Health insurance is basically a type of insurance or a contract or agreement between an insurance provider and a person or his/her sponsor. It covers the whole or a part of medical expenses. The Health Insurance Association of America has defined health insurance as a “coverage that provides for the payments of benefits as a result of sickness or injury. It includes insurance for losses from accident, medical expenses, disability, or accidental death and dismemberment.”
Health insurance can be for lifelong or it can be renewed periodically. The person buying a health insurance policy has to pay premiums or payroll tax that is determined by the insurance company by estimating the cost of healthcare expenses and the overall risk of health care. The type and the amount of cost that a particular health care insurance policy covers are mentioned in writing in the agreement.
Apart from premiums, several other types of expenses can be associated with an insurance policy. Some of these costs are –
Deductible – The amount that has to be paid by the person who is insured from his/her pocket. The higher the deductible, the lower is the premium and vice versa.
Co-insurance – It is the percentage of healthcare expenses that is divided between both the parties as per the policy terms. For example, if the risk of loss is split between the insurer and the insured at the ratio of 85:15, then the insurer will pay 85% of the expenses upon deductible. This type of coverage is usually found in Preferred Provider Organization (PPO).
Co-Payment – This is the cap amount fixed that the insured person has to pay every time he/she goes for any type of medical facility. This type of coverage is usually associated with the Health Maintenance Organizations.
Stop-Loss Limit - The total expenses of covered costs that is in excess of deductible and when the insured person has paid the out-of-pocket maximum amount of co-insurance and therefore, the insurer begins to pay at 100 percent. The limit is basically set to protect the insurer against very large claims.
Health insurance plans offered by the various insurance companies can be broadly classified into the following types –
- Health Maintenance Organizations (HMO) - It is basically a health maintenance organization group health insurance policy, where all healthcare services are provided through a network of healthcare providers and facilities. Here, the out-of-pocket expense is usually less, but one has little flexibility in choosing his/her healthcare provider or hospitals. This type of insurance policy may require you to choose a primary care physician to manage your health care, who can also refer to a specialist, if you need one.
- Preferred Provider Organization (PPO) – In a PPO plan, one gets a network of preferred doctors and hospitals to choose from. The members of the plan are provided services at a discounted rate. The members have to meet their annual deductible before the insurance company starts covering their medical expenses. If one goes for services offered by outside the preferred network, then the out-of-pocket expenses will rise for the members.
- Point of Service (POS) Health Insurance Plans – It is a point-of-service group health insurance policy that combines the features of both HMO and PPO plans. For example, a POS plan, just like the HMO plan, may require the insured to select a Primary care physician (PCP) from a network of primary care providers. If they avail services offered by a provider falling outside the network, they may have to pay deductible and also get a lower level of coverage. Further, they may have to pay upfront and then submit their claims in order to get reimbursed.
- Exclusive Provider Organization (EPOs) – EPO insurance plans are more or less similar to HMO plans, which means that these plans too require the members to go to a network of physicians, except in the case of emergency. However, one does not need a referral from a primary care physician in order to visit a specialist. The members have to pay co-payments, which are usually very small, and additionally, they may require a deductible. But, the plan offers no coverage if you see a health care provider who is not in your plan’s network, except in a situation of emergency.
- Indemnity Health Insurance – Also known as free-for-service plans, indemnity health insurance policies provide coverage for hospital stays and also for major medical and surgical expenses. In general, the insured people usually pay the medical expenses out-of-pocket and then submit a claim to get the covered amount reimbursed. The insured person may be responsible for paying deductibles and co-insurance amounts as well.
- Health Savings Account (HSA) Health Insurance Plans – An HAS is basically a savings account, the contributions to which may be made pre-tax up to a certain limit by the concerned authority. You don’t have to pay taxes while spending from this account, provided you spend money from this account on qualified health expenses. If the money is used for expenses other than those related to healthcare, you may have to incur penalties or pay interest. The unutilized funds in the account roll over each year and accrue tax-free interests as well.
- Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs) – This can be termed as an alternative to the traditional group health insurance for small businesses. With this health insurance plan, companies can provide a monthly allowance of tax-free money to their employees, while employees in their turn, can select and pay for the healthcare services they require. All they have to do is to submit the proof of expenses in order to claim reimbursements up to their allowance amount.