneficiary may have to pay the full cost, or they can request a formulary exception from the plan. Plans can change their formularies annually, and sometimes during the year under specific circumstances, but they must notify members of significant changes. It is crucial for beneficiaries to review a plan’s formulary before enrolling, and annually thereafter, to ensure their necessary medications are covered at an affordable cost.

66. Catastrophic Coverage (Medicare Part D)

Catastrophic Coverage is a stage in Medicare Part D prescription drug plans designed to protect beneficiaries from very high out-of-pocket drug costs. Historically, once a beneficiary’s total out-of-pocket spending for covered drugs reached a certain threshold for the year, they entered the catastrophic coverage phase, where their cost-sharing was significantly reduced to a small coinsurance or copayment for the remainder of the year. A major change occurs in 2025: the previous coverage gap (donut hole) is eliminated, and a new structure is implemented. Starting January 1, 2025, once a Part D enrollee’s out-of-pocket spending on covered prescription drugs reaches $2,000 for the year, they enter the catastrophic coverage phase. In this phase, the beneficiary will pay $0 (zero dollars) for all their covered Part D prescription drugs for the rest of that calendar year. For example, if a beneficiary’s out-of-pocket costs for their medications (including deductible and initial copays/coinsurance) total $2,000 by June, any covered prescriptions they fill from July through December of that year will cost them nothing out-of-pocket. This $2,000 cap is a significant improvement, providing a hard limit on annual drug expenses for Medicare beneficiaries. Previously, even in catastrophic coverage, there was still some minor cost-sharing.

67. Assignment (Medicare)

Assignment in Original Medicare refers to an agreement by a doctor, healthcare provider, or supplier to accept the Medicare-approved amount as full payment for covered services. When a provider accepts assignment, they agree to bill Medicare directly and cannot charge the beneficiary more than the Medicare deductible and coinsurance (typically 20% of the approved amount for Part B services). For example, if a doctor who accepts assignment charges $120 for a service, but the Medicare-approved amount is $100, the doctor accepts $100 as the total payment. Medicare pays the doctor 80% of this approved amount (i.e., $80, assuming the Part B deductible is met), and the patient is responsible for the remaining 20% (i.e., $20). Providers who are “Participating Physicians” have agreed to accept assignment for all Medicare claims. Other providers (“non-participating”) can choose to accept assignment on a case-by-case basis. Choosing providers who accept assignment generally means lower out-of-pocket costs for the beneficiary, as they are protected from excess charges.

68. Excess Charges (Medicare Part B)

Excess Charges in Medicare Part B are additional fees, up to 15% above the Medicare-approved amount, that doctors or other healthcare providers who do not accept Medicare assignment can legally charge beneficiaries for covered services. When a provider does not accept assignment, they are considered “non-participating.” While they still must bill Medicare, they are not bound to accept Medicare’s approved rate as full payment. For example, if the Medicare-approved amount for a service is $100, a non-participating provider can charge up to 115% of that amount, which would be $115. Medicare would pay 80% of its slightly lower approved amount for non-participating providers (which is 95% of the participating provider rate, so 95% of $100 = $95; 80% of $95 = $76). The patient would be responsible for the remaining 20% of that $95 ($19) plus the excess charge (in this case, $115 – $95 = $20, if the doctor charges the full 15% over the non-participating approved rate). So, the patient’s total could be $19 + $20 = $39, instead of just $20 if they saw a provider accepting assignment. Some states have laws (known as MCOPs – Medicare Overcharge Protection) that prohibit or limit excess charges. Certain Medigap plans (like Plan G and, for those eligible, Plan F) cover Part B excess charges.

