If you have ever been sick or injured, you know how important it is to have health coverage.
What types of health coverage are available? If your employer offers you a choice of health plans, what should you know before making a decision? In addition to coverage for medical expenses, do you need some other kind of insurance? What if you are too ill to work? Or, if you are over 65,will Medicare pay for all your medical expenses?
Making Sense of Health Insurance
The term health insurance refers to a wide variety of insurance policies. These range from policies that cover the costs of doctors and hospitals to those that meet a specific need, such as paying for long-term care. Even disability insurance—which replaces lost income if you can’t work because of illness or accident—is considered health insurance, even though it’s not specifically for medical expenses.
But when people talk about health insurance, they usually mean the kind of insurance offered by employers to employees, the kind that covers medical bills, surgery, and hospital expenses. You may have heard this kind of health insurance referred to as comprehensive or major medical policies, alluding to the broad protection they offer. But the fact is, neither of these terms is particularly helpful to the consumer.
Today, when people talk about broad health care coverage, they are more likely to refer to fee-for-service or managed care. These terms apply to different kinds of coverage or health plans. Moreover, you'll also hear about specific kinds of managed care plans: health maintenance organizations or HMOs, preferred provider organizations or PPOs, and point-of-service or POS plans.
While fee-for-service and managed care plans differ in important ways, in some ways they are similar. Both cover an array of medical, surgical, and hospital expenses. Most offer some coverage for prescription drugs, and some include coverage for dentists and other providers. But there are many important differences that will make one or the other form of coverage the right one for you.
The section below is designed to acquaint you with the basics of fee-for-service and managed care plans. But remember: The detailed differences between one plan and another can only be understood by careful reading of the materials provided by insurers, your employee benefits specialist, or your agent or broker.
This type of coverage generally assumes that the medical provider (usually a doctor or hospital) will be paid a fee for each service rendered to the patient—you or a family member covered under your policy. With fee-for-service insurance, you go to the doctor of your choice and you or your doctor or hospital submits a claim to your insurance company for reimbursement. You will only receive reimbursement for "covered" medical expenses, the ones listed in your benefits summary.
When a service is covered under your policy, you can expect to be reimbursed for some, but generally not all, of the cost. How much you will receive depends on the provisions of the policy on coinsurance and deductibles. Here’s how it works:
- The portion of the covered medical expenses you pay is called "coinsurance."
Although there are variations, fee-for-service policies often reimburse doctor bills at 80 percent of the "reasonable and customary charge." (This is the prevailing cost of a medical service in a given geographic area.) You pay the other 20 percent—your coinsurance.
However, if a medical provider charges more than the reasonable and customary fee, you will have to pay the difference. For example, if the reasonable and customary fee for a medical service is $100, the insurer will pay $80. If your doctor charged $100, you will pay $20. But if the doctor charged $105, you will pay $25.
Note that many fee-for-service plans pay hospital expenses in full; some reimburse at the 80/20 level as described above.
- Deductibles are the amount of the covered expenses you must pay each year before the insurer starts to reimburse you. These might range from$100 to $300 per year per individual, or $500 or more per family. Generally, the higher the deductible, the lower the premiums, which are the monthly, quarterly, or annual payments for the insurance.
- Policies typically have an out-of-pocket maximum. This means that once your expenses reach a certain amount in a given calendar year, the reasonable and customary fee for covered benefits will be paid in full by the insurer. (If your doctor bills you more than the reasonable and customary charge, you may still have to pay a portion of the bill.) Note that Medicare limits how much a physician may charge you above the usual amount.
- There also may be lifetime limits on benefits paid under the policy. Most experts recommend that you look for a policy whose lifetime limit is at least $1 million. Anything less may prove to be inadequate.
The three major types of managed care plans are health maintenance organizations (HMOs), preferred provider organizations (PPOs), and point-of-service (POS) plans.
Managed care plans generally provide comprehensive health services to their members, and offer financial incentives for patients to use the providers who belong to the plan. In managed care plans, instead of paying separately for each service that you receive, your coverage is paid in advance. This is called prepaid care.
For example, you may decide to join a local HMO where you pay a monthly or quarterly premium. That premium is the same whether you use the plan’s services or not. The plan may charge a copayment for certain services—for example, $10 for an office visit, or $5 for every prescription. So, if you join this HMO, you may find that you have few out-of-pocket expenses for medical care—as long as you use doctors or hospitals that participate in or are part of the HMO. Your share may be only the small copayments; generally, you will not have deductibles or coinsurance.
