Health Insurance today can be very confusing with many terms and phrases being tossed around. The following information is kind of a health insurance 101 and should only be used to help you understand insurance terms.
Health insurance can be divided into five different categories:
- Preferred Provider Organization (PPO)
- Health Maintenance Organization (HMO)
- Health Savings Account (HSA)
- Point of Service (POS)
- Indemnity Plan
A few insurance terms that most plans health plans have in common are deductible, coinsurance, and network.
- Deductible– is the portion of your health charges that you will be responsible for paying before the insurance company pays anything. Most plans have a deductible.
- Coinsurance– After the deductible is met, coinsurance pays for some of the costs of health care. It’s just as the name implies with two parties paying the health care costs. Not all plans have coinsurance.
- Network -A group of medical providers such as a group of doctors, hospitals, labs, etc. that have a relationship with the insurance company and have established specific pricing for services.
Preferred Provider Organization (PPO)
Most Preferred Provider Organizations (PPOs) always have a deductible and coinsurance and if you stay within the network, there are also co-pays for certain services where the deductible and coinsurance do not come into play. For example, an office visit might be a $15-$40 co-pay without regard to a deductible of coinsurance. For a hospital stay, you would be responsible for the deductible and your portion of the coinsurance. A word of caution, the co-pays are often not all inclusive. For example, an office visit co pay may mean just covers the physician’s portion of the visit. Any lab or x-ray charges, might go towards your deductible and you would have to pay the charges. There is almost always an indemnity plan included in the PPO which allows you to see any doctor you wish, however the out of pocket charge to you will be greater.
Advantages: A PPO provides a great deal of choice of doctors and hospitals. Because of this, the PPOs are the most popular plans at this time.
Disadvantages: Coverage not as comprehensive as an HMO and you would experience greater out of pocket expense
Health Maintenance Organization (HMO)
A Health Maintenance Organization (HMO) is the broadest type of health coverage available. The deductible is typically $0 and often there is no coinsurance. Normally, an HMO has a co-pay for all services. The reason we say this is the most comprehensive coverage is that the co-pay covers all the service that the physician or lab charges. When you go for an office visit, it’s all-inclusive. There is normally a co-pay for a hospital stay or outpatient surgery. If you encounter coinsurance on an HMO, it usually will be in
conjunction with a co-pay for the hospital stay. HMOs usually fully cover the cost of physicals, where the other plans normally have a limit to what they will pay for a physical.
Advantages: The HMO offers the broader coverage with less out of pocket costs during the plan year.
Disadvantages: Primarily less choice in doctors and hospitals. Many of the doctors in an HMO will be employees of the HMO and not in private practice. Treatment is often in a clinical environment.
Health Savings Account (HSA)
The Health Savings Account, formerly MSA, was established by Congress in an effort to make people more responsible for their health care costs. Normally, it is some type of indemnity plan with a high deductible. As an incentive for a person to manage their health care costs, Congress allowed an insured to pay into a special HSA account an amount equal to their chosen deductible. This payment would be taken from the insured’s income on a before tax basis. The insured would then be allowed to use this account to pay for medical and related expenses. The money could even be used to cover medical charges not covered by their health plan. An HSA may be funded in one of three ways: 1) you can fund it 2) your employer can fund it or 3) you and your employer can fund it.
To further simplify, the HSA comes in two parts. One is a high deductible health plan for which you would pay a reduced premium. The second is a medical saving account, where you could pay into the account an amount annually, up to the amount of your deductible. This account is your money. If you use the money to pay medical expenses, it is never taxed. If you do not use the money in this account, it will remain your money and essentially becomes like an IRA. The difference between an IRA and an HSA is the HSA funds can be withdrawn at any time to pay medical expenses without penalty. Also, any excess funds must remain in the HSA account until age 65 in order to be withdrawn without penalty. Any monies withdrawn after age 65 will be subject to regular income tax at the time of withdrawal.
Point of Service (POS)
A POS plan is simply an HMO that also includes an indemnity plan that allows you to go out of network if you choose. All the info on the HMO applies to the POS plus the benefits of out of network treatment with the indemnity plan. Referrals are not required as they are with an HMO.
An indemnity plan was the first type of health insurance plan offered. There is no network of providers (you can go to any doctor or hospital) and there are no co-pays. As an insured with a $500 deductible, you would pay the first $500 of any charges. Then you would go into the coinsurance period where both you and the insurance company are paying, i.e. 80/20 for typically $5000 to $10,000, costing you another $1000 to $2000. After that, the insurance company pays everything up to the limit of the policy. There is always an indemnity plan attached to every POS and PPO plan.
Coverage remains the same for any doctor seen. An indemnity plan is ideal for rural areas where there are no PPO or HMO networks.
The cost of an indemnity plan is usually much higher than a PPO plan because the insurance company does not negotiate cost savings with the providers thereby costing them more money whenever a claim is paid out. Also, there are no office visit co-pays. All charges are applied toward the deductible.