Insurance 101: Everything You Need to Know About Different Health Plans
Find the Right Coverage for Your Needs and Budget.
We’re all feeling the burden of inflation these days.
The state of our economy and our bewilderment at the gas pump has led (or forced) many of us to take a serious look at our finances and expenditures.
You will likely find a few things on your monthly credit card statements that you can easily live without and eliminate those costs.
What else should you consider?
It may be a great time to evaluate your health insurance coverage.
Surprised?
While insurance is not the most interesting topic, it is important. And it can be expensive. You want to make sure you are protected with the correct health plan.
Most people think insurance is confusing and oftentimes they end up with the wrong coverage.
If you are hoping to find a way to save in this area of your finances and get some clarity on insurance, keep reading!
I’ll walk through some general terminology and a few different types of health insurance plans. I promise to keep it as painless as possible and you will have a better understanding of health insurance as a result!
General Terminology
Premium
A premium is an amount an insurance carrier charges for plan coverage. Similar to how you pay a cellular provider each month for phone/data coverage. The premium is the amount you pay each month to be covered by the insurance plan, a fixed amount that you pay every month.
Deductible
A deductible is a set dollar amount you must pay before the insurance carrier will start to cover some of the costs for services.
Hospital stays, imaging, and diagnostic tests are services that are commonly subject to a plan deductible. Most deductibles reset on January first each year.
If you pay for AppleCare had to replace a cracked phone screen, you’re probably familiar with a deductible. The Genius at the store collected $29 before they would replace your screen. That $29 is the deductible. Kind of a bummer to have to pay out-of-pocket first. But $29 pales in comparison to how much it would have cost if you didn’t have insurance. Spoiler alert — it would have been a couple hundred dollars! Thank goodness for insurance.
Coinsurance
Coinsurance is the portion you will pay for medical services after you meet your deductible. This is also known as “cost-share”. Many health insurance policies will have coinsurance set at 20% for member responsibility; the insurance plan will cover the cost for the remaining 80% of the charges.
Example: After you met your deductible earlier in the year, you have to have an outpatient procedure that costs $1,000. You will pay $200 (20% of $1,000) for the procedure and the plan will pay the remaining $800 (80% of $1,000) of the bill.
Copayment/Copay
Some plans may include copayments or copays for some services. A copay is a flat amount that is due at the time of service. Copays are common for general office visits and prescription fills.
Example: Your plan has a $30 copay for office visits. That means your physician will collect a $30 payment from you at your appointment and the plan will cover the rest of the billed charges for the visit.
Out-of-Pocket Maximum (OOPM)
Plans include an annual cap, called Out-of-Pocket Maximum. This is the maximum amount you will pay for cumulative services in the policy year; the worst-case scenario. The deductibles, copays, and coinsurance you pay for services apply toward the OOPM.
Once you meet your OOPM, the plan will pay 100% of medical and pharmacy costs for the remainder of the year. Just like deductibles, the OOPM usually resets on January first each year.
Now that you would ace an insurance terminology quiz, let’s get you familiar with a few types of health insurance plans.
Types of Health Plans
HMO — Health Maintenance Organization
HMO plans typically have rich benefits. Many HMO plans may not even have a deductible; most services will just have set copay amounts. HMO plans usually have lower-cost premiums compared to other plan options.
A low-cost plan with great benefits. Seems too good to be true! There has to be a catch, right? While HMOs plans can be great, they do have some restrictions to keep in mind.
Availability/Network: HMOs usually have a smaller network of doctors that are local to a specific region.
Primary Care Physician (PCP): You will need to select a Primary Care Physician (PCP) to oversee your care. Your designated PCP will be your coach/gatekeeper and help to manage all of your medical care. If you run into a situation that will require specialized care, you will need to rely on them to refer you to another physician in the network.
Referrals: You will need to secure referrals from your PCP for any services outside of their care. You cannot see a different provider unless your PCP gives you the green light to do so.
