Health Insurance - How It Works

Insurance of any kind is intended to transfer financial risk to an insurance company in exchange for a reasonable insurance premium. Where most insurance coverages pay once a loss has occurred, health insurance has the added benefit of paying to keep your loss from getting worse.

Health insurance is probably your most important coverage since it can be the difference between life and death.

Fortunately, most employers offer some form of health insurance. Often you will have to select from several different alternative plans with differing coverages and premiums. 

There are two broad categories of health insurance coverage. One is fee-for-service and the other is managed health care. Under managed health care there are health maintenance organizations (HMOs), preferred provider organizations (PPOs), and point-of-service (POS) plans.

Fee-For-Service

Fee-for-service and managed health plans have distinct differences in the amount of control the policyholder has in choosing doctors and hospitals.  Fee for service plans offer you the greatest amount of choices, allowing you to select doctors and hospitals based on your needs and preferences.  This greater amount of choice comes at a cost, fee for service plans are usually more expensive than managed care plans.

Under a fee for service plan, your doctor will submit a bill to your insurance provider, or, if he or she does not have a relationship with your provider, you may have to pay the bill directly and get reimbursed by your provider.  Under this plan you can see any doctor you wish.  You will most likely be responsible for a percentage of every expense, often 20%.

Fee-for-service plans also have an annual deductible; these generally start at $100 for individuals and $500 for families. Generally speaking, the higher the deductible, the lower your premiums. Before receiving the reimbursement you'll have to pay the deductible amount.

If your doctor charges more than is "reasonable," you will have to pay the difference. You can appeal this if you feel the doctor is charging the same as the other doctors around your area.

Under fee for service plans there is usually a limit to how much you will have to pay before the plan reimburses you at 100%. Some plans also have a lifetime limit on benefits, usually at least $1,000,000. This seems very high but it is not uncommon in serious situations that this number is met.

Managed Care

There are three major types of managed care health plans: HMOs, PPOs, and POSs. Many of these plans charge a co-payment of $10 or $20 a visit. The disadvantage of an HMO is that you must use the doctor and hospitals that participate in the plan. The premiums are generally lower than fee-for-service plans. 

With a managed care plan you will have to select a primary physician who will be responsible for coordinating your care. You will need to be approved by him to seek care by a specialist. You must also get authorization for any hospitalization you may require.  As you can see, the lower premiums associated with managed care are the result of allowing the managed care provider to make many of your health care decisions for you.

PPOs and POSs differ from HMOs in that not only do they have a network of providers, but you are also allowed to use physicians outside the network.

Other Considerations

If you choose not to utilize the coverage offered at work, or if no coverage is available through your employer, you could get your own personal policy or go through a group. Group policies have lower premiums. Also, some group policies do not ask questions about your health. Nevertheless, some policies will not cover preexisting conditions for up to 12 months. You will want to understand all the pre-existing limitations that your coverage includes. If you have had health coverage for at least 2 years and change employment you won't be affected by the exclusion.

If you are terminated from or leave a job where health insurance was provided for you, the government has established guidelines for maintaining your old coverage at your own expense until you can find new coverage.

Health Savings Accounts (HSAs) and Medical Savings Accounts (MSAs).

For small businesses and the self employed, an MSA is a tax-exempt account established for the purpose of paying medical expenses in conjunction with a high-deductible health plan. Like an IRA, an MSA is established for the benefit of the individual, and is "portable". Thus, if the individual is an employee who later changes employers or leaves the work force, the MSA does not stay behind with the former employer, but stays with the individual.

HSA are new for 2004.   HSAs are similar to medical savings accounts (MSAs). However, MSA eligibility has been restricted to employees of small businesses and the self-employed while HSAs are open to everyone with a high deductible health insurance plan. The interest and investment earnings generated by the account are also not taxable while in the HSA. Amounts distributed are not taxable as long as they are used to pay for qualified medical expenses.   Amounts distributed which are not used to pay for qualified medical expenses will be taxable, plus an additional 10% tax will be applied in order to prevent the use of the HSA for nonmedical purposes.