Why Do You Need Health Insurance?
Health care costs are higher than they've ever been, and, as the population ages and as medical research and technology continue to get more sophisticated, health care costs will continue to be a challenge. If you have a serious accident
or a major illness, how will you pay your health care bills? You buy health insurance for the same reason you buy
other kinds of insurance, to protect yourself financially. With health
insurance, you protect yourself and your family in case you need medical
care that could be very expensive. back to top
Changes in Health Care
Health care in America is changing rapidly.
Twenty-five years ago, most people in the United States had indemnity
insurance coverage. A person with indemnity insurance could go to any
doctor, hospital, or other provider (which would bill for each service
given), and the insurance and the patient would each pay part of the bill.
But today, more than half of all Americans
who have health insurance are enrolled in some kind of managed care plan,
an organized way of both providing services and paying for them. Different
types of managed care plans work differently and include preferred provider
organizations (PPOs), health maintenance organizations (HMOs) and point-of-service
You've probably heard these terms before.
But what do they mean, and what are the differences between them? And
what do these differences mean to you?back to top
Types of Insurance
Fee-for-Service (Indemnity Plan)
This is the traditional kind of health
care policy. Insurance companies pay fees for the services provided to
the insured people covered by the policy. This type of health insurance
offers the most choices of doctors and hospitals. You can choose any doctor
you wish and change doctors any time. You can go to any hospital in any
part of the country.
With fee-for-service, the insurer only
pays for part of your doctor and hospital bills. This is what you pay:
A monthly fee, called a premium.
A certain amount of money each year, known as the deductible, before
the insurance payments begin. In a typical plan, the deductible might
be $250 for each person in your family, with a family deductible of
$500 when at least two people in the family have reached the individual
deductible. The deductible requirement applies each year of the policy.
Also, not all health expenses you have count toward your deductible.
Only those covered by the policy do. You need to check the insurance
policy to find out which ones are covered.
After you have paid your deductible amount for the year, you share
the bill with the insurance company. For example, you might pay 20
percent while the insurer pays 80 percent. Your portion is called
To receive payment for fee-for-service
claims, you may have to fill out forms and send them to your insurer.
Sometimes your doctor's office will do this for you. You also need to
keep receipts for drugs and other medical costs. You are responsible for
keeping track of your medical expenses.
There are limits as to how much an insurance
company will pay for your claim if both you and your spouse file for it
under two different group insurance plans. A coordination of benefit clause
usually limits benefits under two plans to no more than 100 percent of
Most fee-for-service plans have a "cap,"
the most you will have to pay for medical bills in any one year. You reach
the cap when your out-of-pocket expenses (for your deductible and your
coinsurance) total a certain amount. It may be as low as $1,000 or as
high as $5,000. Then the insurance company pays the full amount in excess
of the cap for the items your policy says it will cover. The cap does
not include what you pay for your monthly premium.
Some services are limited or not covered
at all. You need to check on preventive health care coverage such as immunizations
and well-child care.
There are two kinds of fee-for-service
coverage: basic and major medical. Basic protection pays toward the costs
of a hospital room and care while you are in the hospital. It covers some
hospital services and supplies, such as X-rays and prescribed medicine.
Basic coverage also pays toward the cost of surgery, whether it is performed
in or out of the hospital, and for some doctor visits. Major medical insurance
takes over where your basic coverage leaves off. It covers the cost of
long, high-cost illnesses or injuries.
Some policies combine basic and major medical
coverage into one plan. This is sometimes called a "comprehensive
plan." Check your policy to make sure you have both kinds of protection.
What Is a "Customary" Fee?
Most insurance plans will pay only what
they call a reasonable and customary fee for a particular service. If
your doctor charges $1,000 for a hernia repair while most doctors in your
area charge only $600, you will be billed for the $400 difference. This
is in addition to the deductible and coinsurance you would be expected
to pay. To avoid this additional cost, ask your doctor to accept your
insurance company's payment as full payment. Or shop around to find a
doctor who will. Otherwise you will have to pay the rest yourself.
Questions to Ask About Fee-for-Service (Indemnity) Insurance
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How much is the monthly premium? What will your total cost be each
year? There are individual rates and family rates.
