Health insurance: understanding 5 types of plans

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Health insurance: understanding 5 types of plans

If you’re not familiar with health insurance jargon and acronyms — high-deductible health plan, HMO, PPO — shopping for a policy can be confusing. No matter if you get coverage through work or on your own, understanding different types of health insurance can help you choose the best option.

Here are five main types of health plans and the benefits they provide:

1. Health maintenance organization plan
An HMO is a network of doctors, service providers and hospitals you can choose from for health care. You select a primary care physician who must refer you to a specialist, when needed, such as a dermatologist or an allergist.

If you get treatment outside of the HMO network, it may not be covered. However, there are exceptions, such as being transferred to an out-of-network hospital in an emergency.

With an HMO, you pay monthly premiums, and benefits begin once you meet an annual deductible. You’re responsible for coinsurance, which is a percentage of health care costs. You also have fixed copays for visits to a doctor’s office and prescription drugs.

Because an HMO gives you less freedom of choice than other plans, it typically costs less. So, it’s a good option when you want to maintain low health care costs, and you’re in relatively good health.

2. Preferred provider organization plan
A PPO is similar to an HMO in that you choose health care providers from a recommended network. However, you’re allowed to get care outside your network, and you don’t have to select a primary care physician or get a referral to see a specialist.

While a PPO gives you more freedom to seek the care you want, it’s typically a more expensive plan compared to other options. If you go out of a PPO network, you usually get less coverage and therefore have higher out-of-pocket costs. Like an HMO, you also pay monthly premiums, a deductible, copays and coinsurance.

A PPO is a good option when you can afford higher premiums and health care costs. But it gives you the most flexibility when you travel frequently or prefer to see out-of-network doctors.

3. High-deductible health plan
A HDHP can be any health plan, such as an HMO or PPO, but it has a higher-than-normal deductible and lower monthly premiums. Plus, many HDHPs qualify you to use a health savings account. With a health savings account, you make pretax contributions up to an annual limit. You can spend the money on a variety of qualified health care, including medical, dental, hearing and vision expenses.

HSAs gives you several tax advantages:

• Contributions are never taxed.
• Interest or investment earnings are never taxed.
• Withdrawals to pay qualified medical expenses are never taxed.
• Balances roll over from year to year with no spending deadline.

If you’re under age 65 and spend HSA funds on nonqualified expenses, you’ll be subject to income tax plus an additional 20% penalty on withdrawn amounts. However, withdrawals after age 65 can be used for nonmedical expenses without penalty (but income taxes would apply).

A HDHP can be a good option if you want lower premiums, you’re in relatively good health, and you’re likely to take advantage of an HSA.

4. Catastrophic plan
A catastrophic plan is designed to provide benefits only when you suffer a major medical event, such as a car accident, heart attack or cancer. It protects your finances if you’re diagnosed with a serious illness or need emergency treatment.

These plans give limited coverage, come with a high deductible, and are typically only offered to those under age 30. They may require you to use in-network providers and may not cover prescription drugs.

Since catastrophic plans offer the least benefits compared to other health plans, they should be used as a last resort when you need the lowest premium possible.

5. Supplemental health plan
Supplemental plans aren’t major medical insurance, but they fill gaps left by standard health policies. They give you added medical coverage or pay costs not covered by a basic health plan, such as deductibles and coinsurance.

Having one or more supplemental plans protects your finances from large, unexpected medical expenses you’re not prepared to pay. After a covered incident, a supplemental policy gives you a lump-sum payment you can use any way you like.

For instance, if you or a covered family member are injured, accident insurance pays for expenses including urgent care, emergency room visits, ambulance rides, and follow-up care.

Hospital insurance is another type of supplemental plan that pays amounts you’d be responsible for, even when you have health insurance. It can help cover out-of-pocket expenses when you or a covered family member get admitted to the hospital on an inpatient or outpatient basis.

The type of health insurance and supplemental policy best for you depends on your financial situation and your health care needs. If you’re managing a chronic illness or take expensive prescription drugs, you need a more comprehensive plan, such as a PPO. But if you’re on a budget and in relatively good health, you may come out ahead choosing a HDHP or an HMO.

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