Shopping for individual health insurance plans can be challenging at best and completely confusing at worst. It is sometimes difficult to accurately compare plans because there are so many choices, and it can be like trying to understand and explain the similarities and differences between apples, kumquats, and watermelon. Which is to say that while not all plans are created equal, there is something to appeal to everyone.
At this moment, I am shopping around for a new health insurance plan for myself and my family, which includes my husband and three teenage boys. This marks the fourth time in six years that I have done the footwork to try to get the best coverage (for us) and the most competitive premium, so I consider myself an educated amateur. Notice that I did not say I look for the least expensive premium, because that may not always provide the best plan for my family. It is important to consider many variables when shopping for a plan that fits both your life and your budget.
If you are lucky to have an employee sponsored health plan, many of those variables have already been set for you and your choice boils down to one or two plans, usually HMO vs. PPO and whether you will be covering just yourself, you and a spouse/partner, or the whole family. Those are questions that will affect everyone, however, so let’s start by discussing the various broad types of health insurance coverage.
In today’s competitive health insurance market, there are three main types of coverage that are offered: Fee-for-Service, managed care plans such as PPO (Preferred Provider Organization) and HMO (Health Maintenance Organization), and Association-based and group plans. It is important to note that all three types of plans are based upon the same premise, which is to provide health care to individuals and families, provide payment to health care providers, and make money for the carrier in the process. Each plan will have a different balance of these factors as well as covered services and this will affect the monthly premium. Some plans require that the patient absorb more costs, some will have more costs absorbed by the providers, and the remainder will have the insurance provider bearing a larger portion of the overall costs. Generally speaking, those that have the provider taking up a greater percentage of the costs will have a much higher premium.
A Fee-for-Service plan, also known as an “Indemnity” plan, is generally more difficult to obtain and has higher premiums, but provides excellent coverage and the widest range of providers. In a Fee-for-Service plan, the health care provider (HCP) and the insurance carrier have negotiated fees in advance. The HCP will charge a “billing amount” for a service but there is also a set amount of reimbursement, known as the “allowable amount”, for each medical procedure. Medical procedures can include everything from office visits to lab tests to long term hospitalization. The patient is commonly financially responsible for the difference between the billing amount and the allowable amount.
To illustrate, suppose that you have a procedure that the HCP would normally bill $100 to perform. Their negotiated fee with the insurance carrier, however, is $75. You may be asked to pay the $100 directly to the provider and be given a receipt to submit to your carrier, who will then reimburse (“indemnify”) you for the $75 negotiated fee. You will be “out of pocket” the $25 difference. In other cases the HCP may have a direct relationship with the carrier, and they will actually bill the carrier for the full $100. Once they receive payment from the carrier for the $75, they will then do a “balance billing” to you for the $25, which is the balance in this case. The HCP in this case gets paid the entire $100 fee.
This seems simple, I know, but we’re not through with the explanation yet. In some cases, the carrier will not allow the HCP to perform a balance billing. The agreement between the carrier and the HCP states that the HCP will accept as final payment only what the carrier pays. Obviously, this is the best case for the patient, who would now have no out of pocket expenses, but worse for the HCP who now makes less money. This would explain why the premiums are higher for this type of plan, as the carrier is bearing the majority of the costs.
Managed care plans like PPO and HMO plans are usually less expensive for the patient but can also be more restrictive. Patient must use doctors and hospitals that are “in network” and are pre-approved by the carrier. The carriers and the HCPs have negotiated fees, much like the Fee-for-Service plans, and the patient will also be responsible for a portion of costs. Just how much those costs are will depend on variables like the “co-pay”, the “deductible”, and the “maximum annual out-of-pocket” that have been chosen for each plan. In addition, each plan may or may not have specific prescription coverage or maternity coverage, each of which will add to the premium costs.
