Which health insurance policy is best for you? A guide to decide
Health insurance is confusing. There are premiums and deductibles; EPOs and PPOs; HMOS and HDHPs. To bring some clarity to the chaos, Straight Arrow News has written this guide on how health insurance really works.
How does health insurance work?
Simply put, consumers select an insurance plan from a health insurance company and pay a monthly fee to keep that plan. This is called a premium, and it’s essentially like a monthly Netflix subscription fee.
In exchange for paying the fee, the insurance company helps pay for medical care. But this is where it gets tricky: Each plan covers different costs in different ways.
Some insurance companies, including most family plans offered through the Affordable Care Act, cover 100% of the costs for preventative care such as cancer screenings, medications to prevent HIV and counseling for drug or tobacco use. For other health care visits and prescription medications, patients may be required to pay a small fee. That is a co-pay.
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In 2023, U.S. health care spending reached nearly $5 trillion – about $14,570 per person – accounting for 17.6% of national gross domestic product.
Throughout the year, patients cover any copays and also pay for some other medical expenses. At some point, the policyholder might hit the insurance plan’s deductible – a pre-determined amount of money the consumer is required to pay out-of-pocket before insurance kicks in. The deductible is one of many data points to consider when selecting a plan.
Then there is coinsurance, the percentage of a bill the consumer is required to pay for a covered service after meeting the deductible. Sound complicated? Here’s how it works: Say a patient needs to spend $200 on bloodwork in February. Since it is early in the year, and that person likely hasn’t hit the annual deductible, they will be responsible for covering all $200 of that cost unless insurance considers that test a part of preventative care.
But say that patient needs another $200 lab test in November and has already hit the deductible for the year. Instead of being responsible for all $200 of that bill, the insured person would only be responsible for a percentage of it – the coinsurance. A consumer with a 20% coinsurance would have to pay $40.
That is, unless the consumer has already hit their out-of-pocket-maximum – the maximum amount of money each insured person will have to pay for medical expenses in a year. Once an individual or family reaches this amount, the insurance company will pay 100% of any additional eligible medical costs. So if a person has hit that out-of-pocket-maxiumum when that $200 blood test rolls around, they would not pay any percentage of that bill as long as that service is covered by the specific insurance plan.
Each insurance plan outlines what services it will cover. Generally, plans will not cover services like cosmetic procedures or experimental treatments or health-adjacent costs such as gym memberships.
Premiums, deductibles, copays, coinsurance and out-of-pocket maximums are costs that each insurance holder incurs with any type of health plan.
What types of health insurance plans are there?
Generally, there are five main types of insurance plans: HMOs, PPOs, EPOs, POS plans and HDHPs. Here is a breakdown of what these are and how they compare:
Health Maintenance Organizations (HMOs): In an HMO, a set of doctors and specialists sign a contract with a health insurance company and agree to provide services at a preset cost. Typically, each insured person selects a primary care doctor who manages care as needed and refers a patient to specialists like cardiologists and oncologists. For medical emergencies, an HMO covers care from any emergency room so a patient does not need to worry about identifying an in-network provider. HMOs are generally the most affordable option – offering lower monthly premiums, lower deductibles and lower prices for services. However, HMOs are the most restrictive type of plan; if an insured person seeks non-emergency care from someone not contracted with the insurance company – calls an out-of-network provider – the individual is responsible for the full cost of that service. HMOs are the most common plan. Across the 31 states that use the federal Affordable Care Act marketplace, 47% of people selected HMOs.
Preferred Provider Organizations (PPOs): In a PPO, consumers are free to seek care from any provider. There is no preset list of providers as with an HMO plan. Often, insurance companies have a list of preferred providers that may provide lower costs. The patient also does not typically need a referral to see a specialist, allowing patients to skip the step of making an appointment with a primary care provider. The flexibility to see any provider with a PPO plan is reflected in the cost. Premiums and out-of-pocket costs are generally higher than HMO plans.
Exclusive Provider Organizations (EPOs): EPOs are a combination of HMOs and PPOs, and there are two types: gated and non-gated. Like HMOs, an EPO has a preset list of providers from which a consumer can seek care, and generally does not cover services from out-of-network providers. Non-gated EPOs are similar to a PPO in that a patient does not need a referral to see a specialist. Gated EPO plans do require referrals like with the HMO option, but may not require patients to select a primary care physician to manage overall care. EPOs and HMOs also work with health care providers in different ways. Unlike with an HMO, physicians do not contract with EPOs. Rather, physicians or health care facilities are paid per service at a specific, negotiated rate. EPO premiums are generally lower than PPOs but higher than HMOs.
Point-of-Service (POS) plans: POS plans are less common. These plans also combine aspects of the HMO and PPO, but in the opposite way of an EPO. In a POS, there is an in-network list of providers as with an HMO; however, a POS still covers care if the patient chooses to go out of network. As with an HMO, a primary care provider manages overall care and refers patients to specialists as needed. POS plan premiums are typically higher than HMO plan premiums but lower than PPO plan premiums.
High-Deductible Health Plans (HDHPs): HDHPs are any plan – whether an HMO, PPO, or POS – that offers lower monthly premiums in exchange for higher out-of-pocket costs. These plans are often paired with a Health Savings Account, which allows the consumer to contribute pre-tax dollars to a bank account. Those funds can then be used to cover any medical expenses for the rest of the insured person’s life. Some employers contribute tax-free dollars to an employee’s HSA. Finance gurus love the HSA because it offers a triple tax benefit.
Some employers also offer a Flexible Spending Account, or FSA, which can be used to cover certain medical expenses and other expenses such as day care. Unlike an HSA, FSAs some with a use-it-or-lose-it policy with funds expiring at the end of each year.
Those are the basics of health insurance. For more guidance on selecting an insurance policy and for other common questions about open enrollment, see our open enrollment guide here.
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Ella Rae Greene, Editor In Chief
