Translating Complicated Health-Care Terms
Oct. 23, 2003 -- Most people don't know the meaning of health-care terms such as HMO and PPO, let alone the difference between the two.
Fewer than 36 percent of Americans are familiar with their health plans, according to an ABCNEWS/Washington Post poll.
If you have the choice between these two options, HMO or PPO, how do you decide?
One way you should not decide is the cost of the plan. One of the leading causes of bankruptcy is unpaid medical bills. That means if you just choose the cheaper plan, it could cost you a lot more in the long run.
For the more than 60 percent of the population covered by employer-based health insurance, it is important to understand the types of health care plans your employer offers as well as the underlying benefits.
HMO vs. PPO
You may have heard of HMOs and PPOs, but it is important to understand the difference if your employer offers you a choice between the two. PPO stands for preferred provider organization. It is a network-based, managed-care plan that allows participants to choose any health-care provider, whether they are a specialist (e.g., dermatologist, obstetrician, etc.) or generalist. If you choose to see a "preferred" provider, meaning they are part of your insurer's network, generally a larger amount of the cost will be covered by your health-care plan.
On the other hand, an HMO, which stands for health maintenance organization, arranges a wide spectrum of health care services that usually include hospital care, physicians' services and other types of health care with an emphasis on preventive care such as checkups, immunizations and screenings for diseases such as breast and prostate cancer.
Although typically less expensive than a PPO, an HMO plan tends to be more restrictive about which doctors you can see and when you can see them. More importantly, if you use doctors outside of the HMO network, you have to pay the cost out of your own pocket. Additionally, if you need to see a specialist, even one that is in the HMO network, you must go to a generalist first to get a referral.
Generally speaking, you might consider an HMO if you are young, in great health, single, have no pre-existing conditions, are not picky about your doctors, and/or live in a big city where you can access a large network of HMO physicians. You might consider a PPO if you are older and likely to need more and more specialists, you have preferred doctors or if you have young children and/or you live in a rural area.
How do you navigate your health care package and decide which plan is right for you?
When assessing which health-care plan is right for you and your family, there are several factors to consider. The one factor that should not solely guide your decision is your monthly premium. In fact, a cheaper premium can ultimately cost more in health-care bills. It is important to evaluate the whole plan, which includes co-payments (for regular doctors, specialists, prescription drugs), the deductible, co-insurance rates and your maximum out-of-pocket.
When evaluating these items, it is important to understand the basic meaning of each:
The Premium: The premium is what you pay each month for health-care insurance. On average, employees pay $196 per month for family coverage.
Co-payments : These are pre-set fees for physician office visits, prescriptions or hospital services that need to be paid at the time the service or prescription is provided. Although this amount may vary, it usually ranges from $10 to $35. The Deductible: The deductible is the amount you will need to pay out of your own pocket for medical services on an annual basis. For example, if your deductible is $500, once you have paid this amount for medical expenses, the plan begins to contribute toward the costs of those covered expenses. Co-insurance: This means you pay for a portion of your medical services and the insurance company pays for the remaining portion. Typically, 70 percent to 90 percent is covered by insurance and the remaining 10 percent to 30 percent is covered by the you, the participant. Here is an example which demonstrates how these items come together:
Example: Let's say you have a PPO and your deductible is $500, and you broke your arm, which resulted in $3,000 in medical expenses. Out of your own pocket, you would pay your deductible of $500, leaving $2,500 to be paid. At this point, co-insurance kicks in. If you went to an in-network hospital, insurance would likely cover 90 percent of the remaining $2,500 ($2,250), leaving you to pay 10 percent ($250). So, now, you have paid a total of $750 out of your own pocket.
If your annual out-of-pocket maximum is $1,000, if you had another health issue that same year, your out-of-pocket costs would not exceed $250 since you have already paid $750 (for a total of $1,000). However, if your out-of-pocket maximum is higher, such as $2,500 or $5,000, you could be out a lot more money if other health-care problems arise. This example illustrates the importance of knowing the underlying details of your plan as it directly affects your wallet. Does your company offer a flexible spending account?
An FSA is to your physical health what a 401(k) is to your fiscal health. If offered by your employer, flexible spending accounts are an additional method to help you cover health-care costs that your insurance does not cover. It also has tax advantages. FSAs permit employees to contribute pre-tax dollars to an account established specifically to pay for medical expenses. Covered expenses include eyeglasses, birth control, dental work (not including cosmetic), co-payments for prescription drugs and doctor's visits, as well as many over-the-counter medicines, such as antacids, allergy medicine, cold medicine and pain relievers.
