Health insurance helps to protect you from not being able to afford the health care you need and from the extreme financial burden of paying for 100% of your health care out of pocket. Under the Affordable Care Act, all health insurance policies must cover 10 essential health benefits. In addition, everyone is required to carry basic health insurance or pay a fine (see Minimum Essential Coverage and Who Is Exempt.) Things could change under the Trump administration, but for now, those are the rules. (Learn more in What If Obamacare Is Repealed? and Trump, Healthcare and Insurers: What Comes Next?)
You can purchase group health insurance through your employer, if your employer offers health insurance as a benefit. These plans sometimes offer better coverage than what you could afford on your own since the employer covers a large percentage of the plan’s premiums and you pay only a small share, which is deducted from your paycheck pretax. You can also buy health insurance through the health insurance marketplace, also known as the exchange, directly from an insurance company, or through a health insurance broker who shops around for plans on your behalf. (Check out Individual vs. Group Health Insurance: What's the Difference?, How to Shop for Health Insurance and Top 5 Health Insurance Providers for the Self-Employed.)
If you purchase health insurance through the exchange, you will be eligible to receive income-based subsidies that help make your premiums more affordable. (Read Cutting Your Cost for Marketplace Health Insurance.) You must enroll in a health insurance plan during open enrollment unless you experience a qualifying life event such as getting married or having a child. (Learn more in Getting Health Coverage Outside Open Enrollment.)
In addition to covering the 10 essential health benefits – doctor’s office visits, hospitalization, emergency services, laboratory services, mental health services and addiction treatment, rehabilitative services and devices, pediatric services, prescription drugs, and preventive wellness and chronic disease treatment, and maternity and newborn care – each category’s specific covered services may vary based on state requirements and based on the specific insurer and plan. For example, some plans may cover acupuncture and chiropractic treatment, but others may not (See Essential Health Benefits Under the Affordable Care Act and 6 Things Obamacare Plans Won’t Cover).
As a health insurance policyholder, these are the costs you will be responsible for.
Premiums: Your insurance premium is the monthly fee you pay for health insurance. This fee will vary based on your age, state, insurer and how comprehensive the plan’s coverage is. It will not vary based on your health status.
Deductible: Your deductible is the amount you must pay out of pocket before your insurance company will start paying a percentage of your bills. Your premiums do not count toward your deductible.
Co-insurance: Coinsurance is the percentage of your bill that you are responsible for after meeting your deductible. For example, if your plan provides 80% coinsurance and your health care provider sends you a bill for $200, your insurance company will pay 80% of the bill, or $160, and you will pay the remaining 20%, or $40. Coinsurance is generally associated with PPO plans (more on those in a minute). Coinsurance is more generous when you see an in-network provider and less generous when you see an out-of-network provider. You might have 80/20 coinsurance in network and 60/40 coinsurance out of network.
Co-payment: A co-pay is a fixed dollar amount that you pay for visiting a health care provider or purchasing a prescription. Co-payments are generally associated with HMO plans. (For related reading, see 20 Ways To Save On Medical Bills.)
Out-of-pocket maximum: The out-of-pocket maximum or out-of-pocket limit is the most you will pay toward your health care bills each year before your insurance company takes over and pays 100% of your remaining bills. Your out-of-pocket maximum may not come into play in a typical year when you are healthy, but it can be a lifesaver if you get sick and require lots of treatment. Premiums do not count toward the out-of-pocket maximum, but deductibles, coinsurance and copayments do.
Why get insurance when you still have so many expenses? Because without insurance, your worst-case scenario is that you can’t afford the treatment you need and you die, or you try to afford it for a while but end up declaring medical bankruptcy. Doctors will not see you unless you can pay up front for their services. With insurance, your responsibility for medical expenses is capped to several thousand dollars a year – an amount that some people will still not be able to afford, but that many will. (For more, see How Health Insurance Helps Manage Financial Risk and When Health Insurance Doesn’t Cover Your Bills.)
The level of each type of expense you’ll be responsible for depends on what type of plan you have. In general, the more you pay in premiums, the less you’ll pay for care, and the less you pay in premiums, the more you’ll pay for care. (For related reading, see Choose Among Bronze, Silver, Gold And Platinum Health Plans.)
