Choosing a Health Insurance Plan
“PPO vs. HMO,” “What’s a co-pay?,” “How do I deductible??”
Aside from being questions that you’ve likely googled in the past, just reading these terms may give you a mild bout of “adulting” anxiety. That’s because, like most things when you enter the working world, having to wade your way through these various headache-inducing acronyms and seemingly life-defining health care choices can be overwhelming. Trust me, I’ve been there. But once you get your head around a couple key concepts, everything becomes much more manageable.
In this post, I’ll help by walking you through several of the most common questions that you may encounter when trying to discern what health care options are best for you.
In the past, you may have been covered under your school’s or your parents’ health insurance. But as you embark into the working world there are more options, and whether you elect to stay under your family’s coverage (which you can do until you’re 26 under the Affordable Care Act), explore federal options, or enroll in your employer’s health plans, there are some key concepts to understand.
First and foremost, when you start to navigate different health plans, you’ll encounter a lot of confusing jargon and terminology. We’re going to break some of these terms down, and then show you how they all fit together to define your health insurance plan:
Premium: Your premium is the payment you make for your health insurance plan on a regular basis, and it’s usually made in the form of monthly deductions from your paycheck. You can think of this like a gym membership fee, which you pay on a regular basis even if you don’t use it (we’ve all been there). If your employer is giving you health insurance, you’ll only pay a portion of your plan’s total premium, and your employer will pay the rest.
Co-pay: Co-pays are the set fees that you pay for different in-network services whenever you use them. Each service you use (e.g. a doctor’s visit, getting x-rays, a hospital visit, etc.) comes with its own unique cost. These co-pays differ according to the healthcare plan you choose. You can find each of these different costs in the descriptions of the health care plans available to you, and you should be sure to read over these costs before making a decision.
Deductible: Your deductible is the amount you will have to spend on health care in a given year before your insurance company begins to pay a larger portion of your bills. In other words, you’ll pay your regular rate for health care until you spend enough to “meet your deductible.” Once you’ve met your deductible, you’re only responsible for a lower percentage of future health costs – more on that below. Typically, if you elect to have a lower premium, you’ll end up having a higher deductible, and vice versa. It’s important to note that co-pays may not count towards your deductible in your plan, and you should look into that ahead of choosing one. Your deductible resets annually.
Co-insurance: That lower percentage you pay for health costs after you hit your deductible is your co-insurance! After you’ve hit your deductible, your insurance company starts to pay a greater percentage of your total charges. For example, if you have what’s called a “20% co-insurance,” that means you’ll only have to pay for 20% of medical bills after passing your deductible, and the other 80% is covered by your insurance company. Your co-insurance is also usually the percentage you’ll pay if you get out-of-network health care.
Out-of-pocket maximum: This is the most that you’d have to pay out of pocket for your health care in one year, before your insurance covers 100% of all future bills (excluding your recurring premium cost).
In-network vs. Out-of-network: “In-network” providers are entities (e.g. doctors, medical groups, etc.) that your insurance company has negotiated with to get discounted rates. As such, it costs your insurance company less money if you go to these providers for your health care, and so they charge you less. These lowered costs come in the form of those standard, pre-determined, co-pays that we talked about before. Conversely, “out-of-network” providers are entities that your insurance does not have special agreements with, and so it costs them more money if you go there for any service. Thus, they’ll charge you more for going there, and you won’t have the lower co-pays that you would have with an in-network doctor.
So how does this all fit together? That was a lot of information to process, so here’s a breakdown of how it all works in reality:
Each month, you’ll pay your health insurance’s premium. Whenever you get any form of medical treatment, you pay the necessary co-pays and associated fees as outlined in your specific policy. If you pay enough of those costs in a year, you’ll hit your deductible, at which point you pay for future expenses at a reduced rate. If you continue to have more costs that year, you’ll eventually hit your out-of-pocket maximum, at which point your insurance will pay for all future care costs until your policy year ends and the process restarts, or you switch insurance plans.
Plans: PPO vs. HMO
Phew! Now that you’ve got that complex terminology down, you can understand the differences between the types of plans available to you. One of the first choices you’ll probably need to make is whether you want a “Preferred Provider Organization,” or PPO plan, or a “Health Maintenance organization,” or HMO plan (the two most popular plan types in the U.S.). But what does that even mean?
In their simplest terms, you can think about the pros and cons of the two options in the following way, and take some time to consider which might apply to you:
PPO: “I don’t expect many health expenses for the next year and I don’t want to see my doctor every time I need a referral to a specialist. I also don’t want to pay more on a month to month basis, and am thus ok with paying a little bit more whenever I do need to see a doctor.”
