Trying to decide what types of health insurance plans to buy for yourself or for your employees? You’re in the right place. There are several types of health insurance plans available, and they vary on many levels from the extent of the coverage to the cost to the ease of use for the insured.
Traditional Types of Health Insurance Plans
Traditional health insurance plans feel a bit like alphabet soup with their acronyms. What each plan means and covers has changed a lot over the last several years as there have been changes in how the healthcare system works in the United States.
When we say “traditional” health insurance, we mean standard group health plans that offer medical coverage, have a monthly premium, and a network of providers (aka doctors).
Types of traditional health insurance plans typically include:
- Health Maintenance Organization (HMO)
- Preferred Provider Organization (PPO)
- Point of Service Plan (POS)
- High Deductible Health Plan (HDHP)
Let’s go through each in detail.
1. Health Maintenance Organization (HMO) Explained
Most people who hear the acronym “HMO” usually have a strong reaction – they either love it or hate it. Why? Because the quality of an HMO insurance plan varies a lot by both state and insurance carrier.
If you or your employees choose to have an HMO plan, you’ll need to know:
- You’ll need an in-network PCP (Primary Care Physician) and you’ll need referrals for specialist appointments.
- Your network’s size, or the number of doctors in-network, is dependent upon your location (which can even vary within a state, such as San Francisco versus San Diego).
- If you can stay in-network on your insurance’s HMO plan, you’ll pay very little in medical expenses even if you get sick or injured!
An HMO contains cost by using only in-network doctors, which then bill at a reduced cost to the insurance company as part of their in-network agreement. As a result, premiums and out of pocket cost are low if you get treatment in network.
If you or your employees have HMO coverage, you need to check which practitioners are in-network (and sometimes, the doctor’s office has to confirm they will take a new patient). If you or your employees can find doctors in-network, a lot of money can be saved with an HMO plan, both by having to pay very little out of pocket and less in premiums each month (when compared to other plans).
However, if someone with an HMO uses an out-of-network doctor, 100 % of the bill will be the patient’s responsibility.
2. Preferred Provider Organization (PPO) Explained
A PPO is what most people think of when they think of health insurance.
If you choose to have a PPO plan, you and your employees need to know:
- The insured person can probably see their current doctor or a doctor very close by. You don’t need a referral to see a specialist.
- You should still double check the insurance’s network coverage since it varies by state and city, even with a PPO.
- Check your costs – as an employer, what kind of premium can you afford or how much are you willing to help your employees?
If you need to go to a doctor, be it for a sniffle or knee pain, then you just go to the doctor you need to go to, whether it’s a nurse practitioner or an orthopedic specialist. The insured person just makes an appointment and gets the matter sorted out, usually within a week.
A PPO is almost that simple. In general, if you or your employees pick a PPO as their health insurance plan, then they can go to the doctor of their choice.
Like an HMO, there is still a network with a PPO, but it’s generally HUGE compared to the HMO. You and your employees still could face extra bills if you go out of network, even though this is a PPO. Caution your employees to always double check their insurance coverage with a doctor PRIOR to treatment to make sure you are in-network.
With a PPO, the insured also don’t need referrals for specialists like orthopedics, which is a nice perk and a difference from being a part of an HMO.
Finally, another big difference between the HMO and PPO is that you don’t need a Primary Care Physician (PCP) as your gatekeeper to treatment when you have a PPO. You can see a specialist directly if needed.
So what’s the catch? Cost, of course. A PPO with a small deductible is going to be by far the most expensive of the plans and will continue to get more costly as you and your employees get older. Some premiums reach into the 4 figures…yes, over $1,000 per month!
However, deductibles (or what someone has to pay before they are covered 80-100% by insurance) are available in a wide range for PPOs. The lowest I’ve personally seen is $400, with the highest at $6,000. Anything over $1,300 for a deductible is known as a High Deductible Health Plan (HDHP), explained more below.
PPOs also vary in some require a co-payment (a flat $20-50 fee per visit) or co-insurance (a percentage of the bill you need to pay) in addition to the deductible. There’s usually details on the back of one’s insurance card, but calling customer service is never a bad idea if you find it confusing (which most people do).
3. Point of Service Plan (POS) Explained
A POS is like the hybrid of an HMO and a PPO, which is why we put it third in our list of types of health insurance plans.
If you or your employees choose to have a POS plan, they need to know:
- You’ll need an in-network PCP (Primary Care Physician).
- Your network’s size, or number of doctors included, is dependent upon your location (which can even vary within a state, such as San Francisco versus San Diego).
- You’ll need to also check your out-of-network’s ease of use; you may be able to keep a doctor you like to work with, even if he or she is out-of-network, but you’ll want to check on practical costs.
- If you can stay in-network on your insurance’s POS plan, you’ll pay very little in medical expenses even if you get sick or injured!
If you or your employees have a POS, like an HMO, you do NOT have a deductible and usually only a minimal co-payment (or nothing!) when you use a healthcare provider within your network.
