Understanding Health Insurance

Insurance is a bit like a gamble between you and the insurance company. The company bets that they'll take in more money in premiums than they have to pay out in benefits, whether it's for health insurance, auto insurance, life insurance or homeowners insurance. You're paying a premium every month just in case something happens.

Health insurance is a contract between you and the insurance company that says that the insurance company will pay a portion of your medical expenses if you get sick or hurt and have to visit a doctor's office or hospital. Some contracts also specify that the insurance company will pay a portion of your medical expenses to ensure you don't get sick, such as paying for annual physicals or immunizations. However, the amount of your bill that the insurance company will pay, and under what circumstances they'll pay it is known as coverage and can vary greatly from policy to policy.

The contract, or policy, spells out what the insurance company will pay for and how much of the bill you will have to pay. For example, the policy may cover an office visit, but you may have to pay a $20 co-payment. Or, the policy may not cover anything until you've paid an agreed upon amount out of your pocket, which is known as a deductible. These deductibles and co-payments, along with any other nonreimbursable expense you may pay is referred to as an out-of-pocket-expense. Other policies may have co-insurance, which is a percentage of the bill that you're required to pay, which may be in addition to your deductible and co-payment. Often, the total amount of co-insurance you have to pay in a given policy is capped by the policy's maximum. The policy will also state the amount you have to pay each month for the coverage, known as the premium, and the total amount the insurance company will pay out for the life of the policy, which is commonly referred to as a lifetime maximum.

Since a single hospital stay could wipe out your savings (and more), not many people can afford to go without some kind of health insurance -- even if they're healthy. Not only will health insurance protect you from bankruptcy in the event of a major medical event, it also gives you peace of mind.

Next, we'll learn about the different ways that you can get insurance coverage.

Before deciding on an exact type of health insurance plan, it's important to know what kind of coverage is out there. While there are a lot of different ways to get health insurance, it's good to know what you may be eligible for before you start your health insurance search.

Group Health Insurance

The majority of people under the age of 65 have medical insurance through their employers' group insurance. According to the National Coalition on Health Care, in 2005, over 80 percent of employees were eligible for employer-group insurance and 83 percent of those who were offered, opted for these types of plans. This is usually because employers and other organizations can get better rates because they have a large number of people to cover. The insurance company sees it as good risk because they'll probably end up paying out very little for many people in the group, while collecting premiums from everyone. Normally, this translates into premiums that are much lower than those found in individual health insurance plans and are the same price for everyone in the group regardless of their health.

While employers aren't required by law to provide health insurance, they may have a difficult time finding good employees if they don't. Also, once group insurance is offered, it falls under the protection of the Health Insurance Portability and Accountability Act (HIPAA) regulations. These regulations protect employees by ensuring that everyone is given access to the employer's health insurance plan regardless of their health status. The act also helps regulate waiting periods of health plans to help achieve continuous coverage for most employees and helps ensure that employees have access to health care if they lose their job.

Because health insurance rates are re-negotiated each year based on the previous year's health care costs, some employers offer wellness programs for their employees. By keeping employees healthier, they can lower medical costs. Participation in these programs can sometimes make employees eligible for reduced health insurance premiums. For employees who pay a portion of the premium themselves (which is typical), this can mean eliminating some or all of that charge.

Most employer's group insurance plans are managed care plans, typically either HMOs or PPOs. Both of these types of plans will be explored in detail later in this article.

Individual Health Insurance

Individual health insurance is the most expensive option for people who don't have coverage (or don't have enough coverage) through employers. Physical exams and questionnaires are usually a part of the application process, so poor health can really make a difference in the cost and eligibility. Types of insurance plans include fee-for-service plans, PPOs, HMOs and catastrophic insurance. Many companies offer health insurance for individuals and specialize in short-term coverage to fill in between employer coverage.

The federal government also has health insurance programs for those who are eligible. Medicare is health insurance for people age 65 or older, those who are under age 65 with certain disabilities, and people of all ages with end-stage renal disease (those with permanent kidney failure requiring dialysis or a kidney transplant). Medicare includes hospital insurance (Part A), medical insurance (Part B) and prescription drug coverage (Part D).

Medicaid is a state-administered health insurance program available to certain low-income individuals and families who fit into a recognized eligibility group. You must meet very specific requirements and considerations that include age, pregnancy, disability, blindness, income, resources, and U.S. citizenship or a lawfully admitted immigrant. These rules can vary from state to state.