HMO plans may have higher premiums but are less expensive in the long run because the patient has little or no other payments to make to providers: the carrier covers all expenses using the funds collected through premiums. HMO plans try to manage costs (remember: it’s called managed care) by providing preventive care and by making the care of patients very efficient. The plan accomplishes this by requiring patients to first see a specific physician, known as the “primary care” physician (PCP), for each illness. The PCP is responsible for assisting the patient in the management of his or her care, and will refer to specialists only on an as-needed basis. This is one of the main differences between an HMO and a PPO: in a PPO you can refer yourself to a specialist and do not need to wait. Many patients appreciate the flexibility of a PPO while others may be more interested in controlling their out-of-pocket expenses with an HMO.
In my opinion, a traditional PPO plan tries to balance the best of HMOs with the best of Fee-for-Service. Personally, I have always preferred the flexibility in choosing my own doctors and this is a hallmark of PPO plans. Most doctors will be “providers” for all of the major PPO insurance carriers, and many will also be providers of smaller carriers who may be popular in their specific geographic area. After all, the doctors want to be available to as many patients as they can so that they can make a living while helping others. As a provider, the physician has a negotiated fee (remember the allowable amount?) with a carrier. In addition, the patient will also be required to pay a portion of the costs, sometimes in the form of a “co-pay”, sometimes as a balance billing, and usually both.
The “co-pay” is a fixed amount, usually between $20 and $45, paid directly to the HCP at the conclusion of an office visit. Sometimes, there are separate co-pays for emergency room visits, hospitalization, or prescription coverage. Using our previous example, let’s say the HCP provides a service in an office billing at $100. You make a $20 co-pay to the doctor, who then bills the carrier for the balance. The carrier pays the HCP the allowable amount, in this case let’s say it is $50 (note: this is different from the Fee-for-Service negotiated rate!). The HCP may or may not do a balance billing to the patient to try to get more money. At this point, everyone is paid and there is no extra money owed to anyone. As you can see in this example, the patient paid less, the carrier paid less, but the HCP also made less. Because the carrier pays less overall, the premiums are lower and they can still make money.
Association and group insurance plans can really fall into any of the above mentioned structures. A group or association plan generally provides lower premiums because there is quite frankly strength in numbers. The more individual members within the group, the better their leverage is to negotiate with insurance carriers. Both small and large companies can be considered “groups”. Large companies with thousands of employees have tremendous buying power with insurance carries simply due to their size. These companies may even be able to structure a very specific plan that would never be made available to the general public, and will provide coverage that best serves the overall needs of their employee population. A good example of this would be companies like UPS, or state or national organizations such as police forces or federal government employees. Union organizations (like the AFL/CIO or the Teamsters) almost always provide some type of insurance coverage for their members and the costs are normally paid as part of the union dues.
Many individuals belong to fraternal organizations (like the Kiwanis) or to alumni associations from their college or university. You may not even know that you are part of a “group” that has access to health insurance, so it is worth checking on this and also checking with your spouse/partner. If you are self-employed, the National Association of the Self Employed (NASE) can be a great resource for insurance. In my family, both my husband and I are self-employed so this is where we found the best plan for our family. Usually, there is a small fee involved in belonging to one of these groups but in the long run it is worth it to pay the annual dues in return for a reduction in health care costs.
Now that you know a bit more about the types of plans available, just how you can control your costs and also where can you turn to find a carrier in your area? The best place to start your investigation is with yourself. Asking yourself a few questions and writing down the answers can turn you in the right direction pretty quickly. Are you young or old, in good health or do you have a chronic illness? Do you use prescription drugs on a regular basis (like insulin, for example) or only when you get sick (like antibiotics)? Do you have children, or do you plan to have children in the near future? Are the children you have generally healthy or do they have chronic conditions (like allergies)? Do you smoke, drink excessively, or skydive?
This is also where you will want to consider whether to purchase dental and vision coverage. If you have children who are facing braces in their near futures, you may want to investigate dental plans that offer orthodontic coverage. If you wear glasses or contacts, you may find that you can save money overall by including a vision service plan in your coverage. Most major insurance carriers will have dental and/or vision plans that they will offer only to those who first obtain a medical insurance plan. Dental plans usually follow the same pattern as medical plans in that there are HOM, PPO, and Fee-for-Service plans. The structure and restrictions are much the same, with fees that vary accordingly.
