Ever feel overwhelmed by the complexity and jargon of the health insurance industry?
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Understanding the health insurance plan landscape can be daunting. Even for seasoned professionals new developments in the market, new laws and implementations can make choosing best options confusing. No single type of plan will cover all medical expenses, but the information provided here may help you to understand the basics.
Fee-for-Service (or Indemnity) Plans
This is the type of insurance that most people had many years ago where you’d make an appointment with any medical provider. The plan would pay a percentage of the bill – usually 80%. You pay for the other 20%, known as coinsurance.
Managed Health Plans
As term implies, under managed care insurance policies, consumers obtain coverage using networks of healthcare providers and agree to follow rules designed to lower their cost of medical care, and in turn their premiums. The service providers also agree to provide their services at discounted rates, in return for a higher patient volume.
Several types of plans are discussed below
HMO: A Health Maintenance Organization (HMO) has the primary goal of reducing healthcare costs in a fee-for-service arrangement, focusing on preventative care and cost controls.
- Insured members pay a fixed monthly premium, regardless of how much medical care is required in a given month. In return for this fee, most HMO plans provide a wide variety of medical services, from office visits to hospitalization and surgery.
- With a few exceptions, HMO members must receive their medical treatment from physicians and facilities within the HMO network.
- Insured individuals choose a Primary Care Physician (PCP) who is the first contact for all medical care needs. The PCP provides general medical care and must be consulted before you see a specialist. Because of this control system, HMO plans generally cost less than other insurance plans.
PPO: Like an HMO, a Preferred Provider Organization (PPO) is a managed healthcare system. However, there are several important differences between HMO’s and PPO’s
- PPO physicians provide medical services at discounted rates and may set up cost controls programs. In return, the insurer attempts to increase patient volume by creating an incentive for employees to use physicians and facilities in the PPO network.
- The insurance company generally reimburses the member for the cost of the treatment, less any co-payment. Physicians and hospitals submit their bills directly to the insurance company for payment. The insurer pays the healthcare provider the covered amount directly and the member pays a set co-payment amount. The price for each type of service is negotiated in advance by the healthcare providers and the PPO sponsor(s).
POS: A Point of Service (POS) plan is a type of managed healthcare system that combines characteristics of the HMO and the PPO insurance plans
- Like an HMO, there is no deductible and usually only a co-payment when using a healthcare provider within the network.
- If a patient chooses to go outside the network for healthcare, POS coverage functions more like a PPO. treatment will likely be subject to a deductible and the co-payment will be a percentage of the physician’s charges.
High Deductible Health Plans (HDPD), aka Consumer Driven Health Plans (CDHP): Changing how we buy healthcare
Introduced in 2004, Consumer Driven Health Plans were designed to motivate better health care purchasing decisions. The underlying idea is that people make smarter financial choices when they’re spending their own money — especially when the money would otherwise grow in a tax-advantaged account.
High Deductible Health Plans (HDHP) combined with a Health Savings Accounts (HSA) or a Health Reimbursement Arrangements (HRA) are the fastest growing way for financing health care. The reason: HSAs put forward a tax efficient way to minimize overall health care expenditures.
These plans provide traditional medical insurance coverage, subject to a high deductible and a tax free way to help you build savings for future medical expenses. The HDHP provides a great deal of flexibility and discretion over how you choose to use your health care benefits.
When you enroll in an HDHP, the type of health plan determines if you are eligible to participate in a Health Savings Account (HSA) or a Health Reimbursement Arrangement (HRA).
Some of the characteristics of HDHP’s are listed below:
Your deposits to a Health Savings Account (HSA) reduce your taxable income, and withdrawals from the account are never taxed — as long as these funds are used to pay qualified expenses, which are defined by the IRS. In other words, HSAs allow you to fund out-of-pocket health care expenses with pre-tax money.
Unused HSA funds are yours to keep, and can remain in your account, without tax consequence, for as long as you live. You can make tax-advantaged HSA deposits until age 65.
Tax-free withdrawals for “qualified medical expenses.”
Qualified medical expenses include:
- Dental treatment such as fillings, braces, extractions
- Hearing aids including batteries
- Prescription drugs and over-the-counter drugs prescribed by a doctor
- Eye exams, eyeglasses and contact lens
- Premiums for qualified long term care insurance (dollar limits may apply)
- Out-of-pocket expenses including deductibles, coinsurance and co-payments
- You can pay your deductible with funds from your HSA or HRA.
