What Is Health Insurance?

This article will address the following elements of health insurance:

  • The four basic plans
  • Health insurance billing explained
  • Supplemental health insurance
  • How health insurance works
  • Catastrophic health insurance
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The Four Basic Plans

The four basic plans are:

  • Health Maintenance Organizations (HMO's)
  • Point of Service Plans (POS)
  • Preferred Provider Organizations (PPO)
  • Fee-For-Service-Plans (Indemnity)  

Health Maintenance Organizations (HMO'S)

In an HMO plan you will be paying for your coverage in advance, instead of paying for each health service separately. Premiums are paid monthly. The HMO will provide benefits to cover preventive, dental or vision coverage. You will need to select a "primary care giver" who will be responsible for coordinating your care. Most HMO plans require a co-payment for an office visit, a hospital stay, or a health service specialist.

Point of Service Plans (POS)

POS plans are HMO's that allow you to control your own health care, rather than insisting on referrals from your primary care physician. When a medical need arises, you will have three "point of service" choices. They are:

  • Go through your primary care physician, and receive coverage under HMO guidelines.
  • Get care through a PPO provider and receive coverage under PPO's in-network rules.
  • Choose the services of a healthcare professional outside the HMO or PPO networks and receive coverage under out-of-network rules.

Preferred Provider Organizations (PPO)

The PPO plan negotiates overall fee arrangements with an assortment of doctors, hospitals, clinics, and other health providers. Your cost sharing will be lower for in-network verses out. You still have the freedom to step out of the network for treatment if you prefer. However, with out-of-network treatments, you will be paying more out of pocket for the same services covered in the network. You will also have to cover any differences in fees for what the physician charges and the PPO negotiated fees.

Fee-For-Service Plans

Basically, this type of plan reimburses medical providers for each service you receive on a case by case basis. This type of plan will require you to pay an annual deductible (out of pocket expense) before it begins to reimburse you for covered services. With this plan, you also have the freedom to choose your doctor, hospital, and clinics. 

How Do These Four Plans Compare?

HMO's offer the least freedom, followed in order by the POS, the PPO and Fee-for-Service plans.

Cost-wise, an HMO is usually the least expensive option, followed by POS plans, PPO plans and finally Fee-for-Service Plans.

Health Insurance Billing Explained   

This is probably the most misunderstood part of medical insurance. Some of the basic words like copay, coinsurance, deductible, and premium may cause you some confusion. The best way to understand how billing works, is to provide an example.

John Doe,with a family of four, has a PPO with XYZ Health Insurance Company which has the following criteria;

  • Premium: $7,000 per year

This means he must pay $7,000 per year just to have insurance with XYZ Health Insurance Company.

  • Deductible: $500

This means he must pay $500 in a given year before his health insurance coverage kicks in.

  • Copay: $30 PCP/$50 Specialist/$75 ER

This means that if he sees a primary care doctor, he will pay $30 for each visit. $50 and $75 for a specialist or ER visit respectively.

  • Coinsurance: 20%

He will be responsible to pay 20% of allowable charges and the XYZ Health Insurance company pays 80%.

Check your health card or insurance policy to see what you have.

Supplemental Health Insurance

Not everyone needs supplemental health insurance. You might consider this if you...

  • Have substantial savings or assets (a small business etc.) that you need to protect.
  • You don't have disability insurance coverage.
  • You have a family history of heart disease, cancer, or other serious chronic illnesses.
  • You're a member of an HMO that doesn't cover out-of-network services.
  • You do not have an emergency fund that could cover three months' worth of household expenses. 

How Does Medical Insurance Work?

Insurance is a gamble between you and the insurance company. The company bets that they'll take in more money in premiums from you than what they have to pay out in benefits.

Health insurance is a contract between you and the insurance company. The insurance company agrees to pay some portion of your medical expenses if you should get sick or hurt and have to visit a doctor's office or hospital. The contract or policy spells out how much they will pay and how much of the bill you will pay.

What Is Catastrophic Health Insurance?

Catastrophic health insurance provides coverage for medical emergencies or accidents. It helps to pay medical bills in case you are badly injured or get a serious illness. These plans are best for people who rarely visit the doctor's office, but want to be covered "just in case".

These plans typically feature low premiums but, have a high deductible (out-of-pocket expense). You would have to meet the deductible first before the plan offers any coverage.

If the deductible is $1,100 for individuals or higher ($2,200 for families) you can open a Health Savings Account (HSA). This will allow you to save money tax-free and pay for expenses not covered in your policy.

Factors To Consider Before Buying Health Insurance
  • Your needs - Make sure the plan covers what you need.
  • Does the plan handle pre-existing conditions?
  • Does the plan offer a high deductible choice?
  • Out of pocket costs - Consider which structure is best for your needs.
  • Co-Payments - This fee will vary with the type of plan you select.
  • Does the plan cover mental health and substance abuse?
  • Does the carrier have a good reputation for paying claims?
  • Do the doctors and hospitals accept the health plan.
  • Quality of care - Check with your doctor regarding their experience with the carrier.

Next Steps
  • Determine how much money you want to pay out of pocket.
  • Determine if your savings is sufficient to cover costs up to three months.
  • Choose a health care plan that is best for you and your family.
  • Examine several scenarios and get quotes for each
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Tool For Comparing Health Care Plans:

Health Plan Premium Cost Out of Pocket Maximum Deductible Office Visit CoPay Diagnostic Coverage % Hospital Coverage % Prescription Deductible Prescription Coverage Prescription Maximum