69. Income Related Monthly Adjustment Amount (IRMAA)

The Income Related Monthly Adjustment Amount (IRMAA) is an additional amount that Medicare beneficiaries with higher incomes must pay on top of their standard monthly premiums for Medicare Part B (Medical Insurance) and Medicare Part D (Prescription Drug Coverage). The Social Security Administration (SSA) determines IRMAA eligibility based on a beneficiary’s Modified Adjusted Gross Income (MAGI) as reported on their IRS tax return from two years prior. For example, 2025 IRMAA surcharges are based on 2023 MAGI. There are several income brackets; the higher the income, the larger the IRMAA surcharge. For 2025, individuals with a 2023 MAGI over $106,000 (or $212,000 for joint filers) will pay an IRMAA. For Part B, the standard premium in 2025 is $185.00. A beneficiary in the first IRMAA tier (MAGI >$106k to $133k for individuals) would pay an additional $74.00 for Part B, making their total Part B premium $259.00 ($185.00 + $74.00). They would also pay an additional $13.70 for their Part D premium on top of their specific plan’s premium. Beneficiaries can appeal an IRMAA determination if they’ve had a life-changing event that significantly reduced their income.

70. Medicare Summary Notice (MSN)

A Medicare Summary Notice (MSN) is a statement that beneficiaries enrolled in Original Medicare (Part A and Part B) receive every three months for their Medicare Part A and Part B claims. The MSN is not a bill. It lists all services and supplies that providers and suppliers billed to Medicare on the beneficiary’s behalf during the 3-month period, shows what Medicare paid, and what the beneficiary may owe the provider. For example, an MSN might show a doctor’s visit on January 15th, the amount billed by the doctor, the Medicare-approved amount, the amount Medicare paid, and a note indicating the amount the beneficiary may be billed (e.g., for their deductible or coinsurance). It also indicates if a claim was denied and provides information on appeal rights. Beneficiaries should carefully review their MSNs to check for errors, services they didn’t receive (which could indicate fraud), and to understand their financial responsibility before paying any bills from providers. If a beneficiary has not received any services, they will not receive an MSN for that quarter.

71. End-Stage Renal Disease (ESRD) Coverage Rules

Medicare provides coverage for individuals of any age who have End-Stage Renal Disease (ESRD), which is permanent kidney failure requiring regular dialysis or a kidney transplant. To be eligible, an individual must generally have ESRD diagnosed by a doctor and meet certain work history requirements under Social Security, the Railroad Retirement Board, or as a government employee (or be the spouse/dependent child of someone who meets these requirements). Coverage timing depends on the treatment:

• Dialysis: Medicare coverage usually starts on the first day of the fourth month of dialysis treatments. For example, if dialysis begins July 1, Medicare coverage starts October 1. However, if the individual completes a home dialysis training program, coverage can start the first day of the first month of that program, provided certain conditions are met.
• Kidney Transplant: Coverage can begin the month an individual is admitted to a Medicare-certified hospital for the transplant (or for services needed before the transplant) if the transplant occurs in that same month or within the next two months.

Medicare coverage for ESRD ends 12 months after the month dialysis treatments stop, or 36 months after the month of a successful kidney transplant. However, individuals whose Medicare eligibility due to ESRD ends 36 months post-transplant can elect to continue Part B coverage specifically for immunosuppressive drugs by paying a premium ($110.40 per month in 2025, plus IRMAA if applicable, and an annual deductible).

V. Small Group Insurance Terms

Small group health insurance is designed for small businesses, typically those with 2 to 50 employees. Understanding these terms helps employers navigate their options and responsibilities.

72. Small Group Market

The Small Group Market for health insurance generally refers to plans offered to employers with a small number of employees, typically defined by federal and state law as businesses with 2 to 50 full-time equivalent employees (FTEs). However, some states may extend the definition to include groups up to 100 FTEs. Self-employed individuals with no employees are generally not eligible for the small group market and would seek coverage in the individual market. Small employers can purchase coverage directly from insurance issuers, through an agent or broker, or via the Small Business Health Options Program (SHOP) Marketplace established by the Affordable Care Act (ACA). For example, a local bakery with 15 employees would typically purchase health insurance in the small group market. Plans in this market must comply with ACA requirements, such as covering essential health benefits and not denying coverage or charging higher premiums based on health status. The definition of a “small group” is important as it dictates which regulations and market reforms apply to the health plans offered.

