Health insurance has one goal—provide money that pays for skilled medical and rehabilitative care if you have a medical event. That’s the only easy part. To determine the correct type of coverage it is important to understand the different forms it takes.
“What are the different types of health insurance coverage?”
There are generally four types of health insurance:
- Health Maintenance Organizations
- Preferred Provider Organizations
- High Deductible Plans
- Catastrophic Health Plans
Health Maintenance Organizations (HMOs) and Exclusive Provider Organizations (EPOs)
HMOs and EPOs may limit coverage to only providers inside their networks (a network is a list of doctors, hospitals, and other health care providers that provide medical care to members of a specific health plan). If you use a doctor or facility that isn’t in the HMO’s network, you may have to pay the full cost of the services provided. HMO members usually have a primary care doctor and must get referrals to see specialists. This is generally not true for EPOs.
Preferred Provider Organizations (PPOs) and Point-of-Service plans (POS)
These insurance plans give you the choice of receiving care within the provider network, or outside of it. With PPO or POS plans, you may use out-of-network providers and facilities, but you’ll have to pay more than if you use in-network providers and facilities. If you have a PPO plan, you can visit any doctor without a referral. If you have a POS plan, you can visit any in-network provider without a referral, but you’ll need one to visit a provider out-of-network.
High Deductible Health Plan (HDHP)
High deductible health plans typically feature lower premiums and higher deductibles than traditional insurance plans. As of 2014, HDHPs are plans with a minimum deductible of $1250 per year for individual coverage and $2500 for family coverage. If you have an HDHP, you can use a health savings account or a health reimbursement arrangement to pay for qualified out-of-pocket medical costs. This can lower the amount of federal tax you owe.
Catastrophic Health Insurance Plan
A catastrophic health insurance plan covers essential health benefits but has a very high deductible. This means it provides a kind of “safety net” coverage in case you have an accident or serious illness.
Premiums by definition are much lower because the individual is responsible for all medical costs, which could reach into the thousands of dollars, until the deductible is reached. Catastrophic plans are available only to people under the age of 30, and to some low-income people who are exempt from paying a penalty fee because other insurance is considered unaffordable, or because they have received “hardship exemptions.”
Health Savings Accounts
A health savings account (HSA) combines high-deductible health insurance with a tax-favored savings account. Money in the savings account can help pay the deductible. Once the deductible is met, the insurance starts paying. Money left in the savings account earns interest and is yours to keep. To get the benefits of an HSA, you must purchase a qualified, high-deductible health insurance plan. In 2015, the minimum annual deductible of a qualified HSA plan is $1,300 for an individual and $2,600 for a family.
- Tax-deductible: Contributions to the HSA are 100% deductible—up to the legal limit—just like an IRA.
- Tax-free: Withdrawals to pay qualified medical expenses, including dental and vision, are never taxed.
- Tax-deferred: Interest accumulates, tax-deferred, and if used to pay qualified medical expenses, is tax-free.
- HSA money is yours to keep. Unused money is not forfeited at the end of the year.
Health Reimbursement Arrangements
Many consumers confuse an HSA with an HRA. An HRA is a 100% employer funded plan that reimburses you for covered expenses. You cannot make contributions, and when you leave the plan you forfeit any funds left behind, since the contributions were never yours.
Is there a difference between buying direct versus an agent?
Most direct-to-consumer sites have a comprehensive explanation of the different types of coverage available to individuals. It’s deciding which one best suits your family where you may want the assistance of a trained health insurance agent. That is particularly the case if you are thinking of starting a small business and are unsure of the provisions of the Affordable Care Act.