However, POS members also need a primary care physician (PCP) that is in-network. And like an HMO, the network of doctors in a POS is going to be smaller than a PPO.
However, like a PPO, the POS network provided is larger and you can also go to an out-of-network doctor for a higher cost (versus an HMO, where out of network would be ALL your cost). With a POS, you might also have to pay higher co-pays or a higher rate of co-insurance for out-of-network providers.
4. High Deductible Health Plan (HDHP) Explained
Health insurance is a bit like gambling. Not sure what that means?
Take the High Deductible Health Plan (HDHP). If you or your employees decide to partake in an HDHP, it’s somewhat putting all the chips into the “I’m not going to get sick” boat.
Why? Because an HDHP is what is known as “catastrophic” coverage since the deductible is so high. Any plan with a deductible that’s greater than $1300 per person gets categorized as a HDHP, but the deductible can go up to $6,000 per person). That makes it impractical if you or your employees get sick and need to see a doctor regularly.
To make it even more complex, an HDHP can be a PPO or a POS (although it’s almost always a PPO). At least you or your employees can go to a doctor of your choice though! Some also offer wellness incentive benefits to help offer a more comprehensive package, like discounted gym memberships.
If you or your employees choose to have a HDHP plan, the insured need to know:
- You can probably see your current doctor or a doctor very close to you because HDHP plans are usually PPO or POS plans.
- You are going to pay out of pocket for anything medical up to the deductible amount, so be prepared for the worst case scenario with some savings or a Health Savings Account (HSA).
- Assess your likely healthcare costs – look at what you have spent on doctor’s visits over the last few years. If you have gone more than 3x in a year, you should consider looking at lower deductible PPOs, POSs, or if you can do an HMO in your area feasibly.
Savings-Style Add-On Healthcare Options
As we said before, picking a healthcare plan is a bit like gambling. What if you and your employees could save for a rainy day where you knew you were going to lose all your chips?
Enter the healthcare savings-style add-on healthcare options! These options allow you and your employees to save for medical expenses without a traditional health insurance plan or in combination with a traditional health insurance plan. In general, the savings-style plans can provide great tax perks for both the employer and employee, as well as help to create more complete coverage when combined with a traditional health plan.
Note that the below plans are NOT health insurance. You still need to have an HMO, PPO, POS, or HDHP in order to be covered!
5. Flexible Spending Account (FSA) Explained
A flexible spending account (FSA) is an account into which your employees can automatically deposit a portion of their pretax paycheck to save for medical expenses. You, as the employer, can also make contributions to employees’ FSAs. An FSA allows employees to save for medical expense, and also provides tax savings for them and for you.
Employees can use the money in the account to pay for qualified medical expenses not covered by insurance, like premiums, co-pays, dental and optometrist visits, and certain “FSA-approved” over-the-counter medications and supplies for chronic conditions. Your FSA should provide a list online of what is approved for purchase.
The big catch to an FSA is that your employees MUST use their dollars before the end of the annual period, which doesn’t necessarily fall on January 1st (it will go back into your pocket as the business owner if they don’t use it…).
At the beginning of the annual period, your employees decide how much money they want to contribute to their FSA, and the max tax-free contribution in 2016 is $2,550 (employees can contribute beyond this amount, but additional contributions will be taxed like normal income). As an employer, you can also kick in a contribution to the FSA as well as a perk to employees who enroll.
An FSA can be beneficial to business owners and end users.
For the business owner:
- The company can save money on payroll
- The company can save on taxes
- The company can tout an FSA as a great benefit
- The company can help with medical expenses in a controlled way (i.e. kick in a flat amount per employee per month into their FSA)
For the insured:
- If you use it correctly, an FSA can help to offset your out-of-pocket medical expenses and pay for your monthly health insurance premiums
- Some types of FSAs can also be used to pay for your day-to-day expenses for childcare
- You can save on employment (as a business owner) and federal income taxes (as an employee)
If you and your employees choose to have an FSA, you need to know:
- It’s a “use your dollars or lose them” system on an annual basis (dates can vary)
- Check on what kind of FSA the company employees signed up for (i.e. can child care expenses be approved? Or just medical?)
- Your employees cannot change what they are contributing until the annual period comes around again, so make sure they commit what they can afford to (it can only be changed if something catastrophic happens, like a death of a spouse)
6. Health Savings Account (HSA) Explained
With an HSA, you and your employees can make tax-deductible contributions into an account each year to pay for current and future health care costs, just like an FSA. An HSA can be provided by you, as the employer, or your employees can get one on their own in the marketplace or from an investment partner (like Fidelity or USAA).
There are three primary differences between an FSA and an HSA:
- Unlike an FSA, an HSA is not use-it-or-lose-it. Any money in an HSA that’s not used in a given year will stay in the HSA and continue to grow tax-free (and should only be withdrawn for medical costs). If you or your employees use any withdrawal for non-medical costs, it will be taxed- and if you are not yet 65, you’ll owe a 10% penalty too. So draw on the account to pay medical costs only.
