The Basics of Choosing a Health Insurance Plan

How to Strike a Balance Between Quality of Coverage and Your Budget

Close up of a Health Insurance Card showing the co-pay levels for services.
•••

Nick M. Do / E+ / Getty Images

Many times, if you have health insurance, it's through a group plan offered by your employer or your spouse's employer. Others purchase individual policies directly from an insurance company or have COBRA coverage. Some people have no coverage at all.

If you're married, single, a parent, young, or old, you need some level of health insurance to protect yourself against financial disaster in the event of a serious illness or accident. Whether you choose a group plan or an individual plan, there are important choices to be made that will affect not only the quality of your medical care coverage but also your wallet. Reviewing some of these choices can help you make an informed decision that fits both your specific needs and your budget.

Key Takeaways

  • Health maintenance organizations (HMOs), preferred provider organizations (PPOs), and indemnity or fee-for-service (FFS) are the most common employer-sponsored plans.
  • Indemnity or FFS plans offer the greatest flexibility of managed care options, yet usually at a higher out-of-pocket cost than other plans.
  • The main difference between PPOs and HMOs is that PPOs allow you to visit providers outside your network, usually for a higher premium.
  • If you are not insured through your employer, you can seek alternatives through private sources, exchanges, or sharing plans.

Types of Health Insurance Plans

There are quite a few confusing terms to weed through when considering health insurance plans, and they all come with their implications to consider. While it is important to know the differences among HMOs, PPOs, POS Plans, and indemnity plans, for instance, it is most helpful to start with the most common health insurance plan types. The most common types can be grouped into one of three categories:

  1. Indemnity, Fee-for-Service (FFS), or Point of Service (POS) Plans
  2. Health Maintenance Organizations (HMOs)
  3. Preferred Provider Organizations (PPOs)

Let's take a deeper dive into these three categories, along with their basic advantages and disadvantages.

Indemnity, Fee-for-Service, and Point of Service Plans

Traditional plans that allow you to go to any doctor or specialist you choose without the need for a referral are called "indemnity," "fee-for-service" (FFS), or "point of service" (POS) plans. With these plans, the insurance company pays for a set portion of your charges, and you pay the rest. These plans provide the most flexibility as they do not set restrictions on the providers you can use and generally do not require that you select a primary care physician (PCP).

Advantages of Indemnity Plans

The primary advantage of an indemnity plan is that you can choose to get your medical care anywhere you want and from whoever you want without getting referrals or prior approvals.

Disadvantages of Indemnity Plans

To control costs, insurance companies shift more costs to you through higher premiums and deductibles, making indemnity plans more costly to you than HMOs and PPOs. You may be expected to pay for your medical services upfront and then submit a claim to your insurance company for reimbursement, which ties up your money and puts you at risk of not getting it back.

Indemnity plans are becoming increasingly hard to find and may be among the most expensive health insurance options.

Health Maintenance Organizations (HMOs)

An HMO, or health maintenance organization, is an association of healthcare professionals and medical facilities that sell a fixed package of healthcare services for a fixed price. Within an HMO insurance plan, each patient has a primary care physician, who is often referred to as a "gatekeeper." The plan does not cover services provided by a specialist unless the gatekeeper (PCP) determines that the specialist is necessary and issues an in-network referral. As such, all of your care is coordinated through your PCP.

Advantages of HMOs

The primary advantage of an HMO is that your out-of-pocket costs are often lower and more predictable. Another advantage is that claim forms aren't usually necessary.

Disadvantages of HMOs

Services provided by healthcare professionals outside the network generally aren't covered except in the case of a true emergency. Another disadvantage for some is that services provided by specialists require a referral from your primary physician, which may require an additional doctor's appointment. Under an HMO plan, some services may be limited to outpatient mental health services. While this risk exists under any insurance plan, in an HMO, you might not receive the medical care you need, either because it is not covered or because your PCP does not issue the necessary referral.

When evaluating health insurance plans, consider whether it makes more sense to pay a higher deductible in exchange for lower premiums or to accept a higher premium for lower out-of-pocket deductible costs.

Preferred Provider Organizations (PPOs)

A PPO, or Preferred Provider Organization, contains the managed care aspect of an HMO but with the added flexibility of being able to go outside the network of healthcare professionals and facilities to any health care provider of your choice when you feel it's necessary. When you go outside the network, your benefits are less, and you pay more out of your pocket than you would if you had stayed within the network, but you do still receive some coverage (unlike in a HMO). If flexibility and choice are important to you, a PPO may be a good choice if it's available to you.

Advantages of PPOs

The primary advantage of a PPO is that you have more flexibility than you would in an HMO, but lower costs that those associated with an indemnity plan.

Disadvantages of PPOs

The primary disadvantage of a PPO is that it can be more difficult to predict your out-of-pocket costs.

Where Can I Get Health Insurance?

Most people get their health insurance through a group plan that is sponsored (and often at least partially paid for) by their employer or a spouse's employer. But many small employers don't offer health insurance. If your company is one of them, you might be able to get group insurance through membership in a labor union, professional association, club, or other organization that offers health insurance to members.

If you're unable to find group coverage, you can buy an individual policy. In the past, such plans were extremely cost-prohibitive for many. One of the primary objectives of the Affordable Care Act—also known as the "ACA" and "Obamacare"—was to overhaul the individual health insurance market and make individual plans more affordable.

You can now search through the ACA's health insurance exchanges—called "marketplaces"—through HealthCare.gov, where you can search and compare policies and see whether you are eligible for any subsidies.

If the exchanges don't work out, you can still opt for individual plans that are offered directly from an insurance carrier or an agent or broker (referred to as "off-exchange plans").

Health Care Sharing as an Alternative

If an employer's plan does not cover you at work, or you can't afford the high premiums often associated with COBRA coverage or plans offered directly by an insurer, there's one more option.

Health care sharing plans aren't traditional insurance. Instead, you pay in a set monthly share amount, which is determined by your family size. That share amount is then pooled with share amounts from other people covered by the plan. When you have to visit a doctor, your health care sharing plan uses money from the shared pool to cover eligible expenses.

Advantages of Health Care Sharing Plans

The primary advantage of a health care sharing plan is cost. These plans tend to be more affordable than purchasing health insurance directly. If you don't go to the doctor that often, it could make more sense to choose healthcare sharing over traditional insurance.

Disadvantages of Health Care Sharing Plans

There are some disadvantages to keep in mind, however. If you're self-employed, you wouldn't be able to deduct your healthcare sharing amount the way you would health insurance premiums that you pay out of pocket. These plans can also have limitations as to which healthcare expenses they cover.

Finally, some plans require you to commit to certain moral, ethical, or religious standards to participate in the plan. Reviewing different healthcare sharing options and comparing them to what's available elsewhere for health insurance can help you decide which one is right for you.