73. SHOP Marketplace (Small Business Health Options Program)

The Small Business Health Options Program (SHOP) Marketplace is an online health insurance exchange established by the Affordable Care Act (ACA) where eligible small employers can compare and purchase group health and/or dental insurance plans for their employees. To be eligible for SHOP, a business generally must have between 1 and 50 full-time equivalent employees (FTEs), although some states allow businesses with up to 100 FTEs to participate. Employers must typically offer coverage to all full-time employees (those working 30 or more hours per week) and meet minimum participation rate requirements (often 70% of eligible employees enrolling or having other coverage). For example, a small tech startup with 10 employees could use the SHOP Marketplace to find a suitable health plan. A key potential benefit of using SHOP is that eligible employers (generally those with fewer than 25 FTEs, paying average annual wages below a certain threshold, and contributing at least 50% of employee premium costs) may qualify for the Small Business Health Care Tax Credit, which can be up to 50% of the employer’s premium contributions (35% for tax-exempt employers). Enrolling in a SHOP plan is generally the only way for most small businesses to claim this tax credit.

74. Full-Time Equivalent (FTE) Employee

A Full-Time Equivalent (FTE) Employee is a calculation used, particularly under the Affordable Care Act (ACA), to determine the total number of full-time employees a business has, considering both full-time and part-time staff. For ACA purposes, a full-time employee is generally someone who works an average of at least 30 hours per week, or 130 hours per month. To calculate FTEs, an employer first counts all employees who meet the 30-hour full-time threshold. Then, for part-time employees, the employer sums up all hours worked by part-time staff in a month and divides that total by 120 (or sums annual hours and divides by 2,080, as per IRS guidance). The result is the number of FTEs represented by the part-time workforce. For example, a business has 40 employees working 35 hours/week (full-time). It also has 10 part-time employees who each work 60 hours a month (total 600 part-time hours). The part-time FTEs would be 600 / 120 = 5 FTEs. The business’s total FTE count would be 40 (full-time) + 5 (part-time FTEs) = 45 FTEs. This FTE calculation is crucial for determining if an employer is an Applicable Large Employer (ALE) subject to the employer mandate, and for eligibility for SHOP plans and the Small Business Health Care Tax Credit.

75. Applicable Large Employer (ALE)

An Applicable Large Employer (ALE) under the Affordable Care Act (ACA) is an employer who employed an average of at least 50 full-time employees, including full-time equivalent (FTE) employees, during the preceding calendar year. The IRS determines ALE status annually using a “look-back” method based on the prior year’s workforce size. For example, if a company had an average of 55 FTEs throughout 2024, it would be considered an ALE for the 2025 calendar year. ALE status is significant because it subjects the employer to the ACA’s employer shared responsibility provisions (often called the “employer mandate”). This means ALEs must offer affordable health coverage that provides minimum value to their full-time employees (and their dependents) or potentially face a tax penalty if at least one full-time employee receives a premium tax credit for purchasing coverage through the Health Insurance Marketplace. ALEs also have specific information reporting requirements to the IRS (using Forms 1094-C and 1095-C) regarding the health coverage they offer. Seasonal workers who work 120 days or fewer during the year are generally not counted when determining if an employer meets the 50-FTE threshold.

76. Minimum Participation Rate (MPR)

A Minimum Participation Rate (MPR) is a requirement set by insurance carriers or, in some cases, by state regulations for group health plans, stipulating that a certain percentage of eligible employees must enroll in the employer’s health plan for the insurer to issue or renew the group policy. This requirement helps insurers manage risk by ensuring a balanced pool of healthy and less healthy individuals, which helps keep premiums stable. For Small Business Health Options Program (SHOP) plans, the federal default MPR is often 70%, meaning at least 70% of eligible employees offered coverage must either enroll in the plan or have other qualifying health coverage (e.g., through a spouse, Medicare, Medicaid). Some states have different MPRs (e.g., Iowa at 75%, Tennessee at 50%). For example, if a business has 20 eligible employees and the MPR is 70%, at least 14 employees must enroll or have a valid waiver (proof of other coverage). If 5 of the 20 employees have coverage through a spouse, they are waived, leaving 15 effectively eligible employees. The business would then need 70% of these 15 (i.e., 10.5, so 11 employees) to enroll. There is typically an annual open enrollment period (e.g., November 15 – December 15 for SHOP) when MPRs may be waived.

