A health insurance policy is a legal agreement in which an insurer gives coverage for medical costs for a certain price. That price is called a premium and for people employed by larger companies, it is often paid by the employer. It can also be paid by individuals themselves or by groups that buy insurance together.
Types of health insurance
There are three basic types of health insurance: fee-for-service plans, managed care plans and preferred provider organizations. Each type has pros and cons that must be weighed carefully when making insurance decisions. For example, a fee-for-service plan gives the most flexibility, but you pay more in terms of time and money. With a managed care plan, you pay less, but you have fewer choices. With the preferred provider organization, you can leave your options open and balance flexibility and cost each time you make a health care decision.
Fee-for-service plans
Fee-for-service plans give the most flexibility in choosing health care providers and treatment facilities. However, this choice comes at a cost in terms of money and time.
Co-payments and deductibles
In a fee-for-service plan, insurance will only reimburse part of medical costs (for example, you might pay 20 percent of the cost and the insurer pays 80 percent). The part paid by you is called the co-payment or co-insurance.
You may have to pay a pre-set amount of your medical costs each year before the insurance payments begin (called a deductible).
No matter how much you pay in terms of the co-payment and deductible, the insurer makes the final decision on whether a certain procedure or cost is eligible for reimbursement.
Time on paperwork
In a fee-for-service plan, you may spend a lot of time coordinating your medical care and filing for reimbursement. With these plans, you are responsible for keeping track of your own expenses, such as receipts for drugs and other medical costs. To get payment for fee-for-service claims, you also may have to fill out forms and send them to the insurer.
Managed care plans
Compared to fee-for-service plans, managed care plans and health maintenance organizations (HMOs) have less flexibility in choosing health care providers and treatment centers. You must use providers and facilities that belong to the plan. Your care is coordinated through your primary care provider, who controls all referrals to specialists. This lack of flexibility may be a drawback for some. However, you pay less money for medical care.
Premiums and co-payments
Managed care plans are often called "prepaid health plans" because most of a plan's services are covered by the monthly or quarterly premiums. The only amount you usually need to pay is a small co-payment for office visits and hospital stays.
Time on paperwork
With managed care plans, you rarely need to submit claims forms for reimbursement. As a result, you usually have less paperwork and less record- keeping than in a fee-for-service plan.
Preferred provider organization
The preferred provider organization is a blend of the fee-for-service and managed care plans. In a preferred provider organization, you can make choices on a service-by-service basis. You can see a health care provider from within the plan’s network and have most of your medical expenses covered, or you can see a provider from outside the network and have fewer expenses covered.
Comparing options for health insurance
There is trade-off between cost and flexibility with each type of health insurance. No one health insurance option is right for everyone. Weighing the pros and cons can help you choose the one that is right for you.
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Pros |
Cons |
Fee-for-service plans
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Most flexibility in choosing health care providers and treatment facilities
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Only covers a portion of medical costs
May have a deductible
Insurer makes the final decision on whether a procedure or cost is eligible for reimbursement
Must coordinate own medical care, track all expenses and file for reimbursement (lots of paperwork)
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Managed care plans (such as HMOs)
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Costs less than a fee-for-service plan
Pay premiums and small co-payments for office visits and hospital stays
Rarely need to submit claim forms for reimbursement
Less record-keeping (paperwork) compared to a fee-for-service plan
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Must choose health care providers and treatment facilities that belong to the plan (limited number of each)
Care is coordinated through a primary care provider who controls all referrals to specialists
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Preferred provider organization
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Blend of fee-for-service and managed care plans
For each medical service, can choose a health care provider/facility from within the plan and have most expenses covered or choose a provider/facility outside the plan and have fewer expenses covered
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May be more expensive than a managed care plan
May have more record-keeping than a managed care plan
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Pre-existing conditions
As part of the 2010 health care reform (Affordable Care Act), insurance companies will no longer be able to apply restrictions on pre-existing conditions in 2014. Until that time, the law provides for a Pre-Existing Condition Insurance Plan for people who have been uninsured for six months or more due to a pre-existing condition. These plans are run by state governments and thus, options vary by state. Learn more about Pre-Existing Condition Insurance Plans.
Updated 01/25/11