If a family earns too much to qualify for Medicaid, they may still qualify for State Children's Health Insurance (SCHIP). Another state-administered program, SCHIP covers uninsured children under the age of 19 whose families earn up to $36,200 a year (for a family of four). For little or no cost, SCHIP pays for doctor visits, immunizations, hospitalizations and emergency room visits.

For those who don't qualify for the above programs and are in relatively poor health, there's another option: high-risk health insurance pools. High-risk health insurance pools are state-mandated programs designed to provide health insurance coverage to those who are unable to purchase private health insurance due to a pre-existing condition. By gathering together those seen as uninsurable into a single group, the state can set up a plan similar to private insurers and offer health care, though at a higher cost, to those previously denied coverage. Plans offered by high-risk pools are comparable to most major medical plans, and have a wide range of premiums and deductibles. Benefits also vary but usually include prescription coverage, maternity care and disease management.

Military Health Care

There are three main types of health care offered to those in the military. The main system for military health care is known as Tricare, which is available to all active military employees and to retired members of the uniformed services along with their families. Tricare offers three basic types of plans including a fee-for-service, a PPO and an HMO. For those retired from the military, the Department of Veterans Affairs offers additional medical help when necessary. CHAMPVA is one such service that helps veterans pay for the cost of their medical services, as well as the medical costs of their dependents and survivors. The VA is a plan which offers the same services but to veterans only.

COBRA

So what happens if you have health insurance through your employer but are laid off from your job? Thanks to the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), your employer may be required to continue your health coverage for a limited amount of time. Depending on the circumstances, it can be as long as 36 months. The reason for loss or reduction of employment must be a qualifying event, meaning there are specific circumstances that do and don't entitle you to continued coverage. For instance, if you're caught pilfering from the company and get fired, don't expect to continue your health benefits through COBRA.

However, just because they're offering you coverage doesn't mean they're still paying for it. You'll have to pay for it yourself. Because you're still participating in the group plan, however, you'll be paying less than you would for an individual plan. And, if you have an existing health condition, you won't have to go through a waiting period to get coverage for it when you do get another job and new health insurance.

Let's find out more about the different types of health insurance, beginning with indemnity insurance.

Fee-for-service (FFS) insurance, or indemnity, is the traditional insurance plan -- much like your grandparents had. You can get basic coverage, which includes doctor visits, hospitalization, surgery and other medical expenses. For serious illness or injuries, you can get major medical, which pays the big bills when basic coverage has run out. Comprehensive coverage combines basic and major medical. This type is typically what's offered in employer-sponsored group health plans.

FFS plans allow you to go to the doctor, clinic or hospital of your choice. You pay the bill and then submit forms for reimbursement by your insurance company. There are a few requirements, however, before you get to the reimbursement stage.

Deductible

Before you get reimbursed for anything, you must have already paid the full deductible amount for the year. Deductibles are usually around $250 for an individual, but they can be as high as $10,000. The higher the deductible, the lower the premium. If you're a very healthy person and don't have any potentially dangerous hobbies, you can get away with a really low monthly premium by choosing a higher deductible. However, you'll have to live with the realization that you might have to pony up a big chunk of cash in the event you get seriously sick or injured.

What's Typically Covered?

No plan covers everything, so you have to read the policy to ensure that it meets your needs. In many cases FFS plans focus on treating health problems rather than preventing them. Therefore, these plans don't usually cover annual check ups and other "well" doctor visits you might have. Families in particular can rack up a lot of expenses just in annual physicals and check ups. FFS plans may also limit the number of days you can stay in the hospital and still receive coverage.

Pros and Cons

FFS plans are typically more versatile than other types of plans. Being able to go to any physician is a big part of that versatility. Additional benefits include not having to get referrals before going to a specialist and not worrying about being "out of network" in the event of an emergency illness or injury when traveling. The drawback is that they can be more expensive for those that tend to use preventative health measures.

Most FFS plans pay 80 percent of the total doctor bill (physician charges) once you meet the deductible. That leaves 20 percent for you to pay, called the co-insurance. Some plans do pay 100 percent of hospital charges that are separate from physician charges, but not all.

Because costs for procedures vary among geographic areas, what your doctor charges for a procedure may not be what your insurance company is willing to pay. The insurance company calls the amount they're willing to pay the reasonable and customary charge. Also, not all services and procedures are covered. What the insurance company doesn't pay is your responsibility.

