Health Insurance, Types of Plans

Insurance Q.& A. : Health Insurance, Types of Plans

What is a major medical plan?

A major medical plan is a health insurance policy that provides comprehensive benefits for both hospital, physician and private nursing services. There is typically a deductible, ranging from $100 to $2,000, (most common, $250 & $500) or more, and a co-insurance percentage, ranging from 10% to 50%, (usually 20%). These two elements of the plan make up the insured's potential out-of-pocket expense, which is the portion of the cost of services that must be paid by the insured. For many policies, there is a cap on the annual out-of-pocket cost to the insured of $1,000 to $5,000 (uaually $1,000). Employees may also be required to pay part of the premium on an employer-provided plan.

What is an HMO?

A growing number of insurance plans now contract with a health maintenance organization (HMO) to provide medical services to policyholders. The typical HMO provides a broad range of services. You (or your employer) pay a monthly premium for its coverage, as well as a small charge for each office visit. You're also usually covered for general physical exams and other types of services. There are no complicated claim forms to fill out. Many HMOs are big medical clinics, with doctors, nurses and therapists on staff. You typically have to choose a doctor from the organization's own roster, and the doctor will coordinate your medical treatment. HMOs tend to provide the least expensive medical coverage and a minimum of paper work. However, your choice of doctors will be limited. Getting an appointment to visit an HMO doctor can also take longer than getting an appointment with a doctor outside the plan, because each HMO physician is responsible for the care of literally hundreds or even thousands of patient-clients.

What are PPO's?

In a preferred provider organization (PPO), you get medical coverage that combines some of the cost-control advantages of an HMO with more of the choice associated with fee-for-service plans. You or your employer pay a monthly or quarterly premium to the health plan and, in exchange, you are covered for a broad range of medical services. Like an HMO, a PPO charges only a small fee for each office visit. There is no complicated paperwork to fill out. But in an HMO, your choices are usually restricted to a list of doctors that the organization has approved. In a PPO, the network of doctors is often much larger, and you're free to use a doctor outside the approved list as well. For this freedom, a PPO usually charges a bit more than an HMO. The cost of each office visit under a PPO may also be a higher than the cost of a visit to an HMO.

Should I get an HMO or a PPO?

Health maintenance organizations (HMOs) and preferred provider organizations (PPO's) are more similar than they are different. Both types of plans offer broad health care coverage, and their insurance premiums are relatively low. The cost of each office visit is nominal, and little or no paperwork is involved. The biggest difference between the two involves your choice of doctors. If you choose an HMO, you will have to select your doctor from a list of professionals the organization has chosen. If you select a PPO, you're free to continue using your family doctor or any other physician you choose. However, if the doctor or hospital you choose is not on the list of preferred providers, the plans generally cover only half of the total costs. If freedom of choice is especially important to you, you'll probably want to choose a PPO even though its premiums will be higher. But if you're looking for the least expensive coverage and don't insist on seeing a particular physician, an HMO would be your best bet. Of course, if you want full choice
and control then you will want a major medical plan, but for a higher premium.

What is daily hospitalization insurance?

Some insurance companies sell daily hospitalization insurance that pays a certain amount per day, usually $75 to $100. These policies usually are a bad idea and are certainly no substitute for a comprehensive health or major medical insurance policy. According to Eric Tyson's "Personal Finance for Dummie$" (IDG Books Worldwide Inc., Foster City, Calif.), "One day in the hospital can rack up a bill of several thousand dollars, so $100 can be gone in an hour or less! These policies don't offer coverage for the big ticket expenses. If you don't have a comprehensive health insurance policy, get it!" If you already have a major medical policy, it might seem useful to buy an in-hospital plan for those expenses not covered by your plan. However, a better approach would be to save an amount equal to the premium in a special account or mutual fund. Such funds could be used for any unforeseen expense.

What is a flexible spending account and are my contributions
to it taxed?

Many employers now offer "flexible spending accounts" to individual workers. Opening one can slash your annual income tax bill and also help to reduce your medical expenses. According to "Get a Financial Life" by Beth Kobliner (Simon & Schuster), a flexible spending account is "an account in which you can put a fixed amount of your own money -- typically anywhere from $100 to $5,000 -- to pay for specific medical expenses that aren't covered by health insurance. What makes an FSA different from a savings account is that you can put the money into the FSA on a pre-tax basis, and that money will never be taxed. FSA money is commonly used to pay for eyeglasses, contact lenses, allergy shots, dental care, prescription drugs, and chiropractic sessions. You can also use the money to pay the deductibles on your medical and dental plans. "However, it's important to note that you can't use FSA money to pay for cosmetic surgery, electrolysis, health club memberships and similar expenses. Rules vary from company to company, so educate yourself before you sign up. One important thing to remember about flexible spending accounts is that these accounts are a “use it” or “lose it” type arrangement. If you place money into the account for medical expenses and do not have sufficient expenses to use the funds set aside, then the money reverts back to the employer. Also documentation must be furnished in order to be reimbursed from a flexible spending account.

Are there any drawbacks to establishing a flexible spending account for my medical expenses?

A flexible spending account lets you save money by making contributions on a pre-tax basis (which lowers the amount of earnings you owe taxes on) to pay for eyeglasses or other medical expenses not covered by your medical insurance. According to "Get a Financial Life" (Simon & Schuster), "There is one drawback to an FSA: If you don't use the money you put into the account during the year, you'll lose it. That's why you should put in only an amount you're certain to spend."

What is an in-hospital indemnity plan?

An in-hospital indemnity plan is a special type of health-insurance policy that pays a specific sum for each claim. This feature sets it apart from traditional payment-for-service health plans, in which payments are based on the actual cost of the medical services the policyholder receives. Indemnity plans are often much cheaper than payment-for-service plans, but they're not always a great bargain. That's because the set amount they'll pay on a claim -- say, a flat $125 per day for a hospital stay -- might pale in comparison to the actual cost of the services you receive. If the hospital charges $350 a day, you'll have to make up the difference.

Does health insurance include a dental plan?

Most health insurance plans don't automatically cover dental work. However, many health plans provide dental coverage for an additional fee. If you're looking for dental insurance, check with the company that provides your health insurance first. It may be cheaper to add the coverage to your existing health insurance policy than it would to purchase a separate dental policy from a different insurer.

What is a cafeteria (Section 125) plan?

A cafeteria plan, also known as a Section 125 plan, is an employee benefit plan governed by the provisions of Section 125 of the Internal Revenue Code. Its purpose is to provide a method for allowing the employee to choose from among a menu of choices (hence the name) those benefits the employee desires to utilize. The benefits may be fully or partially paid for by the employer. If the employee is required to pay for some or all of the benefits, he or she typically pays for them on a pre-tax basis.

How does a cafeteria plan work?

In a cafeteria plan, the employee redirects a part of compensation to the various cafeteria plan accounts, which also has the effect of reducing taxable income by these amounts. The cafeteria plan accounts may include up to $50,000 in group term life insurance, child care reimbursement, medical expense reimbursement, medical, disability, vision, and dental insurance. If any contributions to the accounts are not used by the end of the plan year, the employee forfeits these unused amounts. Also, the employee cannot change the salary reductions during the plan year, except for changes in family status, birth, death, adoption, divorce, substantial change in insurance plans offered, or a change in job status of either spouse. For the medical expense reimbursement account, the employer is also at risk in a cafeteria plan. When an employee submits a voucher for an allowed medical expense, the employer must reimburse the expense even if the employee's account does not yet have a sufficient balance to reimburse the expense. If the employee terminates employment before he or she has had time to repay the employer's advance with plan contributions, the employer may lose the money advanced.