According to Mercer Human Resource Consulting, nearly three-fourths of large employers offer a flexible spending account, but only 18 percent of those eligible actually used a flexible spending account in 2002. Over-the-counter drugs are new additions to the list of eligible expenses and may increase the popularity of this type of account.
The upside to FSAs is that by contributing pre-tax dollars to this type of account, you lower the amount you pay on income taxes. Paying health-care costs through FSAs can reduce a worker's tax bill by 30 cents to 40 cents for every dollar contributed to the plan.
The downside is that any money left at the end of the year is forfeited. This is often cited as one of the major reasons that employees shun FSA accounts. And yet, just 10 percent of workers forfeit any contributions to FSAs and among those who do forfeit, the average is just $30 a year. Tip: If you find yourself with money left in the account at the end year, just go on a drug store shopping spree.
What if you lose your job? With 9 million unemployed in the United States, it is no surprise that the number of uninsured is growing. However, if you are laid off, fired or simply choose to leave your current employer, you have health care options.
The Consolidated Omnibus Budget Reconciliation Act, or COBRA, requires most employers to offer departing employees and their covered dependents the opportunity to purchase the same health-care coverage that the employer provides to its current employees. Although this continuation of coverage only lasts for a specified period of time (usually 18 months) and is expensive, it is an important benefit, as the cost of coverage is still less than what you would pay if you were to go directly to an insurer as an individual.
The average cost of COBRA is $260 per month for an individual and $676 for a family. Compare those amounts to the monthly costs for individual coverage which can range from under $200 a month to more than $900 a month — depending on your health, any pre-existing medical conditions, as well as the size of your deductible — and you can understand the benefit. In terms of individual insurance, generally, the better your health and the larger the deductible, the lower your monthly cost.
What else can you do to save money?
1. Check your hospital bill. More than 70 percent of all hospital bills contain overcharges and errors. These overcharges and errors, on average, add up to more than 13 percent per bill. If you think your insurance company protects you against hospital error, think again. Most insurance companies require patients to make a co-payment, usually 20 percent of the bill. To protect yourself from erroneous fees:
a. Request an itemized bill. After all, you cannot catch errors if you do not know the list of charges behind the total amount owed. b. Make sure you are charged for the correct length of stay and the right kind of room. Similar to a hotel, you should not be charged for a suite if you stay in a standard room. c. Be alert for duplicate billings. If you have bills for inpatient and outpatient services, make sure the same charge does not appear on both bills. d. Check for phantom charges. Many hospitals automatically impose a set of standard fees for procedures they usually perform in connection with specific services. Before accepting the litany of charges for all of these procedures, follow up with your physician to see if you actually had each one of them.
2. Look for deductions. If you are one of 16 million Americans who purchase your own health insurance, the Internal Revenue Service may be able to help you foot the bill. As long as you itemize your taxes, and your health-care expenses exceed 7.5 percent of your adjusted gross income (AGI), you may be entitled to a handful of deductions, including a portion of your premium, deductible and co-payment. In some cases, the IRS will let you deduct the cost of your weight-loss program as well as any travel expenses you incur to receive care. In total, if you are self-employed, you may be able to deduct 45 percent of your insurance premium from your gross income.
3. Stay healthy. Some companies offer their employees a reduction in health-care premiums if they maintain healthy lifestyles. Verizon, for example, gives its employees a $60 reduction annually if their entire family does not smoke. Likewise, other companies reward their employees for going to the gym and staying fit.
4. Be savvy about prescription drug choices. Although employers are bearing the brunt of prescription drug increases, they are passing on some of the costs to their employees through either increased co-payments (47 percent of employers increased the cost of employees' co-payments for prescription drugs) or restructured drug benefit plans. For example, many employers are moving away from co-payments and instead, are requiring employees to pay a certain percentage of their prescription drug bills.
In order to keep your costs low, pay careful attention to the incentives your company offers with respect to prescription drugs. Explore whether it is cheaper to order drugs by mail; ask your doctor whether a generic drug will be just as suitable as a name brand; and shop around in your own neighborhood to determine which pharmacy offers the lowest prices.
Mellody Hobson, president of Ariel Capital Management (arielmutualfunds.com) in Chicago, is Good Morning America's personal finance expert. Ariel associates Matthew Yale and Aimee Daley contributed to this report.