77. Employer Contribution Strategies

Employer Contribution Strategies refer to the methods and amounts an employer chooses to contribute towards the premiums for their employees’ group health insurance coverage. This is a critical decision impacting the affordability of the plan for employees and the overall cost to the business. Common strategies include:

1. Fixed Percentage: The employer pays a set percentage of the total premium, and the employee pays the rest. For example, an employer might cover 75% of the premium for employee-only coverage and 60% for family coverage. If the employee-only premium is $500, the employer pays $375, and the employee pays $125.
2. Flat Dollar Amount: The employer contributes a fixed dollar amount per employee per month, regardless of the total premium cost (which can vary by plan or coverage tier). For instance, an employer might contribute $300 per month towards any plan the employee chooses.
3. Tiered Contributions: Contributions vary based on coverage tiers (e.g., employee-only, employee + spouse, employee + children, family). For example, an employer might pay 80% for employee-only, 70% for employee + spouse, and 60% for family coverage.

Many states and insurers require employers to contribute at least 50% of the employee-only premium to be eligible for group coverage or certain tax credits (like the Small Business Health Care Tax Credit via SHOP). The chosen strategy affects employee uptake, plan affordability (as per ACA rules for ALEs), and the employer’s budget.

78. Fully-Insured vs. Self-Funded Plans

Fully-Insured Plans and Self-Funded (or Self-Insured) Plans are two primary ways employers provide health benefits. In a Fully-Insured Plan, the employer pays a fixed monthly premium per employee to an insurance carrier. The insurance carrier assumes all the financial risk for paying employee medical claims that are covered under the policy. This offers predictable monthly costs for the employer, making budgeting simpler. For example, if an employer pays a $400 premium per employee to “InsureCo,” InsureCo is responsible for paying all covered claims, even if they exceed the premiums collected for that group. These plans are subject to state insurance regulations. In a Self-Funded Plan, the employer assumes the direct financial risk for paying their employees’ medical claims instead of paying premiums to an insurance company. The employer typically hires a Third-Party Administrator (TPA) to manage claims processing and other administrative tasks. Employers often purchase stop-loss insurance to protect against unexpectedly high claims. For example, a company might set aside funds and pay claims as they arise. If an employee has a $50,000 hospital bill, the company pays it (or the stop-loss insurer pays if the claim exceeds a certain threshold). Self-funding offers more flexibility in plan design and potential cost savings if claims are lower than expected, but also carries more financial volatility. Self-funded plans are primarily regulated by federal law (ERISA) rather than state law.

79. Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)

A Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) is an employer-funded health benefit plan that allows eligible small employers (those with fewer than 50 full-time equivalent employees who do not offer a group health plan) to reimburse their employees tax-free for qualified medical expenses, including individual health insurance premiums. The employer sets a fixed allowance amount for each employee, up to annual statutory limits (for 2025, these are $6,300 for self-only coverage and $12,800 for family coverage). Employees then purchase their own individual health insurance policies or incur other eligible medical expenses and submit proof to the employer for reimbursement from their QSEHRA allowance. For example, a small business with 10 employees could offer each employee a QSEHRA allowance of $300 per month. If an employee pays $250 for their individual health insurance premium, they can be reimbursed $250 tax-free from their QSEHRA. Any remaining allowance (e.g., $50) could be used for other qualified medical expenses like deductibles or copays. QSEHRAs provide a way for small businesses to offer health benefits with predictable costs and greater employee choice in coverage.

