The five main types of health insurance plans in the USA

There are five main kinds of health insurance plans, with indemnity plans at one end, and HMOs (health maintenance organization) at the other end of the spectrum. POS (point-of-service plans) and PPOs (preferred provider organizations) include a combination of features from indemnity plans and HMOs; however, they are usually seen as managed care plans.

In 2003, the US Congress introduced a new option, the HSA (Health Savings Account), which is a combination of HMO/PPO/Indemnity and a savings account which has tax-benefits.

Understanding the differences between different kinds of plans is useful and extremely important when you are considering choosing one for yourself, your family, or employees. However, as plans evolve and add more details and take others away, there is more overlap and their distinctions become progressively blurred. The majority of fee-for-service plans (indemnity plans) use managed care techniques to control costs and to ensure there are enough resources to pay for appropriate care. Similarly, many managed care plans have adopted fee-for-service characteristics.

What are managed care plans?

Managed care plans are health insurance plans that have a contract with health care providers and medical facilities to provide medical care at special prices (lower costs). These providers form the plan's network. The network will have rules, which stipulate how much of the care the plan will pay for.

Restrictive plans usually cost the "insured" less, while flexible ones are more expensive. HMOs will typically only pay for care if you use one of the providers in their network. A primary care doctor (general practitioner) coordinates most of the patient's care. PPOs will cover more of the costs if the insured selects a provider within their network, but will also pay up some of the money for providers outside the network. POS plans allow the insured to choose between an HMO or a PPO each time care is required.

What are Indemnity Plans?

The insured can choose any doctor he/she wants. The doctor, hospital or the insured submits a claim for reimbursement to the health insurance company.

It is important to remember that, like any insurance plan, the insured will only be reimbursed according to what is listed and mentioned in the Benefit Summary. It is important to read the Summary carefully and understand all that is printed, even the "small print". Most indemnity plans claim to cover "the vast majority of procedures".

Coinsurance - while indemnity plans do not pay for all of the medical and surgical services, they typically pay for at least 80% of the customary and usual costs, while the insured is liable for the remaining 20 or so percent. The insured is also liable for any excess charges, e.g. if the provider charges more than what is considered as a reasonable and customary fee. Look at the example below:

Example of Coinsurance and excess charges

• You see a doctor for "diabetes care"
• The insurer deems that the customary fee for this type of diabetes care is $200.
• The insurance company pays $160 (80%), while the insured (you) is expected to pay for the rest ($40).
• However, if the provider bills you for $250, you will have to pay for those extra $50.
• So, you will have to pay $40 + $50 = $90.

The 8/20 level coinsurance ratio is only a typical example given in this article. Some plans may be 75/25 or 70/30.

Deductibles - the amount of covered expenses the insured has to pay before the reimbursement system kicks in and starts covering medical costs. The deductible total may range from $100 to $300 per person annually, or from $500 to $1,000 annually for a whole family.

Out-of-pocket maximum - as soon as the insured's covered expenses reach a certain amount during a 12-month period, the plan will cover all usual and customary fees from then on. The insured has to remember that any charges above what are considered as usual and customary by the insurance company will have to be paid for by the insured.

Lifetime limit - if the insured has a lifetime limit of $2 million, it means the insurance company will only cover costs up to $2 million during that person's lifetime. Ideally, one should have a lifetime limit of at least $2 million.

What are Health Maintenance Organizations?

Health Maintenance Organizations deliver care directly to the insured. The insured goes directly to an HMO's medical provider to see health care professionals. The insured does not pay for each individual service that is received. A set premium is paid to the HMO, which in return offers a range of services, including preventive care.

A primary care physician (general practitioner, GP, or family doctor), who is affiliated with the insured's plan usually coordinates the care.

In the majority of cases, the HMO will only provide coverage to specialists within the provider network that are referred by the primary care physician. The HMO will nearly always insist that the insured receive care from health care professionals, laboratories and medical centers which are within its network of providers. The HMO will have negotiated a list of fees for each medical service with them. This is done to keep costs at a minimum.

According to the majority of health insurance advisers, HMOs are usually the cheapest kind of health insurance plan.

Copayment - in most cases, the insured will also have to make a copayment for some services. Some HMOs may not require copayments for hospital stays.

What are Preferred Provider Organization ?

A PPO is in many ways similar to an indemnity plan - the insured can see any doctor whenever they like. The Preferred Provider Organization gets together with health care providers, health professionals and laboratories and negotiates preferential prices. The providers that come to agreed deals with the PPO then become part of its network.

Copayments - when the insured visits a doctor who is within the PPOs network, they make a copayment (pay a fixed amount). When the doctor is not in the network, the PPO will still pay for some of the fees, usually at least 70%, and the insured has to cover the balance, which is known as the coinsurance, plus the copayment.

Deductibles - the insured may have to cover a certain amount of the expenses before the PPO can reimburse. As with indemnity plans, deductibles might range from up to $300 per year per person or $500 to $1,000 per whole family. When deductibles are high, premiums tend to be comparatively low.

Self-referrals - an attractive part of PPOs for many people. You can see the doctor of your choosing, including specialists not included in the insurer's network, without having to be referred to them by a primary care physician, for example.

What are Point-of-Service Plans ?

A POS Plan is like a hybrid of an HMO and a PPO. The insured can chose to either have a general practitioner coordinate their care, or opt to go directly to the "point-of-service".

When the insured requires medical care, there are usually two or three different choices, and they depend on what type of POS Plan is in place: 

• Through a primary care physician - similar to an HMO plan. The insured is just required to make a copayment.
• PPO network provider services - the insured can receive care from a PPO provider that is within the PPO's network. The insured will have to make a copayment, and may also be liable for coinsurance (e.g. the insurer pays 80% of the bill and the insured the remaining 20%).
• Services from non-network providers - some of the medical expenses will be reimbursed. It is important that the insured reads the Benefit Summary carefully, where who pays for what, and how much, should be clearly laid out. There will usually be a copayment and a higher coinsurance charge.

Deductibles - as with the other plans, the insured may be liable for the first $100 to $300 in medical costs, while each family may have deductibles of $500 to $1,000 per year. The higher the deductibles, the lower the premiums tend to be.

What are Health Savings Account ?

These are tax-free savings accounts aimed at building up coverage for future medical expenses. Only patients with a high-deductible plan and currently have no other insurance plans are eligible.

This type of plan is useful for those who are seeking some kind of protection, do not envisage having any or many ongoing medical costs, and would like to be ready for an emergency or catastrophic healthcare cost. Small businesses may find HSAs a useful alternative to the more traditional health plans on the market.

People can enter an HSA plan through their employer if such a plan is available through the company, or individually (in some states). The HSA plan needs to be paired with an existing health plan with an annual deductible of over $1,100 for individuals and $2,200 for families. There is a limit on total out-of-pocket costs, including copayments and deductibles. Limits can vary as time goes by. Even though deductibles tend to be much higher than in other plans, some of them do offer full coverage, while others offer nearly full coverage (with a small copayment for preventive care).

In general, health plans with high-deductibles have cheaper premiums; however, out-of-pocket costs are much higher. To compensate for that, the insured can contribute a certain amount of money to a tax-advantaged account - the amount as well as the details of tax benefits vary from year to year. The contributions can be used to reduce the insured taxable income. If payments are made by an employer on behalf of an employee, they are tax free. The money in the HSA plan can be used at any time for approved medical expenses.

An HSA plan can also act as a top-up for expenses the other paired plan does not cover, such as hearing aids. If the money is not being used, it can be invested; any investment growth is tax free, as long as the account holder only uses the money for medical expenses.