Health Insurance

Having difficulty deciphering your health care options?

Before you hand over all that paperwork to your employer, make sure you choose the coverage plan that's best for you.

Excited and nervous on my first day of work, I arrived early and waited to meet with my new manager for a run down of my responsibilities. Unfortunately, my first "to do" was less than exciting - head down to Human Resources for new employee orientation.

As I met with the HR representative, she walked me through the company's benefits package, including health care. Apparently, I needed to make a decision about a health insurance option as soon as possible so she could begin the enrollment process on my behalf.

Back in my 8x8 cube, I paged through the voluminous health care plan, thinking that the sooner I could make a selection, the sooner I could dive into my new job. An hour later, my frustration level through the roof, I realized that I had no clue where to start the decision- making process. HMO, PPO, indemnity? What was the best deal?

Luckily, I lived through the confusion so you don't have to. Health insurance plans can be broadly divided into two categories: (1) indemnity plans (also referred to as "reimbursement" plans or fee-for-service (FFS) plans), and (2) managed care plans.

Indemnity plans

The coverage offered by most traditional insurers is in the form of an indemnity plan, which reimburses you up to a certain amount for your medical expenses. You're free to see any doctor you like, but different plans use varying methods to determine your reimbursement:

Reimbursement - actual charges. Under this type of plan, the insurer will reimburse you for the actual cost of specified procedures or services, regardless of how much that cost might be.

Reimbursement - percentage of actual charges. Here, the insurer pays a percentage of the actual charges for covered procedures and services. A common reimbursement percentage is 80% - which means you pay 20% of the cost of all healthcare services.

Indemnity. This means the insurer pays a specified amount per day for a specified maximum number of days. For example, a hospital stay may be restricted to five days at a rate of $200 per day. You are responsible for all expenses that exceed these allotments.

Managed care plans

There are three basic types of managed care plans: (1) Health Maintenance Organizations (HMOs), (2) Preferred Provider Organizations (PPOs), and (3) Point of Service (POS) plans. Although there are important differences between the different types of managed care plans, there are also many similarities. All managed care plans involve an arrangement between the insurer and a selected network of doctors, hospitals and health care providers. All offer policyholders significant financial incentives to use the providers in that network - which can benefit you because these plans usually select and monitor network providers carefully to ensure they deliver quality care.

Health maintenance organizations (HMOs). HMOs provide medical treatment on a prepaid basis, which means that HMO members pay a fixed monthly fee, regardless of how much medical care is needed in a given month. In return for this fee, most HMOs provide a wide variety of medical services, from office visits to hospitalization and surgery. With a few exceptions, HMO members must receive their medical treatment from physicians and facilities within the HMO network.

Preferred provider organizations (PPOs). A PPO is made up of doctors and/or hospitals that provide medical service only to a specific group or association. Rather than prepaying for medical care, PPO members pay for services as they are rendered. The PPO sponsor (usually an employer or insurance company) generally reimburses the member for the cost of the treatment, less any co-payment (which is the pre-determined amount the member is responsible to pay). In some cases, the physician may submit the bill directly to the insurance company for payment. The price for each type of service is negotiated in advance by the healthcare providers and the PPO sponsor, usually at a discount. This means you save on medical expenses if you see a provider within the network, but you're still covered if you need to go out-of-network.

Point of service (POS) plans. A point of service plan means you pay no deductible (a pre-determined cost the member is responsible for paying before benefits kick in) and usually only a minimal co-payment when you use a healthcare provider within your network. You also must choose a primary care physician who is responsible for all referrals within the POS network. If you choose to go outside of the network for healthcare, you will likely be subject to a deductible (around $300 for an individual or $600 for a family), and your co-payment will be a substantial percentage of the physician's charges (usually 30-40%).

So which is better?

You're young, you're healthy, and it's not likely you'll need to see a slew of specialists any time in the near future. So in general, managed care plans are better suited for most recent college grads because they end up being more cost-effective in the long run. In contrast, indemnity/reimbursement plans usually involve more out-of-pocket charges (in the form of deductibles and co-payments) and often place caps on the amount of benefits you can receive over your lifetime. However, indemnity plans do offer more freedom than managed care plans in terms of choosing a healthcare provider.

So, as with anything else, the choice between managed care and indemnity plans ultimately depends on your personal circumstances and preferences. If your goal is to minimize costs, you're probably better off with a managed care plan. On the other hand, if your goal is maximum flexibility and cost is not a major factor, consider an indemnity/reimbursement plan. If you're still unsure about which plan is for you, take a look at our list of health care questions to consider, and glossary of health care terms.

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