The Basics of Health Insurance Policies

Medical expenses arising from injuries, accidents, and even pregnancy can overwhelm all but the wealthiest individuals, and this makes health insurance a necessity for anyone who cannot handle paying five figures or more out of pocket. Choosing a provider is often difficult, but knowing the basics will make it easier.

The field of health insurance is currently facing radical changes. Some of these changes can be predicted. For instance, insurers are now allowed to deny coverage for those with pre-existing medical conditions, but this will change in 2014 because of health care reform. Other changes are somewhat vague, and it is not known yet how they will affect the following information.

Health Insurance Is Not True Insurance

Part of the confusion around health coverage is that it does not function like the auto or home policy. True insurance is designed to pay for unforeseen costs that the individual is unable to cover. Health insurance is commonly used as a payment in advance for services. Preventive appointments, diagnostic routines, and prenatal vitamins may or may not be covered depending on the policy and state mandates, alongside treatment for debilitating disease and traumatic injury. This change has been reflected in the higher cost of coverage.

Ways Insurers Manage Costs

In order to keep already high costs from skyrocketing further, insurers use their economy-of-scale to lower the cost of many basic services. This often translates into health management organizations (HMOs), preferred provider organizations (PPOs), or point of service plans (POS). Managed care will pay for services via specific health care providers. They may pay less or not at all when care is sought outside the network. The other option is fee-for-service plans (FFS).

Specifics of FFS

These plans are the closest to true insurance, because full coverage only begins after a yearly cap has been reached. The cap is the amount the individual is expected to pay for health care out of pocket during a given year. Once the combined deductible and co-insurance cap is met, FFS plans cover 100% of the rest. Individuals are allowed a choice of doctors and specialists without the need for referrals.

FFS plans can require more paperwork, and some doctors will refuse patients because of obligations with a managed care plan. Payouts are also calculated by average charges in the area. If costs are higher than average, FFS plans will require the individual to pay the rest. FFS begins paying once the deductible is met (generally between $500 and $1,500), but the individual will still have to pay around 20% of total costs (referred to as co-insurance) until the annual cap is reached.

Specifics of Managed Care

The three types of managed care plans differ in significant ways, but all of them require the use of physicians in a network. HMOs are typically the cheapest option. This results from strict rules over the choice of physician. A primary care physician in the network must be chosen to avoid loss of coverage, and referrals are required for appointments with specialists. These plans have unseen features, because they regulate the amount and type of care physicians can provide.

PPOs are the most expensive type of managed care insurance. The idea behind them is to offer individuals an incentive, not a requirement, to use in-network providers. The same low co-pays as HMOs provide are only possible with doctors in the network. Besides higher co-pays, visits to doctors outside the network will often require payment out of pocket and the submission of paperwork to get reimbursement. PPOs generally will only reimburse up to the amount that doctors in the network would have charged for the same services.

POS plans combine some of the best and worst features of HMOs and PPOs. A primary care physician must be chosen, and referrals are required to see a specialist. However, the POS plan does cover expenses outside the network in cases of injury or illness. Individuals will have to pay out of pocket and submit paperwork reimbursement. There is less coverage for out-of-network physicians, but this varies greatly between POS providers. POS plans tend to have a greater focus on preventive care. They will often contribute to approved pregnancy classes, well-child visits, health club memberships, and other services.

Choosing the Best Insurance

Finding the best plan requires a balance between keeping premiums affordable and not incurring an excessive deductible. Getting quotes from multiple providers is a good start. Learning the specifics of the plan before purchasing will prevent problems down the road.