Understanding Plan Characteristics and Types
One reason insurance issues can be so confounding is that the healthcare market is constantly changing and the coverage plans offered by insurers are hard to categorize. In other words, the lines between HMOs, PPOs, POSs and other types of coverage are often blurry. Still, understanding the makeup of various plan types will be helpful in evaluating your options.
Here’s a breakdown of what various plan types typically feature. As you read about each type, remember that today’s health coverage market often offers “blends” of these traditional types.
Health Maintenance Organizations (HMOs)
In a very general sense, HMOs offer predictable cost-sharing and administrative simplicity for patients. These features come with fairly restrictive rules about which providers patients may see. Participants are entitled to doctor visits, preventive care and medical treatment from providers who are in the HMO’s network. In addition to the monthly premium (which may be shared by the employer and employee), participants usually need to pay a small fee at the time of service called a copay (often in the range of $10 to $30), while the HMO covers 100% of the services provided. Most HMOs use capitation arrangements to reimburse physicians.
HMOs typically require patients to select a “primary care physician” (PCP) who can refer patients to specialists, also within the HMO’s network. HMOs often won’t pay for medical care that wasn’t referred by the primary care physician (some exceptions include emergency services or preventive gynecological exams). They may also require prior authorization before elective hospitalizations or require referrals from primary care physicians before seeing certain specialists.
Preferred Provider Organizations (PPOs)
PPOs generally offer a wider choice of providers than HMOs. Premiums may be similar to or slightly higher than HMOs, and out-of-pocket costs are generally higher and more complicated than those for HMOs. PPOs allow participants to venture out of the provider network at their discretion and do not require a referral from a primary care physician. However, straying from the PPO network means that participants may pay a greater share of the costs.
For example, a PPO available to small businesses may reimburse 60% of out-of-network costs and 80% of in-network costs (with the employee responsible for the remaining 40% or 20%). These percentages may be applied to full charges (“sticker” prices), discounted fees that the health plan has negotiated with providers (“negotiated fees”), or regional average fees (“allowable” or “usual and customary” amounts). Keep in mind that this example is one of many possibilities—in-network and out-of-network coverage can differ from plan to plan.
See “In-Network vs. Out-of-Network Medical Costs Comparison” for a chart of such hospital stay costs.
Point-of-Service Plans (POS)
A POS is a type of managed care plan that is a hybrid of HMO and PPO plans. Like an HMO, participants designate an in-network physician to be their primary care provider. But like a PPO, patients may go outside of the provider network for health care services. When patients venture out of the network, they’ll have to pay most of the cost, unless the primary care provider has made a referral to the out-of-network provider, in which case, the medical plan will pick up the tab.
Health Savings Accounts (HSAs)
Federal legislation enacted in late 2003 authorized the creation of Health Savings Accounts (HSAs). These savings accounts are combined with a high-deductible health plan. Because high-deductible plans generally cost less than low-deductible plans, HSAs are a good option for employers who cannot afford a comprehensive (low-deductible) health plan.
Both employers and employees may contribute to HSAs. Total annual contributions to the savings account may be up to 100% of the annual health plan deductible amount and may be used to pay for any qualified medical expenses. The savings account is controlled by the covered employee and is intended to pay small and routine health care expenses.
Once the deductible amount is reached, additional health expenses are covered in accordance with the provisions of the health insurance policy. For example, an employee might then be responsible for 10% of the costs for care received from a PPO network provider.
Deposits made to an HSA are tax-free to the employer and employee, and money not spent at the end of the year may be rolled over to pay for future medical expenses. Money from the HSA may be withdrawn for any reason, but if it’s not for qualified medical expenses as defined under §213(d) of the Internal Revenue Code, the withdrawal is subject to a 20% penalty and is included in gross income for income tax purposes. (The penalty is waived in a few cases: if the beneficiary dies, becomes disabled or reaches age 65.)
The contribution limits, out-of-pocket expenses and deductible amounts are indexed to inflation. In 2013, the limits for individuals are as follows, according to the IRS:
- A deductible of $1,250 or more.
