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ABCs of health insurance

Health insurance has its own language, and it can be tough to decipher. Here are some basic terms that you'll see as you fill out the paperwork for company-sponsored health insurance and some tips for making the best decision for you and your family.

The basic issues of any plan are:

  • The premium: the monthly cost of the coverage.
  • The deductible: the amount of expenses you pay on your own before coverage begins. It might be zero, $100, $250, $500 or $1,000 or more. Like other kinds of insurance, if you take a higher deductible, your premium will be lower.
  • The co-payment: the set amount of money you'll pay for basic services, such as office visits, emergency room visits or prescriptions. A typical co-pay for a doctor's office visit is $20. For prescriptions, a normal co-pay is $5 or $10.
  • The reimbursement: the percentage of your bill the insurer will pay. It doesn't mean you pay the whole bill and the insurance company reimburses you. Often, a doctor will bill the insurance company first and send you a bill for the rest. A typical reimbursement is 80 percent, with you paying the remainder. Depending on your coverage, your portion could be higher if you use doctors who are not on the plan's list of approved providers.
  • The maximum out-of-pocket expense: the most you will pay out of your pocket during a year, including your deductible and your portion of the bill.
  • The lifetime benefit: the total amount of coverage available over a lifetime. It could be $2 million or more.
  • The network: the group of health-care providers contracted to provide services to members of the plan.
  • Excluded services: some plans may not cover dental or vision care, mental health services or maternity care. Common exclusions include braces, cosmetic surgery or surgery to correct your vision.
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What you're paying for is choice. The more choice, the more it will cost.

There are four basic categories of health insurance. From least to most expensive, they are:

HMO, or health maintenance organization. It will be the least expensive and offer the least amount of flexibility. Your co-payment will be quite low, there may be no deductible and you get unlimited use of the system. The concept behind an HMO is to keep you from getting sick, so it's likely to pay for things such as annual physicals, vaccinations and programs to help you quit smoking.

In an HMO, your entry point into the system is a primary care physician. You see that doctor first and he or she may or may not refer you to a specialist, who is a member of the same network. Go around your primary care physician or use a doctor or hospital that isn't in the network and you may pay the entire cost yourself.

"The intent is to develop a strong relationship with that physician who will refer you to other physicians in the network," says Matt Tassey, past chairman-elect of the Life and Health Insurance Foundation for Education and past president of the Association of Health Insurance Advisors. "As long as you follow those rules, you'll get the highest reimbursement, the lowest premium and the lowest out-of-pocket costs."

POS, or point-of-service plan. It's an HMO that will provide coverage if you go outside the network. You may have to pay a $500 or $1,000 deductible and the reimbursement will be at a lower level.

PPO, or preferred provider organization. Unlike HMO or a POS plan, PPOs don't have primary care physicians. The insurer has negotiated fees with a broad range of doctors and your coverage is good with anyone on the list. "You don't have to get permission to see a dermatologist for a rash," Tassey says.

You can also go outside the network and still have coverage, although at a lower level.

But it's more sick care than preventive care, Tassey says. "If you just want an annual exam and it's not on the schedule, you'll pay a deductible."

Indemnity plan. This is traditional health insurance. You can go to any licensed health care provider anywhere you want. The deductible may be $250, $500 or $1,000, and the reimbursement at 80 percent or 90 percent. Because the insurance company has very little control and few opportunities to reduce costs, they charge the most for this kind of coverage.

For most people, the top issues in the decision are the cost and the health care providers in the network. For those with a family doctor they like, or an ongoing medical condition, changing doctors can be a significant concern. If those aren't issues, it comes down to how much coverage you can afford and how much control you want.

Daniel J. McCleary, CLU, ChFC, MSFS, is a field representative with the Guardian Life Insurance Company and member of the board of directors of the Society of Financial Service Professionals. He recommends that people consider two things when evaluating a health insurance plan.

First, if you have an established relationship with doctors, make sure that that the majority, if not all, of your doctors are in that plan, he says. Secondly, check out what exclusions exist within each of the coverages. Find out what limitations are in the policy and how they apply to your medical history. Certain things will be covered in one and not in the other.

If you have college-aged children who are going to school out of the area, make sure there is a network in that community. If you're married and your spouse is employed, you'll want to do a careful comparison of both companies' benefits. If you take medication on a regular basis, ask to look at the formulary. That's a document detailing the drugs the insurance will cover.

If a flexible spending account is offered, it's definitely something to be taken advantage of, but McCleary cautions against the risk of overfunding the account. "The negative is that if the money isn't used by the end of the term it goes back to the employer."

The biggest risk is not signing up for health insurance at all. "Younger employees don't always sign up for health insurance when they should. They're confused and won't enroll because they don't want to have money taken out of their paycheck," McCleary says. "This is the biggest danger because there's a thing called portability."

Thanks to the Health Insurance Portability and Accountability Act, once you have had uninterrupted group health coverage you're set. As long you are continuously insured with no lapses longer than 63 days, you cannot be denied health insurance due to a pre-existing condition.

"The problem is that when uninsured employees go into the new employers plan, if they have an ongoing problem, that problem won't be covered for a certain period of time," McCleary says.

Thanks to HIPAA, again, insurance companies are limited in the amount of time they can exclude a condition from coverage.

Once committed to obtaining health insurance or signing up for an employer-sponsored plan, the question becomes what do I want to pay for?

Alan Ziegler is a certified employee benefits specialist and 2002-2003 president of the Society of Financial Service Professionals. His general advice is that unless you have some very special circumstances, such as a chronic illness or a family history of a rare disorder, go with the lowest premium costs. Take a higher co-payment and deductible and keep your costs down. It might mean that you pay the first $250 or $500 every year, but if you don't get sick very often, it could save you hundreds of dollars a month in premiums.

If your company offers more than one choice and you don't like the one you've made, you can make changes during the annual open enrollment period. It's usually in the fall. You might decide to add or drop prescription drug coverage. You might decide to take a higher deductible and reduce your costs.

You might be able to change your coverage at other times of the year if you get married or have a child and want to add those new family members.

Keep in mind that plans change from year to year. According to a survey from the Employee Benefit Research Institute, nearly one in five small employers offering health insurance benefits changed them in 2002. Typically, those changes resulted in higher costs to the employees. Most often, the changes increased the co-payments, deductibles or premiums, and nearly a third dropped at least some of their benefits.

Many businesses reported that to cover the increasing costs they either cut out or reduced pay raises or bonuses, reduced other benefits or put off making investments in the company.

"Unfortunately, employers are looked at as Scrooge in this situation, but the costs are astronomical," says Robert Kneip, founder and former chairman of the Oasis Group, a Florida-based professional employer organization that also offers human resources consulting. "There is not one of my clients who doesn't want to give health care. But with the dynamics of business and increasing health care costs, it's a real tough squeeze. When companies increase the employee portion, it doesn't mean they're not paying more, too."

Pat Curry is a contributing editor based in Georgia.

-- Updated: Oct. 19, 2006

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