One of the interesting things about HMOs is that they deliver care directly to patients. Patients sometimes go to a medical facility to see the nurses and doctors or to a specific doctor’s office. Another common model is a network of individual practitioners. In these individual practice associations (IPAs), you will get your care in a physician’s office.
If you belong to an HMO, typically you must receive your medical care through the plan. Generally, you will select a primary care physician who coordinates your care. Primary care physicians may be family practice doctors, internists, pediatricians, or other types of doctors. The primary care physician is responsible for referring you to specialists when needed. While most of these specialists will be "participating providers" in the HMO, there are circumstances in which patients enrolled in an HMO may be referred to providers outside the HMO network and still receive coverage.
PPOs and POS plans are categorized as managed care plans. (Indeed, many people call POS plans "an HMO with a point-of-service option.") From the consumer’s point of view, these plans combine features of fee-for-service and HMOs. They offer more flexibility than HMOs, but premiums are likely to be somewhat higher.
With a PPO or a POS plan, unlike most HMOs, you will get some reimbursement if you receive a covered service from a provider who is not in the plan. Of course, choosing a provider outside the plan’s network will cost you more than choosing a provider in the network. These plans will act like fee-for-service plans and charge you coinsurance when you go outside the network.
What is the difference between a PPO and a POS plan? A POS plan has primary care physicians who coordinate patient care; and in most cases, PPO plans do not. But there are exceptions!
HMOs and PPOs have contracts with doctors, hospitals, and other providers. They have negotiated certain fees with these providers—and, as long as you get your care from these providers, they should not ask you for additional payment. (Of course, if your plan requires a copayment at the time you receive care, you will have to pay that.)
Always look carefully at the description of the plans you are considering for the conditions of payment. Check with your employer, your benefits manager, or your state department of insurance to find out about laws that may regulate who is responsible for payment.
HMOs, PPOs, and fee-for-service plans often share certain features, including preauthorization, utilization review, and discharge planning.
For example, you may be asked to get authorization from your plan or insurer before admission to a hospital for certain types of surgery. Utilization review is the process by which a plan determines whether a specific medical or surgical service is appropriate and/or medically necessary. Discharge planning is an approach that facilitates the transfer of a patient to a more cost-effective facility if the patient no longer needs to stay in the hospital. For example, if, following surgery, you no longer need hospitalization but cannot be cared for at home, you may be transferred to a skilled nursing facility.
Almost all fee-for-service plans apply managed care techniques to contain costs and guarantee appropriate care; and an increasing number of managed care plans contain fee-for-service elements. While the distinctions among plans are growing increasingly blurred, the number of options available to consumers increases every day.
Your employer may have set up a financial arrangement that helps cover employees' health care expenses. Sometimes employers do this and have the "health plan" administered by an an insurer or another company; but sometimes there is no outside administrator.
With self-insured health plans, many state regulations do not apply; instead, certain federal laws may apply. Thus, if you have problems with a plan that isn't state regulated, it's probably a good idea to talk to an attorney who specializes in health law.
Consumer Choice Products
In today's marketplace, employers and insurers are exploring a new type of health insurance product, known as consumer-choice or consumer-driven health insurance. The goal of this type of health insurance - which is really a range of insurance products that have common features - is to provide financial incentives for consumers to consider the cost of services and the value of alternatives.
These products move away from the most common health insurance model, which includes coverage for prepaid, discretionary services (in other words, for services like routine check-ups), to a more traditional approach, with the consumer responsible for lower-cost services (like check-ups), and insurance coverage responsible for higher-cost care that is frequently not discretionary (like a necessary surgical procedure). Consumer choice approaches seek to replace incentives that promote the unnecessary use of medical services with incentives and opportunities to exercise personal preferences in the choice of health care services.
A common model involves employer-funded health reimbursement accounts (HRAs) that each employee can use in conjunction with a high-deductible health insurance policy. Employees draw from the HRA to pay for out-of-pocket costs such as deductibles, office visits, diagnostic tests, and prescription drugs or for services not covered under their health plan; HRA funds left over at the end of the year can be rolled over. The employer contribution to the HRA usually does not equal the amount of the deductible on the insurance policy, and if the HRA is exhausted, the consumer is responsible for paying medical care costs incurred until the deductible for the insurance plan is satisfied.
