Employers typically offer a choice of one or more plans, so deciding which one is best for you may be difficult. There are many decisions that go into selecting the right plan—not just the cost of the premium. The first step in making the best choice is understanding how the different types of medical plans work.
Key Terms for Understanding Your Medical Plan Options
- Covered Expenses. These are the service provider and pharmaceutical charges the insurance company considers eligible for reimbursement.
- Service Provider. The doctor, hospital, or eligible health care practitioner that actually delivers the service.
- Deductible. This is the amount of money you have to pay out-of-your pocket before the insurance company reimburses you or pays your service provider directly for covered expenses (depending upon the type of plan).
There is typically a deductible per individual and a deductible per family. If you have more than two family members, the family deductible can help your coinsurance (see below) kick in faster. Here's how:
Say your individual deductible is $250 per year and your family deductible is $500. Your covered expenses are $250, your spouse's are $200, and your child's are $150—that's a total cost of $600 in covered expenses. Even though only one of you has met the $250 individual deductible, together you have met the $500 family deductible. So, your coinsurance starts to pay your costs over $500.
- Coinsurance. After your deductible is satisfied, the insurance company pays a percentage of covered expenses by either reimbursing you or paying your service provider directly, depending upon the type of plan. The insurance company pays at least 50%, but in most cases the coinsurance ranges from 70% to 90%, up to a specified limit. The insurance company then pays 100% of covered expenses thereafter. (See Out-of-Pocket Maximum below.)
- Copay. This is the amount you have to pay for doctor's visits in a Preferred Provider Organization (PPO) or Health Maintenance Organization (HMO). The copayment typically is not applied against your deductible.
- Out-of-Pocket (OOP) Maximum. It is the maximum amount of out-of-pocket costs for covered medical expenses you will need to pay in a calendar or plan year. Most plans also have an OOP maximum for the individual and the family. Here are two examples of how your plan may describe the OOP maximum.
- Example 1: After the deductible is satisfied, the company will pay 80% (coinsurance) of the next $5,000 of covered medical expenses, and 100% thereafter.
- Example 2: The OOP for an individual is $ 1,000 and $3,000 per family, plus the deductible, or the OOP is $1,500 for an individual and $3,000 per family, including the deductible.
- Reasonable and Customary Charges. This is the average fee charged for a particular service, rendered in a particular geographic area, by service providers with similar training and experience.
Types of Health Insurance Plans
To make the right health insurance decisions, you will need to understand what kinds of insurance plans are available. The principal ones are as follows:
- Traditional group plans, which allow you to see any provider and reimburse you for a percentage of what you pay for doctor's bills.
- Preferred Provider Organization (PPO) plans, where you typically make only a small copayment if you see a provider in the plan's network.
- Health Maintenance Organizations (HMOs) plans, which are similar to PPOs but require you to select providers within the network.
- Consumer-Driven Health Care (CDHC) plans, which combine high-deductible insurance with an untaxed employer-funded personal health account with which you pay medical expenses.
- Under the Affordable Care Act, exchanges were put in place in October 2013 to provide individuals and small businesses an opportunity to purchase coverage at competitive prices. Twelve states and the District of Columbia operate their own exchanges, while 27 states opted to use the federally-facilitated marketplaces, and 11 are operating it via a state-federal partnership (including 4 federally-supported marketplaces and 7 state partnership marketplaces).
IMPORTANT NOTE: The Affordable Care Act of 2010 put in place certain consumer protections regarding health insurance plan practices. For example, health insurers must publicly justify the reasoning in order to raise premiums by 10 percent or more. Insurers can no longer cancel policies except under specific, strict conditions. And, under the 80/20 Rule, a health insurer must spend at least 80 percent of every premium dollar on medical care and quality improvements. If they spend more than 20 percent on advertising, overhead, or executive compensation, they must provide a rebate to members.
Tax, Funding, and Other Considerations
You will also need to understand how you are paying for medical coverage—is it with pre-tax dollars? If you have a choice of insurance plans, making the right choice depends on a number of factors, and you should take them all into account. If you terminate employment, your employer may be required to offer you COBRA coverage. For details see the section on COBRA Coverage.
In addition, you should look into the costs and benefits of dental plans and vision and hearing plans.
Increasingly, the trend in paying for medical care is for individuals to "self-insure" by establishing a savings account dedicated to medical payments. There are two principal types:
- Health Care Flexible Spending Accounts, which save you taxes by allowing you to contribute with pre-tax dollars.
- Health Savings Accounts, which also require a high-deductible health plan but are independent of employment and can be established by any qualified individual.