80. Individual Coverage Health Reimbursement Arrangement (ICHRA)

An Individual Coverage Health Reimbursement Arrangement (ICHRA) is a type of employer-funded health benefit that allows businesses of any size to provide their employees with tax-free reimbursements for individual health insurance premiums and other qualified medical expenses. Unlike QSEHRAs, ICHRAs have no caps on employer contribution amounts, and employers can offer different allowance amounts to different classes of employees (e.g., full-time vs. part-time, salaried vs. hourly). To participate and receive reimbursements, employees must be enrolled in an individual health insurance plan (e.g., a Marketplace plan) or Medicare Parts A and B or Part C. For example, a company could offer its salaried employees an ICHRA allowance of $500/month and its hourly employees $300/month. An eligible salaried employee who purchases an individual market plan for $450/month could be reimbursed that amount tax-free. ICHRAs can also be used by Applicable Large Employers (ALEs) to satisfy the ACA employer mandate if the offered ICHRA is considered affordable and meets minimum value requirements. This model gives employees choice over their health plan while providing employers with predictable benefit costs.

VI. Buy-Sell Insurance Terms

Buy-sell agreements are critical for business continuity, outlining how ownership will transition upon certain events. Life insurance often plays a key role in funding these agreements.

81. Buy-Sell Agreement (Buy-Out Agreement)

A Buy-Sell Agreement, also known as a buy-out agreement, is a legally binding contract between co-owners of a business that dictates how a departing owner’s share of the business will be handled if they die, become disabled, retire, or otherwise leave the business. The agreement typically stipulates that the departing owner’s interest must be sold to, and purchased by, the remaining owners or the business entity itself, according to a pre-determined valuation method and terms. For example, if two partners in a firm have a buy-sell agreement and one partner passes away, the agreement would outline that the deceased partner’s share is to be sold to the surviving partner (or the firm) at a price calculated based on a formula (e.g., 5 times average annual earnings) or a previously agreed-upon fixed price. These agreements are crucial for ensuring a smooth transition of ownership, providing liquidity to the departing owner or their estate, preventing shares from falling into unintended hands (like a deceased owner’s inexperienced heir or an ex-spouse), and maintaining business continuity. Life insurance or disability buyout insurance is often used to fund the purchase obligation created by the agreement.

82. Triggering Event (Buy-Sell)

A Triggering Event in a buy-sell agreement is a specific, predefined circumstance that activates the terms of the agreement, compelling or permitting the sale and purchase of an owner’s interest in the business. These events are crucial as they initiate the buyout process. Common triggering events include:

• Death of an owner: This is a primary trigger, ensuring the deceased owner’s estate can sell their interest and the remaining owners can maintain control.
• Disability of an owner: Long-term disability that prevents an owner from contributing to the business. The definition of disability is critical and should align with any disability buyout insurance policies.
• Retirement of an owner: An owner reaching a specified retirement age or deciding to retire from the business.
• Voluntary Termination/Withdrawal: An owner choosing to leave the business for other reasons.
• Involuntary Termination: Removal of an owner due to misconduct or other specified causes.
• Divorce of an owner: To prevent an ex-spouse from gaining an ownership interest.
• Bankruptcy of an owner: To protect the business from the owner’s creditors.

For example, if “retirement at age 65” is a triggering event, when an owner reaches 65, the buy-sell agreement would outline the process for the other owners or the company to purchase their shares at the agreed-upon valuation.

83. Cross-Purchase Agreement

A Cross-Purchase Agreement is a type of buy-sell agreement where the individual remaining owners (shareholders or partners) personally agree to purchase the ownership interest of a departing or deceased owner. Under this structure, each owner typically owns a life insurance policy on each of the other owners. If an owner dies, the surviving owners use the tax-free death benefits from the policies they own on the deceased to buy the deceased’s share of the business from their estate. For example, if there are three partners (A, B, and C), Partner A would own policies on B and C, Partner B on A and C, and Partner C on A and B. If Partner A dies, Partners B and C use the proceeds from the policies they owned on A’s life to purchase A’s business interest from A’s estate. A key benefit is that the surviving owners receive a step-up in the tax basis of the shares they purchase, which can reduce capital gains tax if they later sell those shares. However, this structure can become complex and administratively burdensome if there are many owners, as numerous policies would be required (n*(n-1) policies, where n is the number of owners).