- To be eligible for an HSA, you or your employees must also be enrolled in a High Deductible Health Plan (HDHP). Translation: Your health insurance plan must have an annual deductible of at least $1,300 for an individual and $2,600 for a family.
- The annual contribution limit to an HSA in 2016 is $3,350 for an individual and $6,750 for a family. If you are 55 years old or older, you can contribute an additional $1,000 in 2016.
If you as the employer offer an HSA, it typically works just like a 401K plan: Your employees’ contributions are taken out of their paycheck on a pre-tax basis and you, as the employer, may also kick in a contribution.
If you have an HSA on your own, you still get the tax break; you just claim the contribution as an “above the line” deduction on your tax return, and your taxable income will be reduced by the amount of your contribution, which is a great perk for people in a higher tax bracket.
What’s more, just about anyone can contribute to an HSA: spouses, parents, even friends (which is not the case for an FSA). Your HSA provider can tell you more about how that works.
If you or your employees choose to have an HSA, you need to know:
- You must be enrolled in a HDHP as your primary form of health insurance in order to have an HSA
- An HSA operates similar to a 401K with dollars being taken out pre-tax, employees take it with them when they change jobs, and there is a max contribution each year
- Your employees can get an HSA on your own if you do not offer one
Typical Combinations of Insurance Plans & Savings Plans
Let’s now figure out what combinations of types of health insurance plans make sense, from both the business owner’s and insured’s perspectives.
Typical Combinations of Insurance (From the Business Owner’s Perspective)
|Type of Health Insurance Plan||Offer with an FSA?||Offer with an HSA?|
|HMO||Not necessary, but can offer it.||Not necessary.|
|PPO||Not necessary, but can offer it.||Yes, if the plan is HDHP, this then creates a complete coverage plan (but you do not have to).|
|POS||Not necessary, but can offer it.||Yes, if the plan is HDHP, this then creates a complete coverage plan (but you do not have to).|
|HDHP||Not necessary, but can offer it.||Yes, this then creates a complete coverage plan (but you do not have to).|
Typical Combinations of Insurance (From the End User’s Perspective)
|Type of Health Insurance Plan||Combine with an FSA?||Combine with an HSA?|
|HMO||Might be a good idea for other medical expenses or if you have children.||Not eligible.|
|PPO||Yes, if you can afford to set aside money for expenses you know you have yearly (i.e. contacts).||Not eligible unless your deductible is over $1,300.|
|POS||Yes, if you can afford to set aside money for expenses you know you have yearly (i.e. contacts).||Not eligible unless your deductible is over $1,300.|
|HDHP||Maybe, but an HSA is more appropriate here.||Yes, this is a good investment for the “just in case.”|
Practical Examples of What Care Looks Like
Let’s take a look some examples, so you can see how your employees will get care depending on which types of health insurance plans and add-on savings options you make available to them.
Example 1: Suzie might have carpal tunnel
Suzie has an office job, and her right wrist really hurts, especially after a long day of typing.
|Suzie's Insurance Plan||What Happens|
|HMO||Suzie needs to get an appointment with her in-network Primary Care Physician to get a referral to a specialist. Suzie can then see the specialist to get her wrist treated, but it may take awhile to get in.|
|PPO||Suzie can make an appointment with an orthopedic specialist directly to get treatment.|
|POS||Suzie might need a referral from her Primary Care Physician or she might be able to go directly to an orthopedic specialist in network- she should call & check.|
|HDHP||Suzie will need to follow the same route as the PPO or POS, but she may have to pay for all of her treatment (if she has not met her deductible). She needs to be prepared for the cost of the doctor’s bills, perhaps using her HSA and/or FSA to help.|
Example 2: Bobby might have pneumonia
Bobby has been feeling sick for a few weeks with a bad cough, a sore throat, and exhaustion.
|Bobby's Insurance Plan||What Happens|
|HMO||Bobby needs to go to an in-network urgent care center in order to be covered for treatment, unless he can get into his Primary Care Physician quickly.|
|PPO||Bobby should make an appointment with a doctor ASAP, or he can go to an urgent care center. Most doctors/ urgent care centers should be in-network, since Bobby has a PPO.|
|POS||Bobby should make an appointment with a doctor ASAP, making sure it’s in-network, or go to an in-network urgent care center.|
|HDHP||Bobby should see a doctor as soon as possible, and he should bring his HSA or FSA card along (if he has one of these accounts) in order to help cover the bill. Bobby will have to pay out of his own pocket if he has met his deductible yet.|
Though sometimes confusing, having a combination of types of health insurance plans tends to make sense, both from the insured’s viewpoint and as a business owner. There is a lot of opportunity for tax savings as well via good health insurance planning, which is always a plus.