PPOs, HMOs, HSAs, and more: An intro to medical insurance types
Trying to get health insurance can feel daunting—especially when all the terms surrounding insurance are an alphabet soup. As you research health insurance options, make sure you understand the jargon and acronyms.
Here’s your cheat sheet for different health insurance plan types and the terms that come with them.
Key Points
- The four main health insurance types have different provider networks.
- Certain high-deductible health plans are compatible with Health Savings Accounts.
- Your deductible is your out-of-pocket expenses before your insurance company begins paying their share.
Four main health insurance plan types
Health insurance is one of those important—and in most cases, mandatory—types of insurance, but it can also feel more complicated than getting other policies. Plus, the alphabet soup really kicks into high gear when comparing health insurance plan types.
Plan types are usually related to a provider network. Whether you’re looking at a company health insurance plan or you’re getting a marketplace plan established by the Affordable Care Act (ACA), you’re likely to see one of these four health insurance plan types:
- Exclusive provider organization (EPO). This plan is designed so that you must use only the health-care service providers in the network if you want services covered. It requires that you double-check to ensure that your doctor, hospital, or other health-care provider is definitely in network, or you could end up paying the entire bill on your own.
- Preferred provider organization (PPO). With this type of plan, you pay less out of pocket when you use doctors, specialists, and hospitals that are part of the network. You can usually use health-care providers outside of the network without a referral, although you’ll pay an extra cost.
- Point of service (POS). As with the PPO, you pay less within the provider network. However, if you want to go out of the network, you must have a referral. Additionally, if you want to see a specialist, your primary care doctor usually needs to provide you with a referral.
- Health maintenance organization (HMO). With an HMO, you need to use only the health-care professionals that are part of the organization (unless you have an emergency). Generally, you need to live or work in a specific service area.
Do you qualify for a tax credit?
If you meet certain income thresholds, you may be eligible for a premium tax credit under the Affordable Care Act (ACA) . If you don’t have a company health insurance plan, or you can’t afford one, you might be able to get help paying your premium with an ACA marketplace plan. Learn more here.
Often, when looking at company health insurance plan options, you’ll choose between an HMO versus PPO, although there might be other options. When deciding which health insurance plan type you prefer, it’s important to consider your health-care needs and whether you think you might occasionally need to get out-of-network services.
Medical insurance premiums (and other costs)
Your medical insurance premium is the amount of money you pay each month to keep your health coverage in force. It’s basically money you pay to an insurance company for protection in case of a catastrophic or high-cost claim. In other words, it reduces your risk of a major health-care bill. Additionally, the insurance company covers some of your preventative care, and may offer discounts on prescription drugs or add-on services.
But the premium isn’t the end of your potential costs. There are four more you need to be aware of:
- Deductible. Your deductible is the amount of money you pay out of pocket before the insurance company starts paying for services. It’s usually given as a yearly number.
- Insurance co-pay. A co-pay is the amount you pay for certain services. For example, each time you see the doctor for a non-preventative visit, you might have to pay a co-pay of $25. The insurance company then covers a portion of the rest of the cost, after your deductible has been met.
- Coinsurance. A percentage, such as 20% or 30%, is usually paid by the insurance company as coinsurance. This means that after your deductible is met, you pay a smaller percentage of the bill while the insurance company picks up the rest of the tab.
- Out-of-pocket maximum. Once you hit your deductible and start paying coinsurance, you’ll reach a point where you’re not required to pay any more—the insurance company begins paying 100%. That point is your out-of-pocket maximum for the year.
In general, if you’re willing to pay a higher deductible and/or accept a higher out-of-pocket max, you’ll get a lower monthly medical insurance premium. If you’re trying to choose among plan options, you’ll have to assess the added cost versus the added risk in case of a catastrophic event.
Example: Deductible, co-pay, coinsurance, and out-of-pocket max
Suppose your plan covers an annual physical, but specialist visits come with a $30 co-pay. Also, your annual deductible is $1,500, and you have 80/20 coinsurance up to your out-of-pocket maximum of $3,000.
Let’s say you had a crazy year. At your annual physical, your doctor noticed a lump and referred you to a specialist, who recommended a biopsy, which involved a $1,500 surgery and a bunch of lab work totaling $2,200. Later that year your bike hit a pothole and you broke your leg, which required an ambulance, emergency room visit, X-rays, and a cast, totaling $6,400. Now you’re in weekly physical therapy. Here’s what this year’s insurance costs would look like (see table below).
| Care | Cost | Your cost | Note |
|---|---|---|---|
| Physical exam | $120 | $0 | It’s covered 100% under your plan. |
| Specialist visit | $225 | $30 | The doctor billed a higher rate, but the insurance covered the balance. |
| Biopsy | $1,500 | $1,500 | After paying the full cost, you hit your deductible for the year so that subsequent expenses are paid at 80/20 coinsurance. |
| Lab work | $2,200 | $440 | You paid 20% coinsurance; your insurance provider covered the rest. |
| Broken leg | $6,400 | $1,060 | 20% coinsurance would have been $1,280, but you hit your out-of-pocket max at $1,060 ($1,500 + $440 + $1,060 = $3,000), so insurance began paying 100% beyond that amount. |
| Physical therapy | $85 | $30 | You still owe a co-pay each visit. |
| Physical therapy | $85 | $30 | Another co-pay. |
| Total | $10,615 | $3,090 | Out-of-pocket max plus all your co-pays. |
What about catastrophic plans?
If you’re under the age of 30, you might get access to a catastrophic plan through an ACA marketplace. Even if you’re over the age of 30, you might qualify for one of these plans if you can show financial hardship or that you can’t afford your company health-care plan.
Basically, a catastrophic plan can help you cover preventative health-care services, as well as emergency access. It’s much cheaper than one of the traditional plans, but comes with a higher deductible.
HSAs, FSAs, HRAs …
For the final bit of alphabet soup, let’s look at these health insurance plan accompaniments. Each of these account types has annual limits and special guidelines.
- Health savings account (HSA). When you see an HSA-compatible ACA marketplace or company health insurance plan, it indicates that you might be able to open and use a Health Savings Account along with your insurance. HSA funds can be used for qualified health-care expenses such as co-payments, prescription drugs, coinsurance, certain over-the-counter items, and even dental and vision expenses. You are allowed to invest the funds, and interest earned is tax-free. The HSA is your own account, and it stays with you, not your employer or insurer. Additionally, the pre-tax money you contribute rolls over year-to-year, so you don’t have to worry about losing it if you don’t use it in a specific year. You must have an approved high-deductible health plan (HDHP) and meet other requirements to use an HSA. Typically, if your company offers such a plan it will be specifically notated as an “HSA-eligible” plan.
- Flexible spending account (FSA). An FSA is administered through your employer, and you have the chance to make pre-tax contributions to this account. You can then use the money for qualified health-care expenses. However, the money doesn’t usually roll over year-to-year, so you need to plan to use your account funds by the end of the year so you don’t lose them.
- Health reimbursement arrangement (HRA). If your employer offers an HRA, they contribute the money to this account, and own it. The money in an HRA is used to reimburse you for out-of-pocket expenses. You don’t get to keep the money when you change jobs.
The bottom line
There’s a lot of jargon and abbreviations to get through when trying to get health-care coverage, whether you go through the ACA marketplace or use a company health insurance plan. Once you know what the terms mean, though, you’ll be better equipped to make the right coverage choice for you.
Study your choices carefully, and be sure to weigh the costs and benefits of each plan against the added risks of higher-deductible plans.