What does the policy cover? Does it cover prescription drugs, out-of-hospital
care or home care? Are there limits on the amount or the number of
days the company will pay for these services? The best plans cover
a broad range of services.
Are you now being treated for a medical condition that may
not be covered under your new plan? Are there limitations or a waiting
period involved in the coverage?
What is the deductible? Often you can lower your monthly health
insurance premium by buying a policy with a higher yearly deductible
What is the coinsurance rate? What percent of your bills for allowable
services will you have to pay?
What is the maximum you would pay out of pocket per year? How much
would it cost you directly before the insurance company would pay
Is there a lifetime maximum cap the insurer will pay? The cap is
an amount after which the insurance company won't pay anymore. This
is important to know if you or someone in your family has an illness
that requires expensive treatments.
Health Maintenance Organizations (HMOs)
Health maintenance organizations
are prepaid health plans. As an HMO member, you pay a monthly premium.
In exchange, the HMO provides comprehensive care for you and your family,
including doctors' visits, hospital stays, emergency care, surgery, lab
tests, X-rays and therapy.
The HMO arranges for this care either directly
in its own group practice and/or through doctors and other health care
professionals under contract. Usually, your choices of doctors and hospitals
are limited to those that have agreements with the HMO to provide care.
However, exceptions are made in emergencies or when medically necessary.
There may be a small copayment for each
office visit, such as $5 for a doctor's visit or $25 for hospital emergency
room treatment. Your total medical costs will likely be lower and more
predictable in an HMO than with fee-for-service insurance.
Because HMOs receive a fixed fee for your
covered medical care, it is in their interest to make sure you get basic
health care for problems before they become serious. HMOs typically provide
preventive care, such as office visits, immunizations, well-baby checkups,
mammograms and physicals. The range of services covered vary in HMOs,
so it is important to compare available plans. Some services, such as
outpatient mental health care, often are provided only on a limited basis.
Many people like HMOs because they do not
require claim forms for office visits or hospital stays. Instead, members
present a card, like a credit card, at the doctor's office or hospital.
However, in an HMO you may have to wait longer for an appointment than
you would with a fee-for-service plan.
In some HMOs, doctors are salaried and
they all have offices in an HMO building at one or more locations in your
community as part of a prepaid group practice. In others, independent
groups of doctors contract with the HMO to take care of patients. These
are called individual practice associations (IPAs) and they are made up
of private physicians in private offices who agree to care for HMO members.
You select a doctor from a list of participating physicians that make
up the IPA network. If you are thinking of switching into an IPA-type
of HMO, ask your doctor if he or she participates in the plan.
In almost all HMOs, you either are assigned
or you choose one doctor to serve as your primary care doctor. This doctor
monitors your health and provides most of your medical care, referring
you to specialists and other health care professionals as needed. You
usually cannot see a specialist without a referral from your primary care
doctor who is expected to manage the care you receive. This is one way
that HMOs can limit your choice.
Before choosing an HMO, it is a good idea
to talk to people you know who are enrolled in it. Ask them how they like
the services and care given.
Questions to Ask About an HMO
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Are there many doctors to choose from? Do you select from a list
of contract physicians or from the available staff of a group practice?
Which doctors are accepting new patients? How hard is it to change
doctors if you decide you want someone else? How are referrals to
Is it easy to get appointments? How far in advance must routine visits
be scheduled? What arrangements does the HMO have for handling emergency
Does the HMO offer the services I want? What preventive services
are provided? Are there limits on medical tests, surgery, mental health
care, home care, or other support offered? What if you need a special
service not provided by the HMO?
What is the service area of the HMO? Where are the facilities located
in your community that serve HMO members? How convenient to your home
and workplace are the doctors, hospitals, and emergency care centers
that make up the HMO network? What happens if you or a family member
are out of town and need medical treatment?
What will the HMO plan cost? What is the yearly total for monthly
fees? In addition, are there copayments for office visits, emergency
care, prescribed drugs or other services? How much?
Preferred Provider Organizations (PPOs)
The preferred provider organization is
a combination of traditional fee-for-service and an HMO. Like an HMO,
there are a limited number of doctors and hospitals to choose from. When
you use those providers (sometimes called "preferred" providers,
other times called "network" providers), most of your medical
bills are covered.
