While the pace of health care inflation has slowed a bit in recent years, prices of health care and health insurance are still going up – just a little more slowly than in the past. The rising cost of health benefits is still a major headache for employers. For several years, employers have tried one technique after another to try to hold down health care costs: self-insuring to cut back on the profit margin of health insurance companies, favoring plans that aggressively manage expensive services, and increasing employee cost-sharing.
Now, some employers are trying to see if a technique that most use for employee retirement benefits could work for health insurance too. They’re moving away from a defined benefit approach – where the employer pays for health insurance, minus employee premiums and cost-sharing – toward a defined contribution approach. They are offering their employees a fixed dollar contribution toward health insurance and leaving it to employees to pick the plan. This is analogous to moving from a pension plan to a 401(k). In some cases (especially with lower paid employees), the employer expects their employees to find insurance on the health insurance exchanges set up under the Affordable Care Act (a/k/a Obamacare). But in many cases, the employer has arranged for a private exchange, usually set up by an insurance broker or benefit consultant.
The private exchange has entered into arrangements with various health insurance companies to offer their policies on the exchange. The employee can take the dollar contribution from their employer and shop for a plan among those offered on the private exchange. If you’ve seen one private exchange, you’ve seen one private exchange. That is, there is great variety in these exchanges. Some offer a greater range of insurance plans than have typically been available through a single employer. This can be a benefit to employees, allowing them to choose the coverage that best fits their needs – but can make the decision at open enrollment time a much more complicated matter. Employees need to make an educated choice taking many factors into account: the provider panel, the premium cost (if any) above the employer’s contribution, and cost-sharing requirements (deductibles, copayments and coinsurance).
Choosing health insurance involves lots of tradeoffs – between lower cost versus more choice, and between lower premium cost versus higher deductibles and copayments. Say you have a choice between an HMO and a PPO. How do you choose?
Pros and cons of HMOs
HMO stands for health maintenance organization. The original idea behind HMOs was that if a group of doctors was responsible for the whole cost of health care for a group of people, they would have an incentive to provide preventive care that could help people avoid expensive medical problems, and provide good care for people with chronic conditions like high blood pressure and diabetes so they could stay out of the hospital. This would be good for people’s health, and good for cost control.
Did HMOs work as they were intended? They did, to a degree. The ideal that the HMO would be invested long-term in the health of the people they covered was never going to be fully realized, for the simple fact that most people can change insurance companies once a year (since many large employers offer more than one insurance option). But during the 1990’s, HMOs were popular with employers because they did help to hold costs down. Many individuals also liked the lower, more predictable costs of HMOs.
So, it’s all good, right? Not quite, because the downside of HMOs is, they restrict the patient’s choice of providers. HMOs were able to negotiate low rates from physicians and hospitals because they locked in a patient population to a small network. Providers figured they could take a lower rate if they could make it up on volume. Also, HMOs don’t allow patients to just go and get whatever specialized care they think they need. Generally, to see a specialist, a patient would have to get approval from their primary care provider. Late in the ‘90’s, there was a rebellion against restrictive HMOs, because people didn’t like being told what doctor they had to go to, and didn’t like having to wait for approval to see a specialist.
What does this mean for you? You might pay a lower premium with an HMO, because doctors and hospitals charge the HMO less. Your out-of-pocket costs will probably be pretty predictable, limited to an annual deductible and a standard copay for an office visit. On the other hand, you will have to go to the doctors and hospitals in the HMO’s network, except for emergencies or rare conditions that the HMO can’t cover in-network. In most cases, if you go to an out-of-network provider, it’s all on your nickel. (That’s usually, but not always the case. There are some HMO plans that are called “point of service” plans, meaning that the patient can choose to see a network provider, or go out-of-network and pay a higher copay.) Also, you will usually be assigned to a primary care provider (PCP). This will be a physician in the specialty of internal medicine or family practice (or in some areas, a gynecologist), who will be in charge of your overall care and will have to approve specialist care and hospitalization.
So – bottom line on HMOs – lower cost, less choice. If you’re thinking about an HMO, get a copy of the provider directory and see if the doctors and hospitals on the list will work for you.
Pros and cons of PPOs
PPO stands for preferred provider organization. Like HMOs, the PPO has a network of doctors and hospitals that have contracted with the PPO, and if you go to a network provider, you have to pay less out-of-pocket. But you can go to a doctor who is not in the network, and still get some of the costs covered. In most PPOs, you don’t have to get the approval of your primary care doctor to see a specialist, but you probably do need to get approval of the insurer for hospital care and other expensive services.
What does this mean for you? You will probably have to pay a higher premium for a PPO plan than for an HMO. The bigger the provider network, the more expensive it will be. So the bottom line for PPOs is: higher cost, more choice.
Confused by the jargon of the health insurance industry? Here's some help.
Coinsurance: A percentage of the bill that you have to pay directly. For example, if your coinsurance for hospitalization is 20% and your hospital bill is $10,000, you will owe the hospital $2,000.
Copayment: A fixed amount that you have to pay directly. For example, you may have a copayment of $20 for each doctor visit.
Cost-sharing: The insurance industry term for the combination of coinsurance, copayment and deductible that you are responsible to pay under your policy.
Deductible: The annual amount that you have to pay out-of-pocket before your insurance kicks in.
EOB: Explanation of Benefits. This is a form from your health insurer that tells you what the health care provider charged, what they paid under the contract between the provider and your insurer (usually there's quite a difference), and what you likely owe the provider. The provider can't usually charge you more than what the EOB says you owe to the provider. This form will also have information about your appeal rights if your claim is denied.
Health Maintenance Organization (HMO): An insurance arrangement in which a network of providers agrees to provide your health care. If you go "out of network" (see below), you are out of luck.
Health Savings Account: An account you can set up to cover the cost-sharing amounts on a pretax basis. Unlike a flexible spending account, you don't have to use all amounts in a health savings account in one year and can save up for future health expenses. A health savings account can only be used with a high-deductible health plan.
Out of Network: Seeing a physician or going to a hospital that is not under contract with your plan. Network providers will be listed in your plan's provider directory.
Point of Service (POS): A specialized kind of HMO plan that does provide some limited coverage for out of network services, usually with higher cost-sharing. Very similar to the Preferred Provider Organization.
Preferred Provider Organization (PPO): An insurance arrangement in which you get a higher level of coverage for seeing a provider in the network, but get some coverage for out of network providers.
Primary Care Provider (PCP): A physician who specializes in family medicine or internal medicine (or pediatrics or gynecology, for patients under 18 or women respectively). In some areas, a PCP could be an advanced practice nurse rather than a physician.