- If you have an HSA, you can also choose to pay your deductible outside of the HSA with other personal funds, allowing your health savings account to grow.
- Interest accrues on the HSA balance.
Rollover of funds
- Unused funds and interest carry over, without limit, from year to year.
- The HSA is yours to keep—even when you retire, leave the Federal government, or change health plans.
Funds held with a qualified trustee or custodian
- Example: Bank, insurance company, Federal credit union.
Other Types of Insurance that can be funded by an HSA:
- Dental care
- Vision care
- Long-term care
- Specified disease or illness
- Insurance that pays a fixed amount per day of hospitalization
Insurance or Accounts Not Permitted with an HSA:
- General Health Care Flexible Spending Account (HCFSA) or a Spouse’s FSA
- Medical coverage by a non-HDHP
- Military TRICARE plans and/or VA benefits used within previous 3 months
- Part A and/or Part B Medicare
Below is a summary of some of the features and characteristics of Health Reimbursement Accounts (HRA) and Health Savings Accounts (HSA)
A Health Reimbursement Account, or HRA, is an account that contains benefit dollars contributed by the employer to assist with satisfying the high deductible.
Employer HRA funds may be rolled over from year to year and accumulate to satisfy deductible obligations of the plan, cover non-reimbursable medical expenses such as prescriptions, co-payments, or non-covered qualified dental and vision care.
With participation in an HRA, members receive:
- Choices on how to spend their health care dollars
- Discounts on covered and non-covered qualified medical expenses
- No out-of-pocket charges for preventive care, although a maximum limit may apply (eg. $500).
The HRA is not portable, and funds return to the Employer if the Employee leaves the company.
A Health Savings Account, or HSA, is a portable, flexible, interest-bearing account that can be funded either by the employer, the employee, or both.
HSAs are individual investment account that belongs to the employee. The account contains pre-tax dollars contributed each pay period by the employee, as well as benefit dollars contributed by the employer.
You may not participate in an HSA if you are covered under a non HSA medical plan. You also may not participate if you are eligible for Medicare.
With participation in HSAs, members gain:
- The ability to earn interest on their health care dollars
- Significant tax savings
- Greater take-home pay with pre-tax HSA payroll deductions
- Discounts on covered and non-covered qualified medical expenses
- No out-of-pocket charges for preventive care
- Unused dollars roll over for the future, encouraging the usage of the HSA as a savings account rather than just a spending account to cover health costs.
Additional annual ‘Catch up’ contributions of $1,000/yr are available for persons ages 55-65.
Note that money can also be used for non-medical expenses but you have to pay regular income tax and a 10% tax penalty if you are younger than 65.
to your account?
|Withdrawal of funds
for non-medical purposes?
|Yes, subject to tax;
and penalties prior to age 65
|Portable?||Yes. You own your account.||No. Your account is forfeited
if you leave the sponsoring
health plan or leave
(except for retirement).
Tradeoffs to consider
For many consumers, HSAs produce a net financial gain, with the understanding that you’ll have a less generous health insurance plan.
With an HSA, you have a higher insurance deductible, and you won’t have office visit and prescription co-pay benefits typical of PPO and HMO plans. Your potential out-of-pocket health care expenses may increase.
However, you’ll have lower going in insurance premiums, taxable income reduced by HSA deposits, out of pocket health care expenses paid with pre-tax funds, first dollar preventive care benefits and freed up dollars to put toward savings.
Are HDHP’s Right for You?
If you’re not already enrolled in an HSA, you should give it serious consideration. Over the years we’ve evaluated numerous health insurance plans, leading us to conclude that HDHP’s in many situations provide a significant financial upside and limited financial downside. If your medical expenses are generally limited to preventive care, or your medical conditions would cause your known annual expenses to exceed the out of pocket limits, you should definitely consider an HDHP, especially if you also have the ability to make additional voluntary contributions to your HSA to accelerate the accumulation of funds for future medical expenses.
With most HDHP’s, once you hit the out of pocket limit, there is no out-of-pocket expense for covered in-network services or prescriptions. If you have significant medical expenses that do not approach catastrophic limits, you are probably better off in a traditional plan.