Health Insurance 101
Health Plan Basics
The first step towards understanding how your health insurance policy works is knowing the five main components common to all health plans: premiums, deductibles, coinsurance, copays and out-of-pocket maximums.
- Premium This is the dollar amount that you pay for your health insurance plan, whether you use medical services or not. You and/or your employer typically pay the premium monthly or quarterly. This is the price by which most plans are compared in the Health Marketplace, which can be misleading. Plans with the lowest premium price can often end up being the most expensive, as these plans typically have the highest deductibles.
- Deductible This is the yearly amount you will pay upfront for health care services before your health insurance kicks in. For example, if you have a $1,500 deductible, you will be liable for paying the first $1,500 in medical bills before you will see a dime from your insurance company. (In some cases, such as a visit to the emergency room, deductibles are waived.) Generally, the higher the deductible, the lower the premium. Healthy, younger individuals often choose plans with high deductibles, while those more at risk will tend towards plans with higher premiums, and lower deductibles.
- Coinsurance This is the amount of your medical bill that you will pay after you have met your deductible. Coinsurance is always calculated as a percentage, such as 80/20, in which your health insurance company will pay 80 percent of your bill, and you pay the remaining 20 percent. For example, if a visit to the doctor costs $100, your insurance company will pay $80, leaving you to pony up 20 bucks.
- Copay Often confused with coinsurance, copay is a not-so-token payment you must pay each time you use a medical service, and is usually a small portion of the medical bill (i.e. $10 to $60). A copay is based on the insurance principle of moral hazard, which means it is designed to keep you from running to the doctor at the drop of a hat, but not so high that it discourages you from seeking medical help when you need it.
- Out-of-Pocket Maximum This is the most you will have to pay for medical services during your policy period (generally a year), not counting your premium or other health care costs not covered by your health insurance policy. Once you hit your out-of-pocket maximum, your insurance company will pick up 100 percent of the bill (at least for covered services). Under A.C.A. law, the maximum amount a consumer with single coverage will pay out-of-pocket in one year is currently $6,350 (for 2014), while a family’s maximum out-of-pocket will run $12,700. These limits will change, as they are calculated yearly.
Let’s put it all together. Say — god forbid — you have an appendectomy, which ends up costing $28,000. If you have had no prior medical bills in your policy year, you will first have to pay your deductible (say it’s $2,500) in full, which brings the bill down to $26,500. Then your insurance kicks in, though it only pays 80 percent of the bill. Consequently, you are still liable for 20 percent of the bill, but — and here’s the good part — only until you reach your out-of-pocket maximum, which thanks to Obamacare is capped at $6,350 for an individual, $12,700 for a family. In this case, you’ll pay your $2,500 deductible in full, plus $3,850 of the remaining bill. After that, any covered medical services you incur for the rest of the year will be paid entirely by your health insurance. Yet when your policy year ends, you have to reset the financial odometer, and once again, you will be subject to your $2,500 deductible.
KNOW YOUR NETWORK
Health Insurance is a constantly evolving landscape, as escalating costs force the industry to create innovative paths to bend the proverbial cost curve. Traditional health plans have given way to an alphabet soup of networks: HMO’s, POS’s, PPO’s. Learning how to navigate this changing landscape is an essential skill for anyone seeking the right kind of health insurance to meet their particular needs.
- Traditional Health insurance For years, health insurance was fairly straightforward: you broke a bone, you went to the doctor of your choice; you paid him for fixing it, and your insurance company reimbursed you for the same amount. This was the reimbursement model, which soon gave way to indemnity plans. In the indemnity model, your insurer determines what price it will pay for that broken bone, based on the UCR, or “Usual, Customary and Reasonable” rates for fixing a broken bone. If the doctor charges more than the UCR price, well, you’re stuck with paying the difference. This Fee-for-Service model once dominated the market, but was unable to exert much control over costs. Consequently, these are typically the most expensive health insurance plans you can buy, and are now somewhat of an endangered species given Obamacare, where the maximum out-of-pocket cap now is $6,350 per individual, and $12,700 for a family. The premium price for traditional insurance can be prohibitively expensive. Instead, this Fee-for-Service model has largely been replaced by plans that provide risk-sharing and active involvement on the part of the consumer, such as those provided by HMOs, many of which are now offered on the Health Exchange.
