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How to choose a health insurance plan: The full breakdown

At a glance:

If you're in the market for a health insurance plan, there are a number of considerations you need to take into account before signing on the dotted line with a particular insurance company.

The major health insurance providers include group plans offered by employers, trade associations and trade unions, individual policies, and those offered by health maintenance organizations (HMOs) and preferred provider organizations (PPOs).

When choosing among plans, you need to consider factors such as the types of coverage, limitations, and what type of access you'll have to physicians and hospitals.

There are also cost considerations, including monthly premiums, out of pocket costs, and deductibles.

If you are self-employed, you can deduct your premiums as a business expense on your tax return.

In addition, any taxpayer who itemizes may be eligible to deduct certain medical expenses on federal and state tax returns.

Linda Morris looks over her Medicare statements, Wednesday, Sept. 25, 2019, in Parker City, Ind. Federal law enforcement officials say they’ve taken down a nearly-$2 billion Medicare fraud scheme that exploited curiosity about genetic medicine by having seniors get their cheeks swabbed for unneeded DNA tests.  A Medicare enrollee, Morris said she was roped in at a conference on aging well. The retired high school math and journalism teacher got her cheek swabbed by one of the many health vendors at the event. (AP Photo/Darron Cummings)
There are many things to consider when choosing a health insurance plan. (Photo: AP Photo/Darron Cummings)

Where to shop for health insurance

When you need health insurance, there are several ways to obtain coverage: group insurance, individual insurance, and policies offered by HMOs and PPOs.

Group insurance is generally the least expensive type of policy. This is because the insurer can spread the risk of insuring for health conditions over a large pool of people. If your employer offers group health insurance, this is usually the best place to get it, as employers usually subsidize part of the premium.

Look into trade associations

Other sources of group insurance are trade associations you may belong to related to your professional or personal interests. Many of these organizations are large enough that they can negotiate health insurance packages from insurance companies to offer to their members. In most cases, group policies do not require you to undergo a physical as a condition of receiving insurance, which is a benefit if you suffer from a chronic health condition.

Individual insurance

Individual insurance is another option. Most insurance companies offer either traditional hospitalization policies or HMO or PPO-type policies. When you apply for an individual insurance policy, you typically must undergo a physical; and if the insurance company accepts you, the results of your physical will have an impact on your premium.

The health insurance exchanges

If you have a computer at home or access to one at work or at a public library, the website makes it possible to shop for health insurance and sign up for a plan. The first step is to create an account, where you provide basic information about yourself and your family. You also provide information about your family income to determine if you are eligible for a subsidy that will help pay part of your monthly health insurance premium.

Once you've created an account, you can shop for insurance. The website makes it easy to compare both medical and dental insurance with different levels of coverage and different premium costs. You can also shop for insurance without creating an account, but you cannot enroll yourself or your family without creating an account.

How to choose a health insurance plan

When it comes to buying health insurance, there are many choices. Your employer may offer health insurance or you may be able to get it through your spouse's employer. If not, you can buy insurance through an insurance agent or through the state or federal health insurance marketplaces.

Employer-based plans may not have very much flexibility, although larger companies may offer several different plans. Individual policies purchased through an agent or in the health insurance marketplaces offer much more flexibility in terms of the types of coverage.

They may be traditional major medical plans or health maintenance organizations (HMOs) or preferred provider organizations (PPOs). Plans with richer benefits and lower deductibles have higher premiums.

Limitations on coverage

Now that the Affordable Care Act (ACA) is the law, insurance companies must provide consumers with pre-existing medical conditions with insurance. The pre-existing coverage rule does not apply to "grandfathered" individual health insurance policies.

A grandfathered policy is a policy bought on or before March 23, 2010 that has not been changed to reduce benefits or increase costs to consumers. Insurance companies cannot terminate coverage unless due to fraud or failure to pay premiums or place limits on essential health benefits such as emergency services, hospitalization, prescription drugs, lab tests and outpatient services.

Insurance companies must provide coverage to consumers with pre-existing health conditions, and that coverage cannot cost more than comparable coverage for someone without that condition. In addition, insurance coverage cannot charge women more than men. Mental health coverage must be included in the essential health benefits provided by insurance companies.

Restrictions on access

Health insurance plans may restrict access to certain doctors, hospitals or labs. Certain types of insurance policies such as HMOs or PPOs, provide a list of doctors and hospitals within their network that are available for lower co-pays. You can see doctors or receive care at out of network facilities, but you will have to pay a higher co-pay than you would have to pay if you went to in-network providers.

Cost considerations of health insurance plans

There are a number of costs involved in purchasing health insurance and health care. These include premiums and out-of-pocket costs. Premiums are amounts you pay on a monthly basis that cover the basic cost of coverage. Premiums run anywhere from several hundred dollars a month to a thousand dollars a month or more. The more people who are covered under your policy, the more expensive your premiums will be, so a family policy covering yourself, your spouse, and two children could cost significantly more than a policy that just covered you, a single individual.

Out-of-pocket costs

Out-of-pocket expenses include a variety of costs from deductibles to co-pays to non-covered items. Deductibles are a threshold amount that you must pay out of your own pocket before your health insurance company pays benefits.

A deductible could apply to your entire health care policy, where you had to spend $500 on your own health care before your health insurance company would start to pay; or it could apply to certain items within your coverage, such as your prescription drug coverage or hospitalization. In that case, your health insurance company would pay for other covered expenses, such as doctor's visits, but would not pay for prescription drug coverage or hospitalization costs until you met your deductible.

What are co-pays?

Co-pays are amounts you pay along with your insurer. Many HMOs and PPOs require co-pays for doctor's visits and prescription drug costs. You pay these co-pays at the time of service, either when you visit the doctor or get a prescription filled.

Co-pays are usually fairly small amounts, such as $10 or $25, although some insurance companies are instituting tiered systems whereby more costly drugs and treatments are subject to higher co-pays ranging from hundreds to thousands of dollars.

Non-covered items

Non-covered items include those that the insurance company excludes from coverage. Many companies exclude items such as hearing aids, eyeglasses, contact lenses and dental coverage unless you buy a separate policy for such coverage.

San Francisco is the healthiest city in the U.S. (Graphic: David Foster/Cashay)
San Francisco is the healthiest city in the U.S. (Graphic: David Foster/Cashay)

Summary of choosing a health insurance plan

If you need health insurance, there are several different ways to obtain it. Many consumers get coverage through group policies offered by their employers or a trade association or union. Others purchase individual coverage directly from insurance companies offering traditional policies or HMOs and PPOs. There is now the option of the exchanges, made possible by the ACA.

When shopping for health insurance, consider the benefits, limitations, and exclusions offered by the health insurance provider, as well as the type of access the policy allows to doctors and hospitals. Costs are an issue, as most policies contain deductibles, co-pays, and premiums you will have to pay.

There are also some provisions of the tax code that are beneficial for consumers purchasing health insurance, including the deductibility of premiums for self-employed people and the ability to write off qualified expenses as itemized deductions.

This content was created in partnership with the Financial Fitness Group, a leading e-learning provider of FINRA compliant financial wellness solutions that help improve financial literacy.

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