Dear Lifehacker,
I’m finally ready to purchase health insurance for myself, but I’m really overwhelmed by the choices out there. What’s the difference between an HMO, a PPO, an HSA, and these other plans? Help!
Sincerely,
Intense Insurance,
Dear Intense,
You’re right, there’s a lot out there, and it can seem very confusing at first. But the main benefits of each plan are pretty simple once you boil them down to their base characteristics. Here’s a brief overview of the more common health care plans, and the good and bad of each one.
Note: If you don’t get health insurance from your employer, check out our guide to buying health insurance for yourself, as well as our explainer on the new health care law to get started. If you have questions, they may have already been answered in our Ask an Expert series, too!
Health Insurance Basics
Before we go into the specific types of plans, it’s important to have a basic idea of how health insurance plans work.
When you go to the doctor, that doctor’s visit has to be paid for. Without insurance, you’d have to pay the entire thing out of your pocket—but with insurance, your insurance company helps you out.
Many plans have a deductible, measured in dollars. This is the amount that you have to pay for health services before your insurance kicks in and helps you cover the cost. So, if your plan has a deductible of $1000, that means the first $1000 of your medical costs for the year come out of your pocket. Plans with lower deductibles tend to have higher premiums, and vice-versa—so which one you pick depends on how often you think you’ll require health care. If you use your coverage often, you may be better off with a high premium, but if you don’t visit the doctor a lot, a low premium could be preferable.
Some plans may waive the deductible for office visits, instead charging you a small co-pay for each visit (usually something like $15-40).
After you meet your deductible, your insurance company will help you pay your health costs. This period is called coinsurance, and its value is usually expressed as a percentage. For example, your insurer may pay 80% of your health care costs after you surpass the deductible, and you pay the leftover 20%.
Lastly, most providers have a “network” of doctors, hospitals, labs, and so on with whom they have a relationship. Going to an in-network doctor is usually more cost effective for you as a customer. For example, during the coinsurance period, your insurer may pay a higher percentage of your costs if you go to an in-network doctor, and a lower percentage for doctors outside their network.
With me so far? This is a very basic overview, but should help you understand the most important points of each type of plan. Let’s look at some of the most common.
Health Maintenance Organization Plans (HMO)
HMO plans provide comprehensive coverage at a low out-of-pocket cost. You choose a primary care physician (PCP) and go to that doctor when you’re sick. To visit to another doctor (such as a specialist), you’ll need a referral from your primary care physician. Generally, with an HMO, you pay a co-pay for your office visits and that co-pay will cover services such as x-rays or lab tests. They usually feature low deductibles or no deductible at all.
Pros: HMOs have a low out-of-pocket cost, which make them a good option if you aren’t looking to spend a ton of money. And, since your co-pay often covers services beyond the basic office visits, it’s fairly comprehensive.
Cons: Because you have to choose one primary care doctor and get referrals to see any specialists, you choices are much, much more limited than with other plans. Many doctor’s offices may not accept HMO plans, and it’s kind of a pain to get a referral every time you need to see a specialist. In addition, HMOs will usually only pay for visits to doctors within their networks—if you visit an out-of-network doctor, your HMO often won’t cover that visit at all.
Some companies are offering what’s called Open Access HMO plans, which let you see specialists without a referral, which is convenient.
Participating Provider Options (PPO)
PPO plans generally have higher premiums, but allow you lots of freedom in choosing your doctor. Unlike HMOs, PPOs will often let you see out-of-network doctors, you just may have to pay a higher portion of the cost than you would with an in-network doctor. They also don’t always require referrals from a primary care physician either, which is nice. However, your office co-pays aren’t as all-inclusive as HMO co-pays are. With a PPO, the co-pay is just for the office visit itself and you may have to pay extra for lab or x-ray charges (though those charges would count toward your deductible, and once you surpass the deductible would be part of your coinsurance).
Pros: You have a lot more choice in the doctor you see, which is great if you have a doctor you already like. You also don’t need a referral to see a specialist.
Cons: PPO plans generally cost more up front, and depending on your needs, may cost you more out-of-pocket throughout the year.
See the video in the HMO section for a more direct comparison between HMOs and PPOs.
Consumer Driven Health Plans (CDHP)
CDHPs are a broad set of plans that put more power (and responsibility) into the hands of you, the consumer. Typically, CDHPs involve a high deductible health plan (also known as an HDHP) with a savings account, like a Health Savings Account (HSA) or Flexible Spending Account (FSA). Essentially, you have a PPO-style plan with a low premium but high deductible. Then, you get to put pre-tax dollars away in a savings account designed to pay for your health care. It still has protection against catastrophic costs, but otherwise gives you full control over what you spend. The video above explains it fairly well.
Pros: CHDPs have lower premiums, since you’re responsible for many of the actual costs of your health care. You have the same freedom of choice that you do with a PPO plan, in that you don’t usually have to choose a primary care physician and get referrals. You save a lot in taxes, and have more responsibility over your personal health expenses. The funds in your HSA can also be put towards retirement.
Cons: If you’re healthy and don’t go to the doctor often, you can save a lot of money, and if something catastrophic happens, you’re covered. But if you’re in that middle ground and require a few office visits and prescriptions a year, you could end up paying more, since most of the costs come out of your pocket and your deductible is very high.
So, you should weigh a few different scenarios and see if a CHDP is actually worth it. Sometimes the tax savings may offset the amount you pay out-of-pocket, and sometimes they won’t. I highly recommend reading Get Rich Slowly’s article on HSAs, which goes into more detail about a lot of the features, pros, and cons of this system. We’ve also talked about it ourselves, so you can check out our rundown for more details on how HSAs and FSAs work.
These aren’t the only kinds of plans out there, but they’re definitely the most common plans you’ll see offered. As you can tell, they all have their ups and downs—some cost less while others give you more convenience and freedom—but hopefully you have a better idea which one is right for you. Good luck, and stay healthy!
Sincerely,
Lifehacker
Title image remixed from elfinspell.