When you go to doctors in the PPO, you
present a card and do not have to fill out forms. Usually there is a small
copayment for each visit. For some services, you may have to pay a deductible
As with an HMO, a PPO requires that you
choose a primary care doctor to monitor your health care. Most PPOs cover
preventive care. This usually includes visits to the doctor, well-baby
care, immunizations and mammograms.
In a PPO, you can use doctors who are not
part of the plan and still receive some coverage. At these times, you
will pay a larger portion of the bill yourself (and also fill out the
claims forms). Some people like this option because even if their doctor
is not a part of the network, it means they don't have to change doctors
to join a PPO.
Questions to Ask About a PPO
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Are there many doctors to choose from? Who are the doctors in the
PPO network? Where are they located? Which ones are accepting new
patients? How are referrals to specialists handled?
What hospitals are available through the PPO? Where is the nearest
hospital in the PPO network? What arrangements does the PPO have for
handling emergency care?
What services are covered? What preventive services are offered?
Are there limits on medical tests, out-of-hospital care, mental health
care, prescription drugs or other services that are important to
What will the PPO plan cost? How much is the premium? Is there a
per-visit cost for seeing PPO doctors or other types of copayments
for services? What is the difference in cost between using doctors
in the PPO network and those outside it? What is the deductible and
coinsurance rate for care outside of the PPO? Is there a limit to
the maximum you would pay out of pocket?
Point-of-Service (POS) Plan
Many HMOs offer plan members the option
to self direct care, as one would under an indemnity or PPO plan, rather
than get referrals from primary care physicians. An HMO with this opt-out
provision is known as a point-of-service (POS) plan. How the plan functions
(that is, like an HMO or like an indemnity plan) depends on whether individual
plan members use their primary care physician or self direct their care
at the "point of service."
To illustrate this point, this is how these
plans typically work. When medical care is needed, the individual plan
member essentially has up to two or three choices, depending on the particular
health plan. The plan member can choose to go through his or her primary
care physician, in which case services will be covered under HMO guidelines
(that is, usually a copayment will be required). Alternatively, the plan
member can access care through a PPO provider and the services will be
covered under in-network PPO rules (that is, usually a copayment and coinsurance
will be required). Lastly, if the plan member chooses to obtain services
from a provider outside of the HMO and PPO networks, the services will
be reimbursed according to out-of-network rules (usually a copayment
and higher coinsurance charge will be required). Because people who belong
to POS plans are responsible for deciding how to access care within the
various options, it is important that they understand the financial implications
of these choices.
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Where Do People Get Health Insurance Coverage?
Most Americans get health insurance through
their jobs or are covered because a family member has insurance at work.
This is called group insurance. Group insurance is generally the least
expensive kind. In many cases, the employer pays part or all of the cost.
Some employers offer only one health insurance
plan. Some offer a choice of plans: a fee-for-service plan, a health maintenance
organization (HMO), or a preferred provider organization (PPO), for example.
Employers with 25 or more workers are required by Federal law to offer
employees the chance to enroll in an HMO.
What happens if you or your family member
leaves the job? You will lose your employer-supported group coverage.
It may be possible to keep the same policy, but you will have to pay for
it yourself. This will certainly cost you more than group coverage for
the same, or less, protection.
A Federal law makes it possible for most
people to continue their group health coverage for a period of time. Called
COBRA (for the Consolidated Omnibus Budget Reconciliation Act of 1985),
the law requires that if you work for a business of 20 or more employees
and leave your job or are laid off, you can continue to get health coverage
for at least 18 months. You will be charged a higher premium than when
you were working.
You also will be able to get insurance
under COBRA if your spouse was covered but now you are widowed or divorced.
If you were covered under your parents' group plan while you were in school,
you also can continue in the plan for up to 18 months under COBRA until
you find a job that offers you your own health insurance.
Not all employers offer health insurance.
You might find this to be the case with your job, especially if you work
for a small business or work part time. If your employer does not offer
health insurance, you might be able to get group insurance through membership
in a labor union, professional association, club, or other organization.
Many organizations offer health insurance plans to members.
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If your employer does not offer group insurance,
or if the insurance offered is very limited, you can buy an individual
policy. You can get fee-for-service, HMO, or PPO protection. But you should
compare your options and shop carefully because coverage and costs vary
from company to company. Individual plans may not offer benefits as broad
as those in group plans.
