Picking a health insurance plan can be overwhelming. It takes time, energy, and the patience to compare benefits and reflect on your own needs. Being able to truly counsel someone on the right plan for their individual needs takes an expert, but there is basic information everyone should know before beginning the process.
While I am not an expert, there are experts out there. Most companies have HR staff who can counsel you on how to pick an insurance plan. If you’re buying through the federal or a state-based exchange, there are a number of resources available to you through the exchange websites. Or if you’re buying a private plan through an insurance broker, can help answer all of your questions.
But before turning to an expert or calling your parents, challenge yourself to read through these basic concepts to understand what kind of choices you need to make when selecting an insurance plan. Understanding these basic acronyms and core concepts will help you know what to look for, ask questions about, and do more research on.
Plan Types–What do all the acronyms mean?
Insurance companies all offer many different types of plans. Each health plan is made up of a mosaic of benefits, but the biggest decision is the plan type which impacts how you access doctors and medical services. Typically you can choose between an HMO, PPO, EPO, and POS. HMOs and PPOs are the most common choices. It’s important to keep in mind that your choices may be limited based on your employer.
Plan types differ based on how you can access doctors and other healthcare professionals. Different plans may restrict access to specialists through requiring referrals and give you more or less choice on which doctors you want to see. When considering plan types I would think about three different factors:
- Choice to seek specialist care
- Administrative headache (paperwork like prior authorizations, claim filing, etc.)
- Flexibility to see out of network providers.
Check out HIP’s breakdown of the most common healthcare acronyms:
HMO – Less Choice, Less Paperwork, Less Flexibility
An HMO is a Health Maintenance Organization and although it is more restrictive, that’s not necessarily a bad thing. With an HMO, a network of doctors are intended to manage your health. That means you have less choice over providers and will have to get a referral from your primary care doctor in order to see a specialist. With an HMO, you have virtually no ability to see out of network doctors unless you are prepared to pay for all the expenses out of pocket. If you see an out of network doctor, an HMO will provide no coverage and you will be responsible for all of the costs.
While you have less choice, your costs will be significantly lower with an HMO. HMOs typically have a low or no deductible–meaning you only have to pay small copays and do not have to hit a certain amount of out of pocket spending before your insurance kicks in to cover healthcare costs.
EPO – Less Choice, Less Paperwork, More Flexibility
EPOs or Exclusive Provider Organizations function similarly to HMOs. Like HMOs, EPOs do not cover out of network providers but, unlike HMOs, you can see a specialist without a referral. EPOs typically have deductibles and premiums in the same range as HMOs but may be a bit more expensive. EPOs strike a nice balance between HMOs and PPOs, but they may not be an option through your employer.
PPO – Maximum Choice, More Paperwork, Maximum Flexibility
PPOs or Preferred Provider Organizations offer the least restrictive health plan. With a PPO, you are still incentivized to see doctors in your network, but, unlike an HMO, you can actively seek specialists without referrals. PPOs also give more flexibility to see out of network providers, but those visits will still be more expensive than one with in network providers. With most PPOs, your insurer will cover only a portion of out of network services.
The increase in choice with a PPO comes with a higher cost. PPOs often have a higher premium and deductibles. With a PPO, you may also have a greater administrative burden because you may need to file claims for out of network providers or have to go back and forth with your insurance over deductibles and other costs.
POS – HMO/PPO Hybrid
POS or Point of Service plans vary in design but operate as an HMO/PPO hybrid. POS plans take different parts of HMO and PPO plans. With a POS plan you may need a referral to see a specialist like an HMO but the plan may also cover a portion of care out of network like a PPO. If you’re considering a POS plan you should read the benefits carefully to fully understand your coverage. Similar to EPOs, POS plans can sometimes be a good balance between the benefits of HMOs and PPOs.
Plans you should probably avoid but are important to understand:
HDHP – High Deductible Health Plans
There are also HDHPs or High-Deductible Health Plans which have a higher deductible than a traditional insurance plan. Although the premium on an HDHP is lower, your deductible is much higher meaning you would have to pay way more of your healthcare costs before the insurance company begins to cover your expenses.
The IRS defines a high deductible health plan as any plan with a deductible of at least $1,350 for an individual or $2,700 for a family. A HDHP is generally recommended for wealthier families who can afford to essentially self-insure or only need coverage help in case of an emergency that would hit their deductible. As a young person with limited financial resources, I would recommend steering clear of HDHPs if possible. Some personal finance advisors may disagree and argue that HDHPs can save a healthy, young person significant savings through paying lower premiums. However, many studies show that high deductibles can influence people to see their doctor less and reduce preventative care. You can read an in depth analysis of HDHPs and their potential impact on your health and the community in a RAND technical report here.
Association Health Plans
Association Health Plans or AHPs allow certain small businesses to group together to buy health insurance. Under new regulations, AHPs can be made up of businesses that share an economic interest, common purpose, are connected by geography, or professional interests. New regulations have loosened requirements for plans.
While AHPS are are intended to make insurance more affordable, they can leave you without critical coverage. AHPs are not required to include the 10 “essential health benefits” that are required by other insurers. If you pick a plan that does not cover the 10 essential health benefits, you could lack coverage for prescription drugs, lab services, or even things like pregnancy care and mental health services. You can see the full list of essential health benefits on healthcare.gov.
Short Term Health Plans
Short term health plans are aimed at people who need medical coverage for a few months in between coverage from longer term plans. You might use a short term plan if you are in between jobs, starting graduate school, or aging out of your parents’ plan and searching for a new plan. Although short term plans may be appealing due to their low cost, they are not a long term solution for health insurance. Similar to AHPs, short term plans do cover pre-existing conditions and do not meet the same standards of plans under the Affordable Care Act.