- Total annual out-of-pocket expenses (other than premiums) for covered benefits not to exceed $6,250.
- Annual contributions not to exceed the lesser of 100% of the deductible or $3,250.
The limits in 2011 for families are:
- A deductible of $2,500 or more.
- Total annual out-of-pocket expenses (other than premiums) for covered benefits not to exceed $12,500.
- Annual contributions not to exceed the lesser of 100% of the deductible or $6,450.
Note: Individuals and couples aged 55 or older may contribute more to the account per year.
Example: For married workers, an employer might provide a family policy that has a $5,000 deductible while depositing 60% of the deductible ($3,000) in each employee’s HSA at the beginning of the year. (Employer contributions must be the same for all employees.) Workers would be responsible for the first $5,000 in medical costs, but they would each have $3,000 in their personal HSA to pay for medical expenses (and would have even more if they, too, contributed to the HSA). If workers or their families exhaust their $3,000 HSA allotment, they would pay the next $2,000 out of pocket, whereupon the insurance policy would begin to pay.
Under the Patient Protection and Affordable Care Act, there has been a small increase in the additional tax that applies to early distribution for nonqualified medical expenses before age 65. For HSAs, the tax has increased from 10% to 20%.
The Archer Medical Savings Account (MSA) was a federally qualified program that allowed the self-employed or individuals who work for an employer with 50 or fewer employees to establish savings accounts in conjunction with high-deductible health insurance policies. The Archer MSA program was discontinued as of December 31, 2003—that is, Archer MSAs may no longer be established. However, rollovers from Archer MSAs to HSAs are permitted, and individuals who already have Archer MSAs may keep them.
Under the Affordable Care Act, the tax that applies to early distribution for nonqualified medical expenses before age 65 has increased from 15% to 20% for Archer MSAs.
Health Reimbursement Arrangements
Another type of savings account—a Health Reimbursement Arrangement (HRA)—gives employers flexibility to offer various combinations of benefits in designing their plan. While an HRA may be offered with other employer-provided health plans, employees need not be covered under any other healthcare plan to participate. Under HRAs, employees are reimbursed tax free for qualified medical expenses up to a maximum dollar amount for a coverage period. (Certain limitations may apply to highly compensated participants.)
An HRA must be funded solely by an employer. There is no limit on the amount of money an employer can contribute to employee accounts, however, the accounts may not be funded through employee salary deferrals under a cafeteria plan. Additionally, employers are not permitted to refund any part of the balance to employees. These amounts can be carried forward to later years but may never be used for anything but reimbursements for qualified medical expenses.
For further information on HRAs including details on qualified medical expenses, see IRS Publication 969.
Plans Offered Under the Health Insurance Exchanges
The Affordable Care Act requires that by 2014, every state establish a health insurance exchange—an online marketplace where small business owners can purchase health insurance.
The exchange will allow small business owners to pool their buying power and drive down the cost of health insurance. The exchange will offer employers a choice of four categories of insurance packages, each with essential minimum benefits. This will allow easier comparison among plans. As an employer, you will decide what level of coverage to offer, and your employees may pick any plan offered within the exchange at your chosen coverage level.
The four coverage levels are based on the specified percentage of costs the plans will cover:
- Bronze = 60%
- Silver = 70%
- Gold = 80%
- Platinum = 90%
The Department of Health and Human Services has defined specific services that must be covered within these packages. This provision is designed to make sure everyone participating in the exchange has access to sufficient coverage. Individual and small group plans must include items and services within these 10 categories:
- Ambulatory patient services
- Emergency services
- Maternity and newborn care
- Mental health and substance use disorder services, and behavioral health treatment
- Prescription drugs
- Rehabilitative and habilitative services and devices
- Laboratory services
- Preventive and wellness services and chronic disease management
- Pediatric services, including oral and vision care
Also, if an insurer offers a qualified health plan, they must also offer a child-only plan at the same level of coverage.