Health Insurance 101

Health insurance, and how you pay for it, can be a touchy and complex subject. Especially when you consider how your physical health and your financial health are connected through health insurance: not having the right insurance for you means not only gambling with your physical health, but also endangering your financial stability if you have a health crisis and can’t pay for it.

We’ve done the research to help explain what the options are so you can be more informed when it’s time to make a decision for you and your health. From there, we highly recommend adding your health insurance payments into your personal budget to stay in control of your finances.

How Health Insurance Works

Health insurance companies work by taking in more money through premiums (the monthly amount deducted from your paycheck) than they will have to pay out in benefits when you get sick. Essentially, they’re betting you won’t get sick.

An insurance company will pay a portion of your medical expenses when you visit a doctor or hospital or make routine visits for a pre-existing condition (a medical condition you have before insurance coverage begins). The amount the company pays for these visits is called coverage. The amount you pay for each visit, in addition to your monthly premiums, is called a copayment (or copay) and can vary depending on what kind of doctor you visit. Or a policy may not cover any costs until you’ve paid a set amount out of pocket, which is called a deductible. The higher the deductible, the lower the premium (monthly) payments. Some policies have coinsurance, which is a percentage of the health care bill you’re required to pay once you’ve met your deductible.

The lifetime maximum of a policy is the total amount the insurance company will pay out over your lifetime. This is an important factor to consider when deciding between different policies. If you have a pre-existing health condition requiring regular medication and doctor visits, a policy with a lifetime maximum may not be the best choice for you as you could reach that maximum within your life.

Some plans will pay a portion of preventive medical expenses, like physicals or immunizations, to help ensure you don’t get sick. And some employers offer wellness programs to keep employees healthy and thus lower medical costs. Participation in these programs may qualify employees for reduced premiums.

Although these payment structures may seem complex and without advantage, paying strictly out of pocket for a single hospital stay could wipe out your savings or checking account—and more. That’s not a gamble many people are willing to make, and you shouldn’t. So what are your options for making sure an unforeseen medical need doesn’t leave you broke?

Policy Options

Under the Affordable Care Act, adults up to age 26 can be covered under their parents’ or guardians’ health insurance. When it’s time to select your own coverage—whether that’s before or after your 26th birthday—it’s important to understand your options.

The majority of people under 65 receive medical insurance coverage through their employers’ group insurance. This means lower premiums for everyone in the group, regardless of health, because the insurance company is collecting premiums from a large collection of people and will probably have to pay out very little. Group plans are also a great deal for employees because it ensures everyone is given access to the health insurance plan regardless of health status—you will never be penalized for a pre-existing condition because group insurance falls under the Health Insurance Portability and Accountability Act (HIPAA), that waiver you always sign when visiting the doctor’s office that says your medical information will not be shared or used against you.

Most employer group plans are managed care plans of three varieties: health maintenance organization (HMO), point of service (POS), and preferred provider organization (PPO). Managed care plans focus on preventive health care and cover regular check-ups and preventive services to avoid greater health concerns in the long run. These plans use selected doctors, hospitals, and clinics to offer services at reduced group rates; these are called in-network. If you chose an out-of-network doctor, you could end up paying much more in a higher copay.

HMOs are generally cheaper than other managed care plans, but you have the least amount of control over choosing your doctors. There usually aren’t deductibles, but you pay a small copay for each visit ($10-$25). In order to see a specialist, your primary care physician (PCP) must make a referral. If you see an out-of-network doctor, you will pay the full price of services. Exclusive provider organization (EPO) plans are similar to HMOs except you don’t always need a primary care physician to coordinate your medical care and make referrals.

A POS combines some aspects of an HMO and a fee-for-service (FFS). Like an HMO, you have a primary care physician who makes referrals, you have no deductible when seeing an in-network physician, and you only pay a small copay (around $10). Like an FFS, you can see an out-of-network doctor without consulting your primary, but you will have to pay a deductible as well as coinsurance.

PPOs are groups of doctors and hospitals providing service to specific groups, sometimes sponsored by an insurance company, by a group of employers, or by another organization. PPO members do not need a primary care physician referral and can receive care from doctors outside the PPO group. Like a POS, there is a deductible if you go outside the group. A benefit of PPOs is the existence of a cap on out-of-pocket expenses (with deductible and coinsurance payments counting toward this cap). This is the amount you must pay before the insurance company pays 100 percent of medical costs.

Fee-for-service (FFS) insurance offers basic coverage like doctor visits, hospitalization, surgery, and other medical expenses. For major injuries and illness that incur big bills, you can purchase major medical. The third FFS option is comprehensive coverage, which combines basic and major medical. An advantage of FFS plans is the ability to go to any doctor, clinic, or hospital of your choice. However, the reimbursement process can be longer and more involved as you submit qualifying forms to your provider. Also remember, you’re paying a higher out-of-pocket deductible before you receive any reimbursement. They also tend not to cover preventive care.

A Flexible spending account (FSA) is set up by an employer so an employee can automatically deposit a pre-tax portion of their paycheck into an account that can be used later for qualified medical expenses (QMEs). An FSA can be opened in addition to an employer-sponsored health plan. The biggest drawback is money not used in an FSA by the end of the year is forfeit: you use it, or you lose it.

Similar to the FSA, a health savings account (HSA) is an account where you can make tax-deferred deposits to be used for qualified medical expenses. To open an HSA, you must be enrolled in a catastrophic insurance plan. Unlike an FSA, the funds in an HSA stay with you even if you leave your employer or stop participation in the catastrophic insurance plan. You can also invest the money in your HSA, with all earnings sheltered from taxation until you withdraw them.

