What to Look for in Buying Health Insurance

1. Know What Market You Are Purchasing In

Health insurance is bought in two ways.  An individual can directly purchase  a policy from an insurer  in what is called the “individual market” or, if an individual is an employee of a firm that offers health insurance (called “employer based insurance”) the employee may select from a menu of options provided by the employer. Businesses are not required to offer health insurance but if they do they are required to offer it to their employees regardless of health status and potential cost. No employee may be excluded or required to pay a higher rate because they are ill or at high medical risk– this is good for individuals with pre-exisiting conditions. On average employers pay 82 percent of the premium for an individual and 72% for family coverage.  The employer based market is subsidized by the Federal government to the tune of about $300 billion per year because the portion of insurance premium paid by the employer  is employee income that is not taxed.

Individuals pay the full amount for insurance they directly purchase. A portion of the premium and other health care costs may be deductible on income tax, however. The individual market is regulated by each state and policies may, therefore, differ widely from state to state. States establish their own requirements for the range of benefits that insurers who sell directly to individuals must offer. For instance,  some states may require coverage of chiropractic care, podiatric care, acupuncture or complimentary medicine and others may not.  Insurers are not required to offer coverage to individuals who are ill or high risk in most states. Insurers may  exclude coverage of specific pre-existing conditions and/or may raise the premium to levels that are unaffordable for high cost or high risk individuals, depending upon the state.  In the individual market, if you become ill, you may only be insurable for the duration of your insurance contract, usually one year. If the relevant provisions of the Affordable Care Act are implemented as scheduled in 2014, insurers in the individual market will be required to offer coverage to anyone who applies and to use the same rates for everyone they insure. Mandated insurance coverage is the price that had to be paid for those two provisions. Without the coverage mandate, “guaranteed issue” of insurance and “community rating” would potentially bankrupt insurers because many of the young and healthy would not purchase insurance until they became ill driving an insurer’s rates up to unaffordable levels for everyone.   With the Affordable Care Act  individuals will for the first time have the same protections for insurability afforded by employer based coverage.

2. Figure Out Which Services are Covered and Which are Not

Usually in the fine print someplace.  Read more carefully if you are purchasing in the individual market because the variability among policies is greater. Look for services that are specifically excluded  and determine what those exclusions mean for you. An older person would care more about cardiac transplantation  being covered than in vitro fertilization and the converse for a younger person. Most comprehensive insurance policies do cover heart transplants. The Affordable Care Act will standardize the benefits offered by insurance policies.

3. Understanding Cost Sharing

Most of the variance in insurance policies is not the range of benefits covered but the amount of cost sharing when medical services are purchased. Generally the higher the cost sharing the lower the premium. People who are young and healthy might pick a policy with a lower premium and high cost sharing whereas a person with a chronic illness who knows they will be using medical services might pick a high premium plan with low cost sharing plan. Some policies (called “high deductible policies”) permit individuals  to tax shelter a substantial amount of money contributed by them and by their employer to be used to cover the cost sharing of “high deductible policies” . If the money is not used it may be returned to the individual when she leaves the company.    There are four forms of cost sharing:

• The annual deductible is the amount that the individual must pay for medical services before the insurer begins to pay anything. Be wary and read carefully, because policies may not count co-payments for an outpatient visit, for instance, toward the deductible.
• Co-payments are a fixed amount that the individual pays at the time of purchase of a medical service, for instance, $20 for an office visit or $100 for an ER visit.
• Co-insurance is a percentage that the individual pays at the time of purchase of a medical service, for instance 20% of the cost of an outpatient visit.
• The annual out of pocket maximum is the maximum amount that the individual is expected to pay in deductibles , co payments or co insurance. After that amount is paid the insurer is responsible for all other services.
• The lifetime maximum is the total amount the insurer is required to pay. The lifetime maximum may vary from $1 million to no limit.  While this figure is of less immediate interest than co pays and deductibles, it is much more important.  A person with a serious medical condition can go through $1 million in a year or two. Purchasing a policy with a lifetime limit that could be exceeded by  a serious medical condition is the worst mistake a person can make in buying insurance because it is the one from which there may be no recovery.  The Affordable Care Act, if implemented, will eliminate any lifetime limits on coverage.

4. HMO vs. PPO

Determine how comfortable you are with an unlimited choice of physicians relative to the cost. Most insurance policies have a panel of physicians with whom they have contracted but that panel is generally large. Most policies will permit a person to see a physician not on their list but at a much higher co-pay or coinsurance amount.  It is worth checking what your additional cost will be if you go “out of network”.  In general, the wider the choice of physicians on a policy the higher the premium.  Health Maintenance Organizations (HMOs) offer premiums that may be at least 15% less expensive that policies with few restrictions on the physicians available. The way HMOs can offer lower premiums is to manage care and that requires  one doctor or group of doctors doing the managing. Some people are more comfortable being managed in a coordinated way by a smaller number of doctors who work together and others  will want maximum choice and are willing to pay their portion of the difference.

Insurers do not make it easy to ferret out the information summarized here but spending a hour or two with your options and thinking about them relative to your expected health care needs and preferences can save a lot of grief later.  Again, the Affordable Care Act will delineate the matters recounted here in a standard format so that they can be readily compared among policies purchased on the  insurance exchanges which the Act creates. Ehealthinsurance.com/ is a great resource for looking up plans in your state and understanding the different breakdowns.

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