HMO: “I expect to have recurring health expenses in the next year, and I don’t mind seeing my doctor every time I need a referral to a specialist. I also don’t mind paying a bit more each month if it means I can save a bit of money every time I see the doctor.”
Ultimately, your decision depends on what you choose to optimize for. The PPO comes with more convenience, as you don’t need to go through the process of getting a referral for each visit to a specialist, and can choose which doctors you want to see in your network. And if you don’t expect to have many health care costs for the coming year (i.e. no major recurring or upcoming health concerns, no dependents), or frequent visits to the doctor, then it’s likely that this will be the best option for you. You’ll have a slightly higher cost per visit to the doctor, but a lower premium each month compared to an equivalent HMO.
Conversely, if you do expect you’ll have a lot of health care costs this year or have dependents who will, then you’ll want to consider the HMO more seriously; while you’ll have to get the approval/referral from your doctor any time you need to see a specialist, and will have a higher premium, you’ll typically end up with lower out-of-pocket costs for each health care expense.
Choosing which type of plan is right for your personal situation will help narrow down your options considerably, and make the next decisions more manageable.
Choosing between providers
Once you’ve decided on the general type of plan you’ll need, you’re going to want to look at the different providers that are available to you, and their associated networks. This will ultimately determine the different type of doctors and specialists that you’ll easily have access to in-network, and the costs you can expect to pay for given services.
Weigh the following when deciding on your specific plan, and make sure to think through things specific to your current health situation:
- What are the co-pays I would pay for the basic medical costs that I will likely encounter?
- If I have recurring or expected medical costs in the next year (e.g. medications or treatment I receive regularly, upcoming surgery, birth of a child, etc.), how are they covered under these plans?
- If I have dependents, what will their associated co-pays be?
- Are the co-pays that I’ll be paying in this plan manageable given my income and other costs?
- Does this plan give me good coverage and broad enough access to doctors, specialists, and hospitals where I live?
- If I already have doctors and specialists that I use and like, will I still be able to visit them in-network with this policy?
- What about if I have to get out-of-network care at any point? How much will those kinds of expenses (e.g. an emergency hospital visit) cost me?
Deductibles, Co-insurances, & Out-of-Pocket Maximums:
- What is the deductible and out-of-pocket max for this plan? If I have a lot of health care costs in the next year, are these amounts reasonable?
- Once I hit my deductible, what will my co-insurances be for each service?
- If I have dependents, what will be the costs/differences in cost for my family?
For each of these questions, you’ll need to consider your own personal situation and do your own research, but don’t be afraid to contact each of your available insurance providers to ask them for further information as needed. Ultimately, they’re vying for your business, and should provide you with the information necessary to make your decision.
Flexible Spending Accounts
We’re really close to the end, and you’ve gotten through the most complicated stuff. The last thing you need to think about is setting up what’s called an FSA, or “Flexible Spending Account.” If you expect to have a lot of health care costs within the next year, an FSA could end up saving you a lot of money. But even if you don’t expect many, it’s still worth considering.
What is it?
An FSA is a special account that you can direct a certain amount of your salary to – pre-tax. That money can then be used to pay for qualifying health care costs throughout the next year. The benefit is that, because this money is taken out of your income pre-tax, it reduces your overall taxable income, and you can thus save some money in the long run.
It’s important to note that whatever amount you don’t use within your benefits year will actually expire at the end of it, under the government’s FSA “Use-or-Lose” rule. This means you should do your best to forecast your health care costs for the next year before determining the amount you want to set aside.
Using your FSA
Once you’ve set up your FSA, with your desired contribution for the next year, you’ll either receive an FSA debit card that can be used to pay directly for qualifying expenses, or you’ll be asked to submit your receipts and then be reimbursed.
There’s a wide range of things that the money in your FSA can be used for, including: deductibles, co-pays, co-insurances, vision and dental costs, prescription medications, psychological treatment, and much more. Take a look through this IRS document to understand all the treatments that can be covered by your FSA.
Just like selecting the rest of your benefits, you’ll need to spend some time understanding the options available to you through your company. Look at the terms of the FSA as defined by your company (which can be different from those of the IRS), and do your best to forecast your upcoming health related expenses within the next year.
Congrats, you now have a better understanding of the ins and outs of picking healthcare in the U.S.! Good luck choosing your plans, and feel free to come back to this guide next year, or any time you need a refresher.