Plan Levels–Bronze, Silver, Gold, & Platinum
Beyond plan type, Insurance plans are organized into three levels–bronze, silver, gold, and platinum. Bronze plans offer the least coverage and platinum plans offer the most coverage. The plan level determines how much your insurer will cover and how much you will pay for your healthcare.
Platinum plans cover an average of 90% of your medical costs, meaning you pay 10%. Coverage goes down from there with gold plans at 80/20, silver plans at 70/30, and bronze plans at 60/40.
Plan levels also indicate what you can expect to pay. Costs will be a trade off between monthly premiums and out-of-pocket costs. Bronze plans will offer the lowest monthly premiums but the highest out-of-pocket costs while premium plans will offer the highest monthly premiums, but the lowest out-of-pocket costs.
What do you pay? Deductibles, Premiums, Copays, & Coinsurance
In addition to understanding the various types of plans, it’s important to understand the various costs incur under health insurance. Every insurance plan has a monthly premium. Plans vary on deductibles, copays, and coinsurance rates.
Premiums are the monthly payments that you make to your insurance company for coverage. If your insurance is through your employer, the premium is likely pulled out from your monthly salary. Employers also pay a percentage of your insurance premium. Different employers offer different levels of cost sharing (something to consider when applying and interviewing for jobs).
Selecting an insurance plan requires balancing the premium cost against the coverage and benefits the plan offers. On average, people who get insurance through their employers pay a total annual premium of $6,368, but employers contribute on average $4,953. That means, on average, an individual employee contributes $1,415 a year to their premiums. It may sound like a lot of money (and it is), but that equates out to about $118 per month.
When you pay it – You will pay a premium for your insurance monthly regardless of how often you go to the doctor and how much you put towards medical expenses. Think of it like rent for your health insurance.
A deductible is the amount of money you must put towards your healthcare costs before your insurance plan starts to pay. After you pay your full deductible, your insurance company will pay for covered services and you will only be responsible for a copay or coinsurance.
Certain services such as vaccinations, annual check ups, and preventative care are covered regardless of how much you’ve put towards your deductible (thanks Obama!). Some plans also have separate deductibles for prescription medications.
When you pay it – you will pay towards your deductible every time you seek care or pay for prescriptions until your deductible until it is reached. For example, if your deductible is $2,000 you will have to cover $2,000 worth of medical services before your insurance company begins to pay.
Copayments or Copays
Copays are a fixed amount you pay for a healthcare service such as visiting your primary care doctor, seeing a specialist, or lab work. If you’ve hit your deductible, then you will only pay your copay when you receive care.
When you pay it – After you’ve hit your deductible, you pay a fixed copay for each service. (ex: $20 every time you see your primary care doctor)
Coinsurance functions similarly to a copay. Like a copay, you pay coinsurance after you’ve reached your deductible. Unlike a copay, coinsurance is not a flat fee. Instead it is a percentage of your medical costs.
When you pay it – After you’ve hit your deductible, you will pay coinsurance for each service–the cost will depend on the cost of the service. (ex: 20% of the total cost of every primary care visit)
Other important Terms
Out of Pocket Maximum/Limit
In addition to all of the cost sharing systems explained above, each health plan has a maximum amount you can pay out of pocket each year. Once you hit this maximum through paying your deductible, copays, and coinsurance, you’re insurance plan will cover 100% of the costs of services.
Below is an example to explain how your deductible, coinsurance, and maximum out of pocket costs work together. This may be more information than you need right now, but it could also be helpful!
Example: Let’s say you have a deductible of $1,200; coinsurance of 35%; and an out of pocket maximum of $4,200. You need a surgery that costs $15,000.
First, you would pay your $1,200 deductible. Then you would be responsible for 35% of the remaining costs (coinsurance).
15,000 – 1,200 = 13,800 (cost of surgery after deductible)
13,800*.35 = 4,830 (your 20% coinsurance on the rest of the cost)
According to these calculations, your total cost would be $6,030 (deductible + coinsurance), BUT your out of pocket maximum is $4,200 so your insurance company will cover all the $1,830 in costs [$6,030 – $4,200] above your maximum. That means you only pay a total of $4,200.
HSA & FSA
Health Savings Accounts and Flexible Savings Accounts are arrangements you can use to pay for out-of-pocket medical expenses with tax-free dollars. The major difference between an HSA and an FSA relates to where you get your insurance and what kind of plan you have. An FSA is an arrangement through your employer, where money is taken out of your paycheck before taxes each pay period based on your “declared” amount. Each year, you set the amount to be taken out and put into an FSA. For example, if you choose to declare $600 for the year and you are paid twice a month, $25 will be taken from each pay check.
An HSA is for people who buy their coverage independently or who have a high-deductible health plan offered by their employer. Unlike an FSA, there is more flexibility for contributing to the account and you are not required to “declare” an annual amount at the beginning of the year. You can contribute money to the HSA via a deduction from your paycheck. HSAs have a higher annual amount limit and you can take the money with you when you change jobs. Because an FSA is associated with your employer health plan, you do not get to take the money if you switch jobs.
Out of pocket medical expenses can be things like copays, deductibles, prescription drugs, or medical devices. FSAs and HSAs are regulated by the IRS. You can learn more about about allowable medical expenses on the IRS’ website.
It’s important to be conservative on the amount you set aside in an FSA because many accounts work on a use it or lose it policy–if you have money left over at the end of the year, you lose it (or at least most of it). If you are just beginning to manage your own insurance and medical costs you could consider not using an FSA the first year. Track your out of pocket medical costs and then consider how much you want to set aside next year.