Increased awareness of the value of self-care is part of the design of consumer-directed care. These plans also typically provide information (often over the Internet) to help consumers develop self-care regimens and to acquaint them with prevention and wellness techniques. They also are providing ways to help consumers manage health care decisions and expenditures such as a health risk assessment, a personal health record, physician and hospital ratings and quality profiles, and health information libraries as well as health-related news stories.
Medical Savings Accounts
Medical Savings Accounts (MSAs) are part of an approach to paying for medical care designed to put consumers in control of a portion of the money that's spent on their behalf. The MSA itself is a tax-exempt account, similar to an Individual Retirement Account (IRA), used to pay for eligible medical expenses. The MSA is intended to pay for most routine medical expenses. It can only be established in conjunction with a qualified high-deductible health plan, which provides protection against the potentially catastrophic expenses of serious illness or injury.
Money that an individual contributes to the MSA is deductible (within limits) for federal income tax purposes. Employer contributions are excluded (within the same limits) from the individual's gross income for federal income tax purposes (and are also exempt from federal employment taxes). Any interest earned on funds in the account is also excluded from gross income.
In general, funds withdrawn from an MSA are also excluded from income if they are used to pay for qualified medical expenses for the account owner or a member of the owner's family. "Qualified medical expenses" are the medical expenses that can be deducted for income tax purposes (when they exceed 7.5 percent of adjusted gross income). Funds may also be withdrawn free of federal income tax to pay premiums for long-term care insurance, "COBRA" continuation coverage, or to pay for health insurance while unemployed and receiving unemployment compensation.
Withdrawals made for other purposes are subject to federal income tax. They are also subject to an additional 15 percent excise tax (unless the account holder is age 65 or older, disabled, or has died).
Flexible Spending Accounts
A Flexible Spending Account (FSA) is a type of benefit plan in which individuals put aside a certain percentage of their salary each year to reimburse themselves for out-of-pocket expenses not covered by other plans. The dollars that go into an FSA are pretax dollars, meaning the contributions to the FSA are deducted from a given paycheck before federal and Social Security taxes are withheld. (FSA contributions are sometimes exempted from state and local taxes, too.) This results in lower taxes overall and an increase in disposable income. Bear in mind, however, that money contributed to an FSA must be spent in the course of a given calendar year. At year's end, unspent funds are forfeited. So it's best for people to plan carefully and not overestimate the amount of money they'll need for otherwise uncovered medical expenses.
How Do I Get Health Insurance?
Health insurance is generally available through groups and to individuals. Premiums—the regular fees that you pay for health insurance coverage—are generally lower for group coverage. When you receive group insurance at work, the premium usually is paid through your employer.
Group insurance is typically offered through employers, although unions, professional associations, and other organizations also offer it. As an employee benefit, group health insurance has many advantages. Much—although not all—of the cost may be borne by the employer. Premium costs are frequently lower because economies of scale in large groups make administration less expensive. With group insurance, if you enroll when you first become eligible for coverage, you generally will not be asked for evidence that you are insurable. (Enrollment usually occurs when you first take a job, and/or during a specified period each year, which is called open enrollment.) Some employers offer employees a choice of fee-for-service and managed care plans. In addition, some group plans offer dental insurance as well as medical.
It should be noted that some employers, and others who offer group insurance to their members (such as professional organizations) are seeking to contain the costs of offering health benefits. In response, insurers and health plans are designing new types of benefit plans, and now offer (for example) tiered copayment levels for hospital and/or prescription drug coverage. Employers are also seeking to contain costs by offering policies or benefits that differentiate among employees or members of the group according to various criteria. These criteria may include health status, claims history, length of time since underwriting occurred, old hires versus new hires, or full-time versus part-time. Thus, it's important for employees (or association members) to be aware of how premiums are calculated and to understand the details of the policy being offered, such as copays and deductibles.
Individual insurance is a good option if you work for a small company that does not offer health insurance or if you are self-employed. Buying individual insurance allows you to tailor a plan to fit your needs from the insurance company of your choice. It requires careful shopping, because coverage and costs vary from company to company. In evaluating policies, consider what medical services are covered, what benefits are paid, and how much you must pay in deductibles and coinsurance. You may keep premiums down by accepting a higher deductible.
Many people worry about coverage for preexisting conditions, especially when they change jobs. The Health Insurance Portability and Accountability Act (HIPAA) helps assure continued health insurance coverage for employees and their dependents. Starting July 1, 1997, insurers could impose only one 12-month waiting period for any preexisting condition treated or diagnosed in the previous six months. Your prior health insurance coverage will be credited toward the preexisting condition exclusion period as long as you have maintained continuous coverage without a break of more than 62 days. Pregnancy is not considered a preexisting condition, and newborns and adopted children who are covered within 30 days are not subject to the 12-month waiting period.
