Learning about health insurance is like learning a foreign language. Not knowing the language can cause huge financial mistakes. This article has been requested of me by some of my favorite people. Here are their stories:
Caitlin had just graduated from college, just had her first child, and had just accepted her first “real” full-time job with benefits. She found it very confusing to have to read through and select her health care plan. In the end, she realized it would be smarter to stay on her parents’ plan as long as she was legally allowed to do so.
Kelsey had the benefit of Preferred Provider Organization (PPO) medical plan. She made an appointment with an in-network doctor. After the insurance claim was filed, she found out that certain services are excluded from her policy when she was presented with a $400 bill.
Shannon also had insurance through a PPO plan. She found a doctor near her new home and made an appointment for the purpose of meeting and selecting a primary care physician (PCP). After the claim was filed, she also received a $400 invoice because it was coded as a preventive exam which is not allowed by her policy.
Today’s article should be useful for those individuals who get to choose between employee sponsored, managed care plans. Many employers provide their employees with medical benefits. They usually pay for part of the premium. The premium is a fixed payment which is usually deducted from each paycheck regardless of whether the employee receives any medical care or not. Here’s an example to show what that means:
Austin works for a company which offers medical insurance with a premium of $500 per month which is the group rate negotiated by his employer for each employee who chooses to participate in the medical plan. Austin’s company is very generous, so they subsidize, or cover the cost of, his premium by 80%. That means Austin pays only $100 per month (20%X$500) for his medical insurance plan which would be worth $500 if he didn’t work for such a great company. His share of the premium would be deducted directly from his paycheck with pre-tax dollars. In other words, the premium would be deducted from his gross wages, and then, taxes would be calculated on the balance (gross wages minus insurance premium) X tax multiplier). Austin was confused when he saw his first paycheck because his deduction was not $100 as he expected it to be. When he called his payroll department, they explained that his premiums would be pro-rated, or divided up equally between all his paychecks. Austin’s medical premium for the year would be $1,200, so if he was paid only once per month, then his paycheck would have showed a $100 deduction for his medical premium. But lucky Austin was paid every other Friday, so he had a biweekly pay schedule. 52 weeks in a year divided into 2-week periods assured Austin of 26 pay checks in a year. His premium of $1,200 pro-rated equally between 26 paychecks created a deduction of $46.15 on each paycheck. Congratulations to Austin. He now has medical insurance, so if he gets sick, will all his medical care be free? Far from it! If he never gets sick or goes to the doctor, he must still pay the premiums.
Now that you’re familiar with how a premium works, we’re going to backtrack and talk about the two most common types of managed care plans, specifically PPO (preferred provider organization) and HMO (health maintenance organization).
PPO’s offer more choices, but the premiums are higher. Most services are subject to a deductible and a coinsurance must be paid by the person who receives service. You can choose between a service provider who is in the network or one who is outside the network. The difference is that the plan will pay a higher percentage of expenses if you choose an in-network provider. You are not required to choose a (PCP) primary care physician and you can usually go directly to any specialist (eg. dermatologist) that you choose without having to see your primary care doctor first to get permission to do so.
HMO’s offer fewer choices but lower premiums. You must choose a PCP to coordinate your medical care. For example, if you want to go to a dermatologist, you first need an appointment with your PCP to ask for a referral. If your referral is given, you will need to select a dermatologist from a limited network. HMO’s have a tidy, predictable co-pay(ment) schedule and lower premiums, but is offset by fewer choices.
If you look at the table and see blah, blah, blah insurance, just skip to the example after the table…
|Coverage||Comments||PPO In Network||PPO Out of Network||HMO|
|Preventive Care||100%, no deductible||Services paid at 70% after deductible||$0 co-pay|
|Deductible||First $400 of medical care each year is paid by Austin before the insurance will reimburse any expenses.||$400 single, $800 family||$400 single, $800 family||None|
|Co-Insurance/Co-pay||Co-Pay (HMO only) is a fixed predetermined amount for service||85%* of eligible charges**after deductible***||70% of eligible charges after deductible||Co-Pay based on service|
|Out of Pocket Max||$2,800 Single, $8,100 family||$3,100 single,||$9,000 family||$1,800 single, $3,600 family|
|Primary Care Visit||85% of eligible charge after deductible||70% of eligible charge after deductible||$25 Co-Pay|
|Specialist Care Visit||85% of eligible charge after deductible||70% of eligible charge after deductible||$40 Co-Pay|
|Hospital Care/Surgery||85% of eligible charge after deductible||70% of eligible charge after deductible||$200 day/max $1,000 year|
|Outpatient Surgery||85% of eligible charge after deductible||70% of eligible charge after deductible||$150 Co-Pay|
|Emergency Room||(ER)||85% of eligible charge after deductible||70% of eligible charge after deductible||$150 Co-Pay|
|Diagnostic Tests||85% of eligible charge after deductible||70% of eligible charge after deductible||$0. Co-Pay|
*Percentage figure in the entire chart shows the percentage of the eligible charges which will be covered after deductible.
**Eligible charges exclude certain procedures or services which should be called out in your policy document.
***Deductible example-Austin breaks his arm and ends up in the emergency room (ER) at the hospital which is in his PPO network. His eligible medical expenses total $2,500. A claim is filed by the hospital with his insurance company so they can pay the hospital directly for Austin’s medical care. We’re going to assume here that Austin had chosen the PPO plan and we can see in the table that an emergency room trip is subject to a deductible. Because this is the first time this year that Austin has incurred any medical expenses, he hasn’t met his deductible. Once the insurance company reviewed the claim and determined that all the expenses were eligible, they paid the hospital $1,785. The hospital then sent a bill to Austin for the additional $715. He reviewed his Explanation of Benefits (EOB) to see the claim details from the insurance company to make sure that he was being billed the right amount. This is how the insurance claim was calculated:
- $2,500 for hospital services less his $400 deductible (Austin was single) left $2,100 of eligible expenses
- $1,785 ($2,100 X 85%) is the amount the insurance company paid to the hospital
- $715 is the total of the deductible ($400) plus Austin’s 15% coinsurance (2,100 X 15%=$315)
- $200 is charged by his orthopedic surgeon for a follow up visit
- The EOB shows that the insurance paid $170 (85%) and Austin owes $30 (15%) since the deductible has already been met for the year
The emergency room bill is just one component of the medical treatment. Austin could be billed separately by the physician who treated him in the ER as well as for any diagnostic tests, such as x-rays, that needed to be done.
Austin pays the hospital for his share of the ER visit. If he didn’t have insurance, he would have owed the entire $2,500. Austin sits at home with a broken arm, wishing he had chosen an HMO since his ER trip would have cost him only $150! Since he doesn’t get to go back to work for a while, he has plenty of time to read about his insurance plan. He learns that dental insurance and vision insurance are covered in separate policies and he did not select them. He is relieved to discover that his company has Open Enrollment once per year, so he will have the option of switching to an HMO for next year and adding both dental and vision insurances.
How does each story end? Caitlin takes the money she saves on premiums and starts an emergency fund for unexpected expenses. Both Kelsey and Shannon have worked with their doctors to ask if there is another appropriate medical code that can be used to resubmit the claim to the insurance company. If the insurance company will still not pay the medical claim, they’ve learned that they may be able to negotiate a fee reduction for charges not covered by insurance. And Austin? Well, he takes his good arm and pats himself on the back for choosing to purchase the insurance even though he didn’t really think he needed to!