So in addition to paying 20 percent of the total bill, you'll also be paying the differences between the reasonable and allowable charges. Here is an example: Your child has his tonsils taken out and the bill is $350. Since you've met the deductible already you should only have to pay 20 percent, or $70. But your insurance company says the maximum allowable charge for a tonsillectomy is $300, which means you really owe $110 (20 percent of $300, plus the extra $50 your doctor charged above what the insurance company will pay).

The good news is that most policies include stop loss protection. This is the annual maximum amount that you'll have to pay. So if you end up with a lot of medical bills, at some point the insurance company begins to pay 100 percent (of the reasonable and customary amount that is).

The flip side of this is that the insurance policy itself will have a lifetime (your lifetime) cap. That means that when your bills reach a certain amount (usually $1 million or above) the insurance company won't pay anymore. For some policies there may be a cap for the year or for a specific illness claim. At this point you may have to get insurance through a different company.

Recently some FFS plans have begun operating more like managed care plans. For example, they may require that you pay a deductible and 20 percent of the charges, but there may also be co-pays for doctor visits and other services. However, premiums for FFS plans are often fairly low compared to managed care plans.

Managed care plans typically involve three variations similar to FFS plans, the health maintenance organization (HMO), point of service (POS) plan and the preferred provider organization (PPO) plan. While some managed care plans can bear a close resemblance to an FFS plan, the focus of managed care is on preventive health care. The idea is that by allowing coverage for check ups and other preventative services, doctors can identify potentially serious illnesses early.

Managed care plans use networks of selected doctors, hospitals, clinics and other health care providers that have contracted with the plan to provide comprehensive health services to members at a reduced group rate. Because of this, managed care plans are usually more affordable than FFS plans for similar levels of coverage. In addition, by centralizing billing and administrative functions, networks can lower their overhead costs.

Health Maintenance Organization (HMO)

Typical HMO coverage includes access to a primary care physician, emergency care, specialists and hospitalization when needed. These plans are usually cheaper than other managed care plans but you have the least amount of control over choosing your health care providers than any other plan. There are usually no deductibles, but there is a small co-pay for each office visit (usually $10 to $25). You're required to select one doctor from the organization's network as your primary care physician (PCP). This doctor is in charge of coordinating your medical care. If you need to go to a specialist, you must get a referral from your PCP first. Any specialist you see must work within the HMO network, otherwise you'll pay for the visit yourself.

HMOs can have their own medical facilities and staff, or the HMO can contract with outside physician groups or individual doctors. These outside groups are called Individual Practice Associations (IPA).

Exclusive Provider Organization (EPO)

An EPO is similar to a traditional HMO and uses contracted network physicians, hospitals, ancillary health care providers and facilities. With an EPO, however, you don't always have to have a primary care physician. You're also allowed to self-refer to other physicians (including specialists) within the network.

Point of Service (POS)

POS plans give you a combination of an HMO plan and a FFS plan. Like a traditional HMO, you have a PCP who will make referrals to other providers within the plan when needed. You have no deductible when seeing a physician within the network and will pay a small co-pay (around $10) for each office visit. If you want to go to a physician outside the network, you're free to do so without consulting your primary care physician. But, when going outside the network you'll usually have to pay a deductible (around $300 for an individual) as well co-insurance (usually 30 to 40 percent) as you do with FFS plans. You save money if you stay within the network, but you have the flexibility to go outside the network if you need to. However, if you choose to go outside the network, you're in charge of all paper work needed in order to get reimbursed for the expenses.

Preferred Provider Organization (PPO)

A PPO is a group of doctors and hospitals that provide medical service only to a specific group or association. The PPO may be sponsored by a particular insurance company, by one or more employers, or by some other type of organization. The most obvious difference between HMOs and PPOs is that members aren't required to work through a PCP in order to get referrals. In addition, members aren't limited to care from PPO physicians; they're free to go outside the PPO group. The insurance company may reimburse you for 100 percent of care obtained from network physicians, but will only reimburse you 80 percent for non-network treatment. Like POSs, there is a deductible if you go outside the network. An additional benefit of the PPO, however, is that there's a maximum on out-of-pocket expenses. An out-of-pocket expense maximum, or cap, is the amount that you have to meet in order for the insurance company to pay 100 percent of your policy's benefits. Your out-of-pocket expenses that go toward this cap include any deductible and co-insurance payments. Unfortunately co-payments and your monthly insurance premium do not count.

What's Typically Covered?

With preventive care as the focus, all general "well" visits are typically covered. Managed care plans won't pay for services not deemed medically necessary, but each plan's definition of medically necessity might be different. For plans that cover prescription drugs, there may be requirements for specific drugs (such as generic vs. name brand).