- Health Maintenance Organizations HMOs came into being as a result of President Nixon’s Health Maintenance Organization Act of 1973 (authored by Sen. Kennedy), and really gained momentum in the 80s and 90s. HMOs are based on network of prepaid providers who are capitated, or given a set fee per patient regardless of treatment. Unlike indemnity insurance, an HMO covers care by using doctors and other professionals who have been contracted (and prepaid) to treat patients according to the HMOs’ guidelines and restrictions. (And in turn, these providers are assured a guaranteed stream of business. Since doctors work on this retainer fee, there isn’t much incentive to prolong treatment, which also keeps a lid on prices. (Some physicians may even be liable for penalties if there are too many office visits, or too much time spent in the hospital by HMO members.) Members of an HMO typically select a doctor to be their primary health care provider, and this physician coordinates all of their medical care. Should you wish to see a specialist, you must first be referred by your primary care physician (PCP), which can result in longer wait times. (The majority of services need to be pre-authorized.) If you end up seeing someone who isn’t part of the prepaid network, you might have to foot the entire bill. Also, as medical records are routinely reviewed by auditor types as a way of controlling costs, your medical privacy may also be a concern. On the bright side, this form of managed care results in greatly reduced costs, with very low monthly premiums, which make them popular with employers who want to provide benefits to their employees without busting the bank. Some HMOs don’t charge deductibles at all. Plus, there is a lot of transparency, with few hidden costs. There are different forms of HMOs. Some are staff models, where doctors, labs, and a pharmacy are situated in clinic environment: one location for one-stop shopping. Others are more flexible HMOs known as IPAs (Independent Practice Associations), where you have to go to the doctors’ own offices. These IPSs typically provide a larger selection of doctors and specialists to choose from. HMOs have always been strong on offering free preventative services as a way to keep a lid on prices, services that Obamacare has now made standard across the board in all insurance plans, which may dim their appeal. Yet HMOs are beginning to adopt more choices in their networks, often allowing you access to preferred providers outside of the usual network, plus HMOs are traditionally less expensive than the other main type of insurance found on the new Health Exchange: PPOs.
- Preferred Provider Organizations PPOs blend the strengths of traditional indemnity plans with the cost-savings of HMOs (a strict network and prepaid medical care), which lends them great flexibility. Just like an HMO, they are based on a network of health care providers who agree to a discounted fee schedule when seeing PPO patients. PPOs also provide coverage for services from providers who are not part of the network. You may have to pay more to use these out-of-network providers, and your premiums will likely be higher, but you can make an appointment directly with a specialist or hospital without having to waste time being “pre-approved” by your primary care physician, as you would with a typical HMO. If you have a doctor you want to keep, and want the flexibility to go straight to a specialist, a PPO is a solid choice, especially if your doctor isn’t part of a local HMO network.
- Point of Service A small but growing share of plans in the Health Exchange Marketplace are Point-of-Service markets, a marriage-of–convenience between HMOs and PPOs. These POSs are typically more expensive than HMOs yet cheaper in price than a PPO (but usually come with a smaller network). You select your primary care physician from a network list, much like an HMO, and use that doctor to refer you to specialists when needed. You may self-refer yourself to a specialist who is out-of-network, but you’ll likely pay a larger percentage of the cost than if you were in a PPO. That is, unless your doctor refers you out-of-network, in which case your health plan will pick up most of the tab, unlike an HMO. Consider POSs as HMOs with out-of-network benefits, which makes them a good choice for people who want some geographic flexibility and out-of-network benefits, and don’t mind that it provides a more limited (and less expensive) network than what a PPO provides. If you never plan on going out-of-network, an HMO might make more sense.