If you get a non-cancelable policy (also
called a guaranteed renewable policy), then you will receive individual
insurance under that policy as long as you keep paying the monthly premium.
The insurance company can raise the cost, but cannot cancel your coverage.
Many companies now offer a conditionally renewable policy. This means
that the insurance company can cancel all policies like yours, not just
yours. This protects you from being singled out. But it doesn't protect
you from losing coverage.
Before you buy any health insurance policy,
make sure you know what it will pay for – and what it won't. To find out
about individual health insurance plans, call insurance companies,
HMOs, and PPOs in your community, or speak to your insurance agent.
Tips when shopping for individual insurance:
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Shop carefully. Policies differ widely in coverage and cost. Contact
different insurance companies, or ask your agent to show you policies
from several insurers so you can compare them.
Make sure the policy protects you from large medical costs.
Read and understand the policy. Make sure it provides the kind of
coverage that's right for you. You don't want unpleasant surprises
when you're sick or in the hospital.
Check to see that the policy states: the date that the policy will
begin paying (some have a waiting period before coverage begins),
and what is covered or excluded from coverage.
Make sure there is a "free look" clause. Most companies
give you at least 10 days to look over your policy after you receive
it. If you decide it is not for you, you can return it and have your
Beware of single disease insurance policies. There are some polices
that offer protection for only one disease, such as cancer. If you
already have health insurance, your regular plan probably already
provides all the coverage you need. Check to see what protection you
have before buying any more insurance.
Medicare is the Federal
health insurance program for Americans age 65 and older and for certain
disabled Americans. If you are eligible for Social Security or Railroad
Retirement benefits and are age 65, you and your spouse automatically
qualify for Medicare.
Medicare has two parts: hospital insurance,
known as Part A, and supplementary medical insurance, known as Part B,
which provides payments for doctors and related services and supplies
ordered by the doctor. If you are eligible for Medicare, Part A is free,
but you must pay a premium for Part B.
Medicare will pay for many of your health
care expenses, but not all of them. In particular, Medicare does not cover
most nursing home care, long-term care services in the home, or prescription
drugs. There are also special rules on when Medicare pays your bills that
apply if you have employer group health insurance coverage through your
own job or the employment of a spouse.
Medicare usually operates on a fee-for-service
basis. HMOs and similar forms of prepaid health care plans are now available
to Medicare enrollees in some locations.
The best source of information on the Medicare
program is the Medicare Handbook. This booklet explains how the
Medicare program works and what your benefits are. To order a free copy,
write to: Health Care Financing Administration, Publications, N1-26-27,
7500 Security Blvd., Baltimore, MD 21244-1850. You also can contact your
local Social Security office for information.
Some people who are covered by Medicare
buy private insurance, called "Medigap" policies, to pay the
medical bills that Medicare doesn't cover. Some Medigap policies cover
Medicare's deductibles; most pay the coinsurance amount. Some also pay
for health services not covered by Medicare. There are 10 standard plans
from which you can choose. If you
buy a Medigap policy, make sure you do not purchase more than one.
You need to shop carefully before deciding
on the best policy to fit your needs. You may get another booklet, Guide
to Health Insurance for People with Medicare, to help you in making
the right choice. To order a free copy, write to: Health Care Financing
Administration, Publications, N1-26-27, 7500 Security Blvd., Baltimore,
Another good source of information on the
same topic is The Consumer's Guide to Medicare Supplement
Insurance. To order a free copy, write to: Health Insurance Association
of America, 555 13th St., N.W., Suite 600 East, Washington, D.C. 20004.
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Medicaid provides health care coverage for some low-income
people who cannot afford it. This includes people who are eligible because
they are aged, blind, or disabled or certain people in families with dependent
children. Medicaid is a Federal program that is operated by the states,
and each state decides who is eligible and the scope of health services
General information on the Medicaid program
is given in the Medicaid Fact Sheet. For a
free copy, write to: Health Care Financing Administration, Publications,
N1-26-27, 7500 Security Blvd., Baltimore, MD 21244-1850. For specifics
on Medicaid eligibility and the health services offered, contact your
State Medicaid Program Office.
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