How to Choose a Healthcare Plan

With today’s healthcare options resembling an alphabet soup, choosing a healthcare plan can seem like a daunting task. This quick guide will help you decipher the healthcare lingo and choose the right plan for you and your family.

1: Terminology

It’s essential to understand key health insurance terms. Understanding the lingo will allow you to know what services the plan will pay for and how much it will cost. Here are some key terms:

Premium

A “premium” is the amount you pay for coverage each month.

Network

The amount a policy will cover depends on whether the provider was in your plan’s “network.” You will likely pay less when you use in-network providers. This extremely important as you may not have coverage if you choose to use a doctor or hospital that is not in your plan’s network.

Deductible

A deductible is an amount you pay for care before your insurance begins to cover your medical costs. Once you meet the deductible, the plan will cover some or all the costs of your care.

Co-payments

A co-payment is a fixed amount you pay as your share of the cost for a medical service or item, like a doctor’s visit, with your plan paying the remainder of the cost.

Co-insurance

Co-insurance is similar to co-payments in that it’s your share of the cost for a covered health care service, but it’s calculated as a percentage (like 20%) of the service cost rather than a fixed dollar amount.

Out-of-pocket maximum

Is the maximum amount you’ll have to pay for medical care in a given year. The limit resets each year on your policy renewal (generally January 1st). For example, if your plan has a $3,000 out-of-pocket maximum, once you pay $3,000 in deductibles, coinsurance, and co-payments, the insurance company will pay 100% of any covered care for the rest of the year.

2: Types of health insurance plans

The plan you choose will help determine your out-of-pocket costs and which doctors you can see. So, it is critical that you know the differences between each plan. Here are the characteristics for the most common insurance plans:

Health Maintenance Organizations (HMOs): HMOs have strict networks and require referrals from your primary care physician before scheduling a procedure or visiting a specialist. If you use services outside of the network (unless an emergency), your plan will not pay for the services. Because of the restrictive network, your location may dictate your eligibility for an HMO. Due to the restrictions, however, HMOs tend to be the cheapest type of health plan, overall. HMOs generally pay 100% of your eligible expenses after you pay a co-payment, and there are no deductibles.  

Is an HMO right for you?

An HMO plan may be right for you and your family if you don’t mind your primary doctor choosing a specialist for you. An added benefit of an HMO plan is there’s less work for you since your doctor’s staff coordinates visits and handles medical records.

Preferred Provider Organization (PPO): PPOs provide more flexibility, such as not requiring referrals to see a specialist, having a broader network, and allowing you to go outside of your network for a higher cost.

Is a PPO right for you?

If you want more options and flexibility, a PPO may be a better fit than an HMO. Also, if you expect to have a lot of healthcare costs during the year, you may want to opt for a PPO plan with a lower deductible. On the other hand, if you expect to have few healthcare costs throughout the year, you can save money by going with a PPO plan with a higher deductible and lower monthly premium.

High Deductible Health Plans (HDHP): HDHPs have lower monthly premiums with a higher deductible. HDHPs are also the only plans that qualify you to open an HSA, which is a tax-advantaged account you can use to pay health care costs. If you’re interested in this arrangement, be sure to learn the ins and outs of HSAs (here is my article on HSAs).

Is an HDHP right for you?

If you expect to have few healthcare costs throughout the year, you can save money by going with an HDHP.

3: Compare health plan networks

Costs are lower when you go to an in-network provider compared to an out-of-network provider. While comparing plans, review the provider directory, which lists the doctors and clinics that participate in the plan’s network. If you have preferred doctors and want to keep seeing them, make sure they’re in the provider directory for the plan you’re considering. If you don’t have a preferred doctor, you may want a plan with a large network, so you have more choices.

4: Compare out-of-pocket costs

To further narrow your list, add up your total annual premiums and the maximum out-of-pocket limit of your insurance choices. That’ll give you a quick sense of how much your total out-of-pocket costs could be if you had a major medical event. Any plan’s summary of benefits should lay out how much you’ll have to pay for services. Your goal during this step is to narrow down choices based on out-of-pocket costs.

A plan with lower out-of-pocket costs, but higher monthly premiums, may be better if:

  • You see a primary physician or a specialist frequently.
  • You take expensive medication regularly.
  • You are expecting a baby, plan to have a baby, or have small children.
  • You have a planned surgery coming up.
  • You’ve been diagnosed with a chronic condition such as diabetes or cancer.

A plan with higher out-of-pocket costs and lower monthly premiums might be the better choice if:

  • You can’t afford the higher monthly premiums for a plan with lower out-of-pocket costs.
  • You are in good health and rarely see a doctor.

Final Thoughts

Deciphering the alphabet soup of plan options can be complicated but choosing the plan type with the right out-of-pocket costs and network for you and your family can save you from future heartache. It is worth mentioning that you should use this guide to support your evaluation, along with reviewing the plan documents and consulting your human resource personnel (if reviewing employer-sponsored plans). If you have a complex need or want a professional opinion, you should consult with a qualified financial planner.

Author: Armenta, MsBA, ChFC®, EA

Jose is a financial planner who writes about Federal Government employee benefits in a way that is easy to understand.

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