Individual health insurance can be used to fill the gap between employer coverage and need. It’s the most expensive option to receive health insurance but sometimes the only option for those self-employed. With individual health insurance, physical exams are part of the application process, so poor health or pre-existing conditions have a big impact on cost and eligibility. Types of plans include FFSs, PPOs, HMOs, and catastrophic insurance. Catastrophic insurance exchanges low monthly premiums for higher deductibles when you do visit the doctor. Routine doctors’ visits or prescriptions are much more expensive, but a significant health catastrophe is covered. If you are young and healthy or have low income but want a health care safety net, this can be a short-term health insurance option. Just remember, everyone ages, medical costs increase, and new medical conditions develop, so it’s best to only rely on this type of coverage for a limited time before securing a more comprehensive policy.

Medicare is health insurance offered through the federal government for people 65 and older with certain conditions and for those under 65 with certain disabilities. It also covers people of all ages with end-stage renal disease.

Medicaid is offered through individual states to certain low-income individuals and families who meet strict eligibility requirements. Eligibility varies from state to state. If total family income is the only reason disqualifying a family from receiving Medicaid, they may still qualify for State Children’s Health Insurance (SCHIP), which covers uninsured children under 19 for doctor visits, immunizations, hospitalizations, and emergency room visits for little or no cost.

High-risk health insurance pools are an option for those ineligible for other plans due to poor health. These state-mandated programs combine uninsurable individuals into a single group for whom the state sets up a plan similar to private insurers, though at a higher cost. Plans offered by high-risk pools are comparable to most major medical plans with a range of premiums and deductibles. Benefits vary but usually include prescription coverage, maternity care, and disease management.

The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) may mean your employer will continue your health coverage for a limited time after you leave the company. The time frame can be as long as 36 months. This helps during a transition to another job and prevents the complications of not having continuous health care coverage. Although coverage is still offered by your ex-employer, you may have to pay higher premiums or deductibles. In general, this is still less expensive than purchasing a short-term individual plan.

Saving Money on Prescriptions

Each health insurance plan has its own list, called a formulary, of prescriptions they are willing to pay for. Some include both brand-name and generic drugs, while others only cover generic verities. If you purchase non-preferred drugs, it will come at a higher price. Following the list of your insurance provider’s covered prescriptions isn’t the only way to save, however.

The best place to fill your prescription may be at discount retailers like Walmart, Costco, or Sam’s Club. Costco sells prescription glasses, and often their prices are less expensive than an in-network optometrist. You still need to get your prescription from an optometrist, but Costco offers competitive prices on glasses. Walmart pharmacy may carry your prescription for less. It’s worth the time to call around to your local pharmacies to price out your regular prescriptions like insulin or heart medication.

No one can predict the future. Having a suitable health insurance plan ensures your health and finances are protected when the unexpected happens.

How to Choose a Policy

Questions to consider before choosing a plan through your employer:

  1. Do you want a plan covering preventive care like regular check-ups?
    1. If you do, a managed care plan like an HMO, POS, or PPO is the best bet, especially if you have children.
      1. Note: You could also choose an FSA or HAS, but until you save enough to cover the costs of regular doctor visits, it can be expensive if you don’t also have another employer-sponsored health plan.
    2. If not, an FFS is a good option.
  2. How healthy are you?
    1. If you are young and relatively healthy with no pre-existing conditions, a plan like an FFS with a low premium and high deductible could be for you. You may also consider an FSA or HSA if your employer offers them.
    2. If you have pre-existing conditions, pick an HMO, PPO, or POS plan.
  3. Do you already have a specific doctor or clinic you want to continue using?
    1. If you do, choose a POS, PPO, FFS, FSA, or HSA.
    2. If you don’t, an HMO is a great option.
  4. How important is it to have easy access to specialists?
    1. If it’s important, choose a POS, PPO, FSA or HSA. You could also choose an FFS, but it could be much more expensive.
    2. If it’s unimportant, go for an HMO.
  5. What are your options if you’re self-employed?
    1. Individual health insurance (which offer their own HMO, POS, and PPO plans) or some FFSs if you are not a high-risk patient.
    2. High-risk pools if you are ineligible for other health insurance.

Policies Overview

Premium/Amnt

Deductible

Copay

Coinsurance

PCP Referral

Out-of-Network Doctor Choice

Preventive Care

Emergency Care

HMO

Yes/Low

No

Yes

No

Yes

No

Yes

Yes

POS

Yes/Med.

Not in-network

Yes

Not in-network

No

Yes

Yes

Yes

PPO

Yes/Higher

Not in-network

Yes

Depends

No

Yes

Yes

Yes

FFS

Yes/Low

Yes/High

No

Yes

No

Yes

No

Yes

FSA

Chosen monthly deduction

No

No

No

No

Yes

Yes (qualified)

Yes (qualified)

HSA

Chosen monthly deduction

No

No

No

No

Yes

Yes (qualified)

Yes (qualified)

Individual

Yes/Low

Depends/High

Yes

Depends/High

Depends

Depends

Depends

Depends

High-Risk Pools

Yes/Range

Range

Range

Depends

Depends

Depends

Yes

Yes

Medicare

Depends

Yes

No

Yes

Depends

Depends

Yes

Yes

Medicaid

Depends

Yes

Depends

Depends

Not in-network

Yes

Yes

Yes

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