84. Entity-Purchase Agreement (Redemption Agreement)

An Entity-Purchase Agreement, also known as a Redemption Agreement or Stock Redemption Plan, is a type of buy-sell agreement where the business entity itself (e.g., corporation, LLC, partnership) agrees to purchase (redeem) the ownership interest of a departing, disabled, or deceased owner. Under this arrangement, the business typically owns and is the beneficiary of life insurance policies on each of the owners. When a triggering event like death occurs, the business receives the life insurance proceeds and uses these funds to buy back the deceased owner’s shares from their estate. For example, if a corporation with three shareholders has an entity-purchase agreement and one shareholder dies, the corporation uses the death benefit from the policy it owned on that shareholder’s life to purchase their shares from the estate. This increases the proportionate ownership of the surviving shareholders. This structure is often simpler to administer than a cross-purchase agreement when there are multiple owners, as only one policy per owner is needed (n policies). However, the surviving owners do not receive a step-up in basis for their existing shares, and the insurance proceeds received by a C-corporation could be subject to the Alternative Minimum Tax (AMT).

85. Funding Mechanisms (Buy-Sell)

Funding Mechanisms in a buy-sell agreement refer to the methods used to ensure that cash is available to carry out the purchase of a departing owner’s interest when a triggering event occurs. Without adequate pre-arranged funding, the remaining owners or the business might be forced to use personal funds, take out costly loans, or sell assets to meet the buyout obligation. Common funding mechanisms include:

1. Life Insurance: This is a very common method, especially for funding buyouts upon an owner’s death. The business (in an entity-purchase plan) or the individual owners (in a cross-purchase plan) purchase life insurance policies on each owner. The death benefit provides tax-free liquid funds to purchase the deceased’s interest. For example, if a business is valued at $1 million and has two equal partners, each partner might have a $500,000 life insurance policy on the other to fund a buyout.
2. Disability Buyout Insurance: Similar to life insurance, but designed to fund a buyout if an owner becomes permanently disabled according to the policy’s definition. Benefits may be paid as a lump sum or in installments after a waiting period.
3. Cash/Company Reserves (Sinking Fund): The business or owners set aside funds over time. This may be insufficient if a trigger event occurs prematurely.
4. Installment Payments: The purchase price is paid to the departing owner or their estate over a specified period. This eases the immediate financial burden but creates a debt obligation for the buyers.
5. Loans: The business or remaining owners borrow money to fund the buyout.

The choice of funding mechanism depends on factors like the type of triggering event, the business’s financial situation, and the owners’ preferences. Life and disability insurance are often favored for death and disability triggers due to their ability to provide immediate liquidity.

86. Business Valuation Methods (Buy-Sell)

Business Valuation Methods in a buy-sell agreement are the agreed-upon procedures or formulas used to determine the purchase price of an owner’s interest when a triggering event occurs. Establishing a clear valuation method in advance is crucial to prevent disputes and ensure a fair price. Common methods include:

1. Fixed Price: The owners agree on a specific price per share or interest, which is stated in the agreement. For example, the agreement might state each of an LLC’s 100 units is valued at $1,000. This method is simple but requires regular updates to remain fair, as business value changes over time. Failure to update can lead to a significantly over or understated value.
2. Formula-Based Value: The agreement specifies a formula to calculate the value, such as a multiple of earnings (e.g., 5 times average pre-tax earnings over the last 3 years), book value, adjusted book value, or capitalization of cash flow. This allows the value to fluctuate with business performance but can be complex to define accurately and may not capture all aspects of value.
3. Appraisal Process: The agreement stipulates that one or more independent professional business appraisers will determine the fair market value at the time of the triggering event. This can provide an objective value but can be costly and time-consuming, and the price is unknown until the appraisal is complete.

