Understanding health insurance

Choosing a health insurance plan that's right for you starts with understanding how insurance works. Unfortunately, that's not so easy. Below is a quick lesson in the basics, plus what you should look for in a health-insurance plan.

Good health insurance protects you from medical expenses you couldn't easily afford on your own. Inadequate insurance is everything else, including some products you can buy that may seem like health insurance but aren't.

What does good insurance look like?

Health insurance should do two things:

• Cover all kinds of medical care. That includes outpatient treatment, doctor visits, hospitalization, prescription drugs, emergency services, mental-health and substance-abuse treatment, laboratory and imaging tests, preventive care, maternity care, and rehabilitation services. You might not need everything now, but sickness and injury can strike at any time.
• Limit your out-of-pocket exposure. Good insurance should pick up 100 percent of your medical expenses when your out-of-pocket expenses from deductibles and co-insurance hit a certain level in a year—say, $5,000 or $10,000.

Resist the temptation to lower your premium by selecting a plan that omits major benefit categories, such as prescription drugs. Instead, lower your premium by opting for a higher deductible (say $5,000 rather than $2,500), a higher out-of-pocket limit (say $15,000 rather than $10,000), or both. That does mean that in years when you're healthy, you might get little or no benefit from your policy. But it's vital protection against financial catastrophe due to high medical bills.

Make sure you understand the plan's details

Starting this fall, all insurance plans (except for Medicare plans) must start providing a standard form, the "Summary of Benefits and Coverage," that sets out critical plan details such as deductibles, co-insurance, co-pays. If you have a choice of plans, use this form to compare them.

What about limited-benefit plans?

Those inexpensive plans, also known as "mini-meds," are often sold directly to consumers through telemarketers or online as "affordable" products you can get even if you're in poor health. They're cheap for a reason; they are designed to cap what they'll pay out for any given illness. For instance, a plan might pay only $1,000 a day for a hospital stay that could cost two to three times that. Or you might be entitled to only a few doctor visits a year, and little or nothing for costly outpatient treatments such as cancer chemotherapy. The risk if you ever develop a serious illness? Tens of thousands of dollars of debt.

Are medical-discount plans considered insurance?

No; they're programs that charge you a monthly fee for a card that supposedly entitles you to discounts from various medical providers. Even the legitimate ones are no substitute for real medical insurance in the event of a serious illness or accident. And some are scams that give you little or nothing for your money. The Federal Trade Commission has a consumer-education program, that can help you tell the difference.

What about health-care sharing ministries?

Those faith-based organizations don't claim to offer health insurance. Instead, they collect monthly "shares" from participating members that are then distributed to those with medical needs. They don't pay providers directly and don't have a binding contract to cover members' expenses. If you join such a ministry, you should know that you won't have any of the legal protections available to people who buy state-regulated insurance products. Learn more about health-care sharing ministries.

Most people in the U.S. are enrolled in some form of "managed care" health insurance—either a preferred provider organization (34 percent), health maintenance organization (31 percent), or a point-of-service (9 percent) plan, which is a hybrid of the other two.

Both PPOs and HMOs contract with doctors, hospitals, and other health-care providers to create a network of participating providers. But there are important differences, too, and understanding them is key to choosing a plan that's right for you.

Preferred Provider Organization

You'll pay more out of pocket for a PPO compared with an HMO, especially if you see out-of-network doctors. But PPOs tend to have larger networks and they make it easier to get out-of-network care.

Here are the major features of PPOs:

• For in-network, or "preferred," doctors, you typically pay a $15 to $30 co-payment.
• You have to pay an annual deductible, generally between $250 and $1,500, before insurance kicks in.
• You can see specialists, including those outside the network, without a referral from a primary-care doctor.
• You can get care outside the network but will pay more, generally 20 to 50 percent of the bill. Moreover, you will likely also have to pay the difference between what the doctor charges and the PPO deems "reasonable and customary." For example, say a doctor's bill is $100 and the PPO pays 80 percent but says the reasonable charge for the service is $75. In that case, the insurer will pay $60 (80 percent of $75) and you will pay $15 (20 percent of $75) plus the $25 difference between the doctor's bill and the reasonable charge, for a total of $40.