Pros and Cons

The primary benefits for managed care are the lower costs for preventive care with some plans not even requiring a copay. The drawbacks of HMOs are fewer choices in doctors and facilities, as well as having to go through a primary physician in order to see specialists. Drawbacks of PPOs include higher fees for those doctor's outside of the network, which at times can be substantial.

No matter what plan you have, prescription benefits can be confusing. Find out more about how these benefits work in the next section.

As a large amount of our population ages, spending on prescription drugs is increasing faster than other aspects of health care costs such as hospital visits or physician services. From 1994 to 2003, prescription drug costs rose at double-digit rates each year. Today, prescription drug spending is still rising, but the rise can now be measured in single digits. This slow-down in spending is attributed to a few changes in the world of prescription medication including the way health insurance companies offer prescription drugs to their users. Many insurance plans have excluded high-cost drugs from coverage, cut down on the amount of refills and increased co-pays. The basis of any insurance plan's prescription benefits is a formulary, which is a list of all the drugs your insurance company is willing to pay for.

A formulary can be used in several different ways depending on your exact insurance plan. Some plans will cover drugs both on the formulary, which are referred to as "preferred" drugs and usually include generic drugs, and drugs not found on the formulary, or "nonpreferred" drugs usually including brand-name drugs. However, use of nonpreferred drugs comes at a higher price and you'll usually be charged a higher co-pay. Other insurance plans may be more cut and dry, covering only those drugs on the formulary and denying payment for any drug not on the formulary without some sort of pre-approval process. However, the majority of formularies fall somewhere in between these two types of plans and into a "tiered" formulary. In these plans, drugs are assigned to a tier, with each tier increasing the co-pay amount. Normally, in a three-tier plan generic drugs are found at the cheapest tier-one level. Tier two includes brand-name drugs in which generics are not available, and tier three contains drugs that aren't found in the formulary, or are nonpreferred, and thus are charged an even higher co-pay.

However, if a drug prescribed by your doctor isn't included on your health insurance plan's formulary list, most plans have a prior-authorization process in which a drug may be approved on a case-by-case basis. Usually in these situations, you must have already failed the approved treatments or experienced adverse effects from the approved medication for your ailment. If your coverage is still denied an appeal process is usually available.

In addition to the two major categories of plans, you could also opt for supplemental insurance. These types of insurance plans are designed to pay benefits in addition to your regular insurance plan. They're usually very specialized and while they may duplicate some of what your normal insurance policy covers, they shouldn't be used in place of a comprehensive plan like an HMO or PPO. Different types of supplemental insurance include:

Flexible Spending Account

While not a supplemental insurance, a flexible spending account (FSA) can be used along with your employer-sponsored health plan. An FSA is an account set up by an employer in which employees can automatically deposit a portion of their pre-tax paycheck into a tax-advantaged financial account that can be used to pay for qualified medical expenses not covered by insurance. These types of accounts can be beneficial to both employers and employees. Employers can tout an FSA as a great benefit in an effort to attract and keep employees, while both employer and employee can save money on payroll and social security taxes. In addition, if used correctly, an FSA can help to greatly offset an employee's out-of-pocket medical expenses and help pay for the monthly health insurance premiums. Different types of FSAs can even be used to pay for an employee's day-to-day expenses of caring for a dependent or to cover adoption expenses. The big down side to these accounts is that the money you don't use in your health insurance year can't be rolled over into next year's FSA. So basically, if you don't use it, you lose it.

Polices will vary quite a bit on their limitations and exclusions so it's always very important to read the actual policy (not the marketing information) carefully before making a selection. Here are some limitations and exclusions common for many health insurance policies:

Along with limitations and exclusions in your health insurance policy, waiting periods can also affect your overall health care. Find out more about how these waiting periods work and how some can be eliminated all together.

Waiting Periods

The idea of a waiting period in the world of health insurance may seem simple enough: It's the period of time specified in a health insurance policy which must pass before some or all of your health care coverage can begin. However, the definition is just the tip of the iceberg. Underneath are the types of waiting periods, the rules that apply to each and how they each apply to a given type of health insurance plan.

In general, there are three main types of waiting periods that you encounter in health insurance: employer waiting periods, affiliation periods and pre-existing condition exclusion periods.

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Selecting Your Policy

Whether you're trying to decide which plan to get through your employer (since they often offer several choices) or you're trying to decide on an individual health plan, you need to think first about your needs.

For lots more information about health insurance and related topics, check out the links on the next page.