A hybrid approach, such as using a formula that can be overridden by a periodically agreed-upon designated value, is sometimes recommended. The IRS scrutinizes valuations in family businesses to ensure they reflect fair market value.

87. Right of First Refusal (Buy-Sell)

A Right of First Refusal (ROFR) is a contractual provision often included in buy-sell agreements or shareholder agreements that gives existing owners or the company the option to purchase an owner’s shares before that owner can sell them to an outside third party. If an owner (the “selling owner”) receives a bona fide offer from a third party to buy their shares and wishes to accept it, they must first offer those shares to the other owners or the company under the same terms and conditions as the third-party offer. For example, if Shareholder A wants to sell their 20% stake to an external buyer for $100,000, an ROFR would require Shareholder A to first offer that 20% stake to the company or the other existing shareholders for $100,000. If the company or other shareholders exercise their right and match the offer within a specified timeframe, they buy the shares. If they decline, Shareholder A is then free to sell to the third party under the terms originally offered. This provision helps maintain control over the ownership of the business and prevents unwanted outsiders from becoming owners. Variations exist, such as a “right of first offer,” where the selling owner must offer shares to the company/insiders before seeking external offers.

88. Mandatory vs. Optional Buyout

In a buy-sell agreement, the terms can stipulate either a Mandatory Buyout or an Optional Buyout upon the occurrence of a triggering event. A Mandatory Buyout clause obligates the remaining owners or the company to purchase the departing owner’s interest, and it obligates the departing owner or their estate to sell that interest. For example, a clause might state: “Upon the death of a Member, the Company shall purchase, and the estate of the deceased Member shall sell, all of the deceased Member’s interest…”. This creates certainty for all parties; the departing owner/estate knows there will be a buyer and liquidity, and the remaining owners know they can consolidate ownership. Life insurance is often used to fund mandatory buyouts upon death. An Optional Buyout clause gives the remaining owners or the company the right, but not the obligation, to purchase the departing owner’s interest. The departing owner or estate may or may not be obligated to sell if the option is exercised, depending on the specific wording. For example, a provision might state: “Upon the death of a Member, the Company and/or the remaining Members shall have the option to purchase the deceased Member’s Interest…”. This provides flexibility but less certainty. If the option is not exercised, the departing owner’s shares might pass to heirs or be sold to an outsider, if permitted by other terms of the agreement. The choice between mandatory and optional buyouts depends on the owners’ goals for control, liquidity, and business continuity.

VII. Key-Person Insurance Terms

Key-person insurance is a vital tool for businesses to protect themselves against the financial loss resulting from the death or disability of a critical employee.

89. Key Person/Key Employee

A Key Person or Key Employee is an individual whose skills, knowledge, leadership, or relationships are considered critical to a business’s ongoing success and profitability. The absence of this individual due to death, disability, or unexpected departure would likely cause significant financial harm to the company. Examples of key persons often include founders, owners, top executives (CEO, CFO), lead scientists or engineers with specialized knowledge, top salespersons responsible for a large portion of revenue, or partners with crucial client relationships. For instance, in a small tech startup, the lead software developer who created the company’s core product could be a key person. In a medical practice, the lead physician whose reputation attracts many patients would be a key person. Identifying key personnel is the first step in determining the need for key person insurance, which is designed to compensate the business for losses incurred upon losing such an individual.

90. Key Person Life Insurance

Key Person Life Insurance (often called “key man insurance”) is a life insurance policy that a business purchases on the life of an essential employee or owner whose death would cause a significant financial loss to the company. The business is the policy owner, pays the premiums, and is the designated beneficiary of the death benefit. If the insured key person dies, the policy pays a tax-free death benefit directly to the business. These funds can be used by the business for various purposes, such as covering lost revenue, recruiting and training a replacement, paying off debts, reassuring lenders and investors, funding a buy-sell agreement to purchase the deceased owner’s shares, or facilitating an orderly shutdown of the business if necessary. For example, if a company’s top salesperson, responsible for 40% of its revenue, dies unexpectedly, the proceeds from a key person life insurance policy can help the company manage the immediate revenue shortfall and cover the costs of finding and training a new high-performing salesperson. The policy can be either term life or permanent life insurance.