If you have had group health coverage for two years, and you switch jobs and go to another plan, that new health plan cannot impose another preexisting condition exclusion period. If, for example, you have had prior coverage of only eight months, you may be subject to a four-month, preexisting condition exclusion period when you switch jobs. If you’ve never been covered by an employer’s group plan, and you get a job that offers such coverage, you may be subject to a 12-month, preexisting condition waiting period.
Federal law also makes it easier for you to get individual insurance under certain situations, including if you have left a job where you had group health insurance, or had another plan for more than 18 months without a break of more than 62 days.
If you have not been covered under a group plan and have found it difficult to get insurance on your own, check with your < state insurance department to see if your state has a risk pool. Similar to risk pools for automobile insurance, these can provide health insurance for people who cannot get it elsewhere.
What Is Not Covered?
While HMO benefits are generally more comprehensive than those of traditional fee-for-service plans, no health plan will cover every medical expense.
Very few plans cover eyeglasses and hearing aids because these are considered budgetable expenses. Very few cover elective cosmetic surgery, except to correct damage caused by a covered accidental injury. Some fee-for-service plans do not cover checkups. Procedures that are considered experimental may not be covered either. And some plans cover complications arising from pregnancy, but do not cover normal pregnancy or childbirth.
Health insurance policies frequently exclude coverage for preexisting conditions, but, as explained, federal law now limits exclusions based on such conditions.
You should also remember that insurers will not pay duplicate benefits. You and your spouse may each be covered under a health insurance plan at work but, under what is called a "coordination of benefits" provision, the total you can receive under both plans for a covered medical expense cannot exceed 100 percent of the allowable cost. Also note that if neither of your plans covers 100 percent of your expenses, you will only be covered for the percentage of coverage (for example, 80 percent) that your primary plan covers. This provision benefits everyone in the long run because it helps to keep costs down.
What Happens to My Insurance if I Lose My Job?
If you have had health coverage as an employee benefit and you leave your job, voluntarily or otherwise, one of your first concerns will be maintaining protection against the costs of health care. You can do this in one of several ways:
- First, you should know that under a federal law (the Consolidated Omnibus Budget Reconciliation Act of 1985, commonly known as group health plans sponsored by employers with 20 or more employees are required to offer continued coverage for you and your dependents for 18 months after you leave your job. (Under the same law, following an employee’s death or divorce, the worker’s family has the right to continue coverage for up to three years.) If you wish to continue your group coverage under this option, you must notify your employer within 60 days. You must also pay the entire premium, up to 102 percent of the cost of the coverage.
- If COBRA does not apply in your case—perhaps because you work for an employer with fewer than 20 employees—you may be able to convert your group policy to individual coverage. The advantage of that option is that you may not have to pass a medical exam, although an exclusion based on a preexisting condition may apply, depending on your medical history and your insurance history.
- If COBRA doesn’t apply and converting your group coverage is not for you, then, if you are healthy, not yet eligible for Medicare, and expect to take another job, you might consider an interim or short-term policy. These policies provide medical insurance for people with a short-term need, such as those temporarily between jobs or those making the transition between college and a job. These policies, typically written for two to six months and renewable once, cover hospitalization, intensive care, and surgical and doctors’ care provided in the hospital, as well as expenses for related services performed outside the hospital, such as X-rays or laboratory tests.
- Another possibility is obtaining coverage through an association. Many trade and professional associations offer their members health coverage—often HMOs—as well as basic hospital-surgical policies and disability and long-term care insurance. If you are self-employed, you may find association membership an attractive route.
- Yet another possibility for some individuals is obtaining coverage through an insurance purchasing pool or risk pool (sometimes called a high-risk pool). Many states have established risk pools so that otherwise medically uninsurable individuals (those with preexisting health problems) can purchase health insurance at an affordable price. (Typically, premiums for risk-pool-based coverage are higher than for comparable health insurance purchased from a commercial company.)
Frequently Asked Questions
Q What is the first thing I should know about buying health coverage?
A Your aim should be to insure yourself and your family against the most serious and financially disastrous losses that can result from an illness or accident. If you are offered health benefits at work, carefully review the plans’ literature to make sure the one you select fits your needs. If you purchase individual coverage, buy a policy that will cover major expenses and pay them to the highest maximum level. Save money on premiums, if necessary, by taking large deductibles and paying smaller costs out-of-pocket.