Types of Plans
There are several types of health insurance plans to choose from. Each one has different pros and cons and different out-of-pocket expenses.
Health Maintenance Organizations (HMO)
A health maintenance organization (HMO) has contracts with various healthcare providers that reduce costs for both the insurer and its policyholders. Each policyholder must choose a primary care provider that he or she will visit first for any health problem. The PCP will refer the patient to a specialist in the HMO’s network if needed. If the patient wants to see a doctor outside the HMO’s network, insurance will not cover it. However, costs to see in-network providers are relatively low. HMOs may have low premiums, low copayments and no deductibles. If saving money is your primary concern and you aren’t picky about which providers you see, an HMO may be your best option.
Preferred Provider Organization (PPO)
A preferred provider organization (PPO) also has contracts with various healthcare providers that reduce costs for both the insurer and its policyholders. These are the PPO’s in-network providers, and policyholders will pay less to visit these providers. However, unlike an HMO, a PPO still provides coverage to see out-of-network providers; it just doesn’t provide as much coverage. PPOs do not require policyholders to choose a primary care physician or get a referral to see a specialist. PPOs tend to have higher premiums than HMOs. They also have annual deductibles for seeing both in-network and out-of-network providers plus coinsurance for each visit. If freedom of choice is more important to you than cost, a PPO may be your best option.
Indemnity Plan or Fee-for-Service Plan
An indemnity plan, also called a fee-for-service plan, does not have a network of health care providers that it has negotiated rates with. It does have a deductible and coinsurance or copayments. Your insurer will cover a percentage of your covered medical expenses at the usual, customary and reasonable rate. These plans offer the greatest flexibility in choosing which health care providers you see. However, they may cost you more than a PPO or HMO would.
Point-of-Service (POS) Plan
A point-of-service plan is an uncommon option that combines features of both HMOs and PPOs. It requires you to choose an in-network primary care doctor and get referrals to see a specialist, like an HMO. But it provides coverage at a reduced rate for out-of-network services, like a PPO, and that coverage improves if it comes with your physician’s referral. There is no deductible for in-network services and a high deductible for out-of-network services. These plans have copayments.
Catastrophic health insurance is an option for adults younger than 30 and adults of any age who have a government-approved general hardship exemption from obtaining minimal essential coverage. A catastrophic plan may be a PPO or an HMO. It has low premiums but the highest legal out-of-pocket maximum and deductible. It is designed for people with very low incomes and people who are young and healthy and unlikely to need to use their health insurance for more than the occasional minor illness or checkup. (Learn more in Is Catastrophic Insurance Right for You? and How Catastrophic Health Insurance Works.)
HDHPs and HSAs
Any type of plan can be a high deductible health plan, as long as it has a deductible of at least $1,300 for an individual plan or $2,600 for a family plan. HDHPs have lower premiums in exchange for their higher deductibles. The main advantage of having an HDHP is the ability to combine it with a health savings account, which allows you to pay for qualified medical expenses tax free. (Learn more in How High-Deductible Health Plans Work and How HSAs Work.)
A flexible spending account is not a type of health insurance plan; it’s a benefit that some employers offer to help employees pay for out-of-pocket medical expenses with pretax dollars. In other words, it acts as a complement to your HMO, PPO or other plan. (Learn more in How Flexible Spending Accounts Work.)
Medicare is the federal government’s subsidized health insurance program that primarily serves senior citizens. It provides low-cost coverage for hospitalization, surgery, doctor’s visits, prescriptions and more. (See What Does Medicare Cover?, What You Should Know About Medicare Enrollment and Medicare 101: Do You Need All Four Parts?)
Medicaid is a health care program jointly funded by the federal government and state governments to provide for low-income individuals and families. It also provides care for people with certain disabilities and seniors with minimal assets. (Read 4 Tips for Qualifying for Medicaid and What’s the Difference Between Medicare and Medicaid?)
The Children’s Health Insurance Program (CHIP) is also funded jointly by the federal government and state governments. It provides health insurance for children younger than 19 whose parents cannot afford their children’s health care coverage but who earn too much to qualify for Medicaid. (See Medicaid vs. CHIP: Understanding the Differences.)
Next, we’ll cover disability insurance, which provides something health insurance doesn’t if you become severely sick or injured for an extended period: income replacement.
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