91. Key Person Disability Insurance

Key Person Disability Insurance is a type of insurance policy purchased by a business to protect itself against financial losses resulting from a key employee or owner becoming disabled and unable to work for an extended period. Similar to key person life insurance, the business owns the policy, pays the premiums, and is the beneficiary of the disability benefits. If the insured key person suffers a qualifying disability as defined by the policy (often after an elimination or waiting period), the policy pays benefits directly to the business. These funds can be used to cover costs such as hiring a temporary or permanent replacement, offsetting lost revenue or profits due to the key person’s absence, paying ongoing operating expenses, or covering debt obligations. For example, if a lead engineer in a manufacturing firm becomes disabled and cannot oversee critical production processes, the disability benefits can help the company hire a skilled interim manager and compensate for potential production delays or quality issues. Benefits may be paid as a monthly income stream for a defined period (e.g., 12-24 months) or as a lump sum, depending on the policy structure.

92. Policy Owner (Key Person Insurance)

In a Key Person Insurance arrangement (both life and disability), the Policy Owner is the business itself. The business applies for the insurance policy on the life or disability of the key employee, pays all the premiums, and holds all ownership rights associated with the policy. For example, if “ABC Corp.” identifies its CEO as a key person and decides to purchase a $1 million key person life insurance policy, ABC Corp. will be listed as the owner on the policy documents. As the owner, the business has the authority to make changes to the policy (if permissible), receive dividends (if it’s a participating policy), access cash values (if it’s a permanent life insurance policy), and is responsible for ensuring premiums are paid to keep the coverage in force. This ownership structure is fundamental because it ensures that the benefits are paid to the business, which is the entity suffering the financial loss from the absence of the key person. The insured key person does not own the policy and typically has no rights under it, although their consent is required for the policy to be issued.

93. Beneficiary (Key Person Insurance)

In a Key Person Insurance policy (both life and disability), the Beneficiary is the business that owns the policy. This means that if the insured key employee dies (in the case of life insurance) or becomes disabled according to the policy terms (in the case of disability insurance), the insurance proceeds are paid directly to the company, not to the employee’s family or estate. For example, if “Tech Solutions Inc.” owns a key person life insurance policy on its chief technology officer, and the CTO unexpectedly passes away, Tech Solutions Inc. (as the beneficiary) will receive the death benefit payout from the insurance company. The business can then use these funds to mitigate the financial impact of losing the CTO, such as recruiting a successor, covering operational disruptions, or repaying business loans. This beneficiary designation ensures that the financial protection is directed to the entity that has an insurable interest in the continued service of the key person and would suffer a loss upon their absence.

94. Determining Coverage Amount (Key Person)

Determining the Coverage Amount for key person insurance involves assessing the potential financial loss the business would incur if the key person were to die or become disabled. There are several methods businesses use:

1. Multiples of Income/Salary: This common approach involves multiplying the key person’s annual salary (including bonuses and benefits) by a factor, typically ranging from 5 to 10 times. For example, if a key executive earns $200,000 annually, coverage might be sought in the range of $1 million to $2 million.
2. Replacement Cost: This method calculates the costs associated with recruiting, hiring, and training a suitable replacement for the key person, plus any lost revenue or productivity during the transition period. For instance, if hiring a new CEO costs $50,000 in recruitment fees, $30,000 in training, and the company anticipates $200,000 in lost revenue during the search, the coverage might be around $280,000 plus any additional buffer.
3. Contribution to Earnings/Profits: This method values the key person based on their direct contribution to the company’s profits or revenue. For example, if a key salesperson generates $500,000 in annual profit, the business might seek coverage for a multiple of that amount to cover the profit loss while a replacement is found and brought up to speed.

The most appropriate method and amount will depend on the specific circumstances of the business and the role of the key person. Insurers may also have their own underwriting guidelines that limit the amount of coverage available.