Q Can I buy a single health insurance policy that will provide all the benefits I’m likely to need?
A No. Although you can select a plan or buy a policy that should cover most medical, hospital, surgical, and pharmaceutical bills, no single policy covers everything. Moreover, you may want to consider additional single-purpose policies like long-term care or disability income insurance. If you are over 65, you may want a Medicare supplement policy to fill in the gaps in Medicare coverage.
Q I’m planning to keep working after age 65. Will I be covered by Medicare or by my company’s health insurance?
A If you work for a company with 20 or more employees, your employer must offer you (through age 69) the same health insurance coverage offered to younger employees. After you reach age 65, you may choose between Medicare and your company’s plan as your primary insurer. If you elect to remain in the company plan, it will pay first—for all benefits covered under the plan—before Medicare is billed. In most instances, it is to your advantage to accept continued employer coverage.
But be sure to enroll in Medicare Part A, which covers hospitalization and can supplement your group coverage at no additional cost to you. You can save on Medicare premiums by not enrolling in Medicare Part B until you finally retire. Bear in mind, though, that delayed enrollment is more expensive and entails a waiting period for coverage.
Q I’ve had a serious health condition that appears to be stabilized. Can I buy individual health coverage?
A Depending on what your condition is and when it was diagnosed and treated, you can probably buy health coverage. However, the insurer may do one of three things:
• provide full protection but with a higher premium, as might be the case with a chronic disease, such as diabetes;
• modify the benefits to increase the deductible;
• exclude the specific medical problem from coverage, if it is a clearly defined condition, as long as the insurer abides by state and federal laws on exclusions.
Q One of my medical bills was turned down by the insurance company (or health plan). Is there anything I can do?
A Ask the insurance company why the claim was rejected. If the answer is that the service isn’t covered under your policy, and you’re sure that it is covered, check to see that the provider entered the correct diagnosis or procedure code on the insurance claim form. Also check that your deductible was correctly calculated.
Make sure that you didn’t skip an essential step under your plan, such as pre admission certification. If everything is in order, ask the insurer to review the claim.
Whether you end up choosing a fee-for-service plan or a form of managed care, you must examine a benefits summary or an outline of coverage—the description of policy benefits, exclusions, and provisions that makes it easier to understand a particular policy and compare it with others.
Look at this information closely. Think about your personal situation. After all, you may not mind that pregnancy is not covered, but you may want coverage for psychological counseling. Do you want coverage for your whole family or just yourself? Are you concerned with preventive care and checkups? Or would you be comfortable in a managed care setting that might restrict your choice somewhat but give you broad coverage and convenience? These are questions that only you can answer.
Here are some of the things to look at when choosing and comparing health insurance plans.
Health Insurance Checklist
Covered medical services
- Inpatient hospital services
- Outpatient surgery
- Physician visits (in the hospital)
- Office visits
- Skilled nursing care
- Medical tests and X-rays
- Prescription drugs
- Mental health care
- Drug and alcohol abuse treatment
- Home health care visits
- Rehabilitation facility care
- Physical therapy
- Speech therapy
- Hospice care
- Maternity care
- Chiropractic treatment
- Preventive care and checkups
- Well-baby care
- Dental care
- Other covered services
Are there any medical service limits, exclusions, or preexisting conditions that will affect you or your family?
What types of utilization review, preauthorization, or certification procedures are included?
How much is the premium?
If you get health care coverage at work, or through a trade or professional association or a union, you are almost certainly enrolled under a group contract. Generally, the contract is between the group and the insurer, and your employer has done comparison shopping before offering the plan to the employees. Nevertheless, while some employers only offer one plan, some offer more than one. Compare plans carefully!
If you are buying individual insurance, or any form of insurance that you purchase directly, read and compare the policies you are considering before you buy one, and make sure you understand all of the provisions. Marketing or sales literature is no substitute for the actual policy. Read the policy itself before you buy.
Ask for a summary of each policy’s benefits or an outline of coverage. Good agents and good insurance companies want you to know what you are buying. Don’t be afraid to ask your benefits manager or insurance agent to explain anything that is unclear.
It is also a good idea to ask for the insurance company’s rating. The Standard & Poor's Corporation, and Moody's all rate insurance companies after analyzing their financial records. These publications that list ratings usually can be found in the business section of libraries.
And bear in mind: In some cases, even after you buy a policy, if you find that it doesn’t meet your needs, you may have 30 days to return the policy and get your money back. This is called the "free look."