Out-of-Network Benefits: There are no out-of-network benefits. If you receive care from a provider that is not part of the HMO network, you will be responsible for the full cost of the bill. The one caveat to this rule is a true emergency. Plans will provide coverage for emergency services at an out-of-network provider.
Although HMO plans have some restrictions, they do provide great coverage for members. If your trusted physician is a participating provider, it may be a good plan for you.
PPO — Preferred Provider Organization
PPOs are the most common type of health insurance plan. They offer more flexibility and have fewer restrictions than HMO plans.
Most plans have large provider networks, and will even pay a portion of the cost if you receive care from a provider that is not in their network. Although they supply out-of-network benefits, it’s most cost-effective to see in-network providers.
You do not have to pick a designated Primary Care Physician and most PPO plans do not require referrals for any services.
PPO plans typically have deductibles, copays, and coinsurance. Plans will have modest copays (maybe $35 or $50) for an office visit or prescription fill and maybe a $1,500 deductible for a hospital stay.
Many people choose PPO plans because they are easy and convenient. This can equate to higher premiums.
Think about when you go to the grocery store. You can choose to pay less for a whole green pepper or get the green pepper that is already pre-packaged and diced for you. But pre-packaged is going to be more expensive because it’s convenient. The same logic applies to health insurance!
HDHP — High Deductible Health Plan
A High Deductible Health Plan (HDHP) is a type of PPO plan. So all of the general PPO information applies. They have broad provider networks, include out-of-network coverage and members do not need to pick a PCP or get referrals for services.
What sets a HDHP apart from a typical PPO plan? There are a few differentiators:
- They have higher deductibles, which equates to lower monthly premiums.
- They do not have any copays. The deductible will apply to all services, including prescription fills. This means you will pay out-of-pocket for all medical services and perceptions until you meet the plan deductible.
- HDHPs can be paired with a Health Saving Account (HSA).
Number three in the list above is a big deal. The greatest perk of an HDHP plan is it allows you to be eligible for a Health Savings Account (HSA).
There is a lot to unpack when it comes to HSAs — they’re worthy of a separate article.
But here are the cliff notes: HSA’s offer a triple tax advantage. Contributions you make into the account reduce your taxable income, earnings for interest (and investment gains) are not taxed, and withdrawals are tax-free if used for qualified medical expenses. An HSA is the holy grail of tax advantages!
A HDHP plan may be a great option if you are somebody that rarely goes to the doctor. Take advantage of the lower monthly premiums and make regular (tax-free!) contributions into your HSA account to build up a safety net. If you have an unexpected medical expense down the road, you’ll be covered by the nest egg you built up.
What is the best type of plan?
It depends. Everybody has different circumstances when it comes to their health and finances. You’re going to have to do a bit of reflection and analysis to determine which plan will be best suited for you.
Each insurance carrier has a member portal where you can download claims information. Take a look at your claims over the past two or three years and evaluate how much you utilized the insurance and also how much you’ve paid in premiums.
You may discover that you have used the insurance a lot, with numerous office visits and prescription fills. Or maybe you will learn that you haven’t even been to the doctor once in the past couple of years.
Does your current coverage make sense based on how much you utilize the plan?
You may find that you are overinsuring yourself by paying high premiums for more insurance than you need. Consider a higher deducible plan. Why pay more premium if you rarely use the plan?
If you are anticipating a hospital stay or procedure soon, you may conclude it would be difficult for you to afford the deductible. In this case, you may find more value in paying a little more each month on premiums in exchange for a lower deductible plan.
You will also need to figure out your risk tolerance.
The good news — there are no long-term commitments with health insurance. Policies are only in effect for a year. If you try out a plan and discover it’s not a good fit, you can change it down the road. Ditch that policy and try out another one in the future! Lesson learned.
There is a lot to consider when it comes to health insurance. There are different pros and cons to each type of plan. I hope the information you read today will help you make an informed decision about your coverage in the future.