You might want to choose a PPO if you:

• Want ready access to specialists and out-of-network doctors and hospitals.
• Don't mind paying more for care than you might if enrolled in an HMO in exchange for greater freedom.
• Don't mind the hassle of filing claims and figuring out your bills.

Health Maintenance Organizations

With an HMO you will have more limited options for out-of-network care than with a PPO. But you will generally pay less out-of-pocket, have less paper work, and have more coordination of your care that's overseen by your primary-care doctor. HMOs also emphasize measuring and improving quality of care.

Here are the major features of HMOs:

• Co-payments are generally $10 to $20.
• Deductibles are generally lower than in a PPO, between $100 and $500.
• You usually won't have to pay co-insurance.
• You need a referral from your primary-care doctor to see a specialist. But these are more readily available now than in the past.
• You can see providers or go to hospitals outside of the HMO's network but you'll usually have to pay the full cost.

You might want to choose an HMO if you:

• Are comfortable with some restrictions on your choice of doctors and hospitals.
• You are happy with the choice of doctors and hospitals within the plan.
• Like the idea of a primary-care doctor coordinating your care.
• Prefer to have more certainty about your out-of-pocket costs.

Point-of-Service Plans

You can view POS plans as a compromise option. They operate like HMOs in that you choose a primary-care doctor from the plan's network, have low co-payments and no deductibles or co-insurance costs for in-network providers, and you must get a referral to see in-network specialists. But as with PPOs, you can also see out-of-network providers, though you will need a referral first and will have to pay a deductible and a percentage of the cost. Many HMOs offer a POS option.

You might want to choose a POS plan if you:

• Like the idea of an HMO but want more flexibility to see out-of-network providers.
• Like an HMO in your area but have one or two doctors you want to see that are not in its network.
• Don't mind paying more to see out-of-network doctors.
• Don't mind the paperwork hassles if you go out of network.

An option that might work for you is high-deductible health insurance combined with a health-savings account (HSA) or a health-reimbursement arrangement (HRA). But make sure you understand what you're signing up for because those accounts are complex and have some disadvantages.

Don't confuse HSAs and HRAs with flexible-spending accounts (FSAs). Read more about FSAs.

How they work

You can withdraw money in a health-savings account or a health-reimbursement arrangement to pay for certain medical expenses tax-free. HSAs must be linked to a high-deductible health-insurance plan, and HRAs often are. (For preventive care, such as cancer screenings, you might not have to pay the deductible first.) You might get a special debit or credit card for the HSA or HRA account, which makes it easier to pay bills and track expenses.

Here are some differences between HRAs and HSAs:

• HRAs. Only your employer can set up a health-reimbursement arrangement, and the company will make all the contributions. Employers can contribute as much, or as little, as they like. Your employer also owns the account. The company can reclaim any unspent balance, though most employers let the money roll over from year to year.
• HSAs. You can set up an HSA on your own and contribute to it. Your employer can contribute, too, but doesn't have to. Most important is that you own the money in an HSA even if it was set up by your employer and includes employer contributions. And you can roll over any money in it from year to year, and the interest income in the account remains untaxed. But there are some strict rules governing HSAs. For example, in 2013, you can contribute up to $3,250 for individual coverage and $6,450 for a family, though you can add another $1,000 if you're between 55 and 65.

For more information, see the website of HSA Educator.

Will you save money?

The higher your deductible, the lower your premium usually is. But the savings over a standard HMO or PPO plan can vary substantially depending on your age and medical circumstances.

An HRA or HSA makes most sense if you're young or middle-aged and healthy, and can comfortably afford to pay several thousand dollars out of your own pocket for medical expenses. If you have no medical expenses in a given year or minimal ones, you'll save money on premium costs and will essentially squirrel away tax-deferred dollars for future use. But the accounts require careful oversight of your medical bills and your account balances. And they probably aren't worthwhile if you expect medical expenses close to the deductible amount.