Finding coverage can be pretty simple and fairly inexpensive if you are young, healthy, and stay out of trouble. You may want to take out a PPO plan, so that you have a choice in your doctors. You may choose a plan with a high deductible, which is another way to say more money out-of-pocket to you when you get sick, but less overall if you stay healthy. The deductible can range from $100 (a really good employee sponsored plan) to $5,000 (a low premium individual plan) annually. It is rare to find an individually purchased plan with a $100 deductible.
Some people consider high deductible plans to be a roll of the financial dice and this can create problems if you become very ill, as you will have to come up with the full deductible on your own before the carrier will start to pay anyone for anything. You definitely need to know just how much a hit your wallet can take before you make this decision as it is a very personal issue. Most people shoot for balance, sacrificing a lower premium to get a lower deductible. For a family, there is usually a two-person “cap” on the deductible (i.e. $5,000 per person, $10,000 family). For all plans, there will also be a “maximum out-of-pocket” which would be the deductible plus an additional amount. Again, there will be a per-person as well as a family amount in the max out-of-pocket. I have found for my own personal insurance quest, when all other issues are mostly equal, comparing the max out-of-pocket amount between different policies can help me make my ultimate decision.
Once you have your list of “must haves” and “nice to haves” in place, you can start looking at specific plans. A good place to start if you are feeling wise and confident is the Internet. There are many insurance providers who have corporate sites that allow you to get a basic quote. Sometimes it is helpful to price yourself and your spouse/partner together and break the kids off onto their own policies. That way you can design policies that best fit individual needs, such as a child who has a chronic illness. Corporate Web sites will allow these types of quotes and remember, a quote is simply window shopping! Feel free to browse two or three sites to get a feel for the marketplace.
If you become overwhelmed at the choices and confused by the premium structures and coverage differences (believe me, it’s easy to do so don’t feel bad) or if you simply do not have the time to do the research on your own, you may want to use a licensed insurance agent. Most agents represent a variety of companies (some Web sites do the same) and once you have given your “shopping list”, you should receive quotes from two or three different providers. You may receive several quotes from the same provider that vary based on deductible, co-pay amount, or coverage (i.e. maternity, chiropractic, etc.). An agent may be a good source of information on which plans cover most doctors in your area. The agent gets paid by the carriers and not by you, so there should be no charge for utilizing the agent’s services.
Insurance quotes for the same or similar coverage may vary as much as 50% from carrier to carrier, so don’t be afraid to shop around. An important fact to consider is that while you may receive a quote from an agent or from a Web site, no quote (even from an insurance company Web site) is final until the policy has been completed, or “underwritten”. The process of underwriting happens when the insurance carrier investigates the health history information included on your application. This process may include requesting medical records and may even include the carrier asking you to have a physical to check on the state of your health. Underwriting can take anywhere from two weeks to a month or more so make sure to plan ahead and be patient. Keep in mind that you should be honest on your application because if you falsify information on the application and the carrier discovers it, you most likely will be denied coverage. It would be a shame to have all of your hard work and research go to waste so be as honest as you can.
When your final approval comes in, you may notice that the actual premium is higher that the original quote. This may be due to the underwriter seeing something in your medical records (for instance, high blood pressure) that leads the carrier to basically “hedge their bet”. They are agreeing to take you on, but feel that you are a higher risk (for instance, high blood pressure left untreated often leads to strokes) and therefore charge you a higher premium, just in case. Sometimes, if you are applying as a family and one family member is sickly, they may deny coverage only to that family member. In this case, they may decide to offer coverage to that person if they are on a separate policy, charging a higher premium for the privilege. If this happens to you, an agent can be very helpful in trying to find you the best “mix” of coverage for your special circumstances, including going with two separate providers as my husband and I have done in the past.
Of course, the best way to control your health care costs is to stay healthy in the first place. Eat well, exercise, and try to keep minor conditions from turning into chronic illnesses. However, there are few things in life that can provide the peace of mind that good health insurance provides for you and your loved ones. As my father used to say, “It’s better to have it and not need it that to need it and not have it”. With a bit of investigative ability and some patience, just about anyone can find a plan that works at an affordable price.
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