If you’ve ever been sick or injured, you know how important it is to have health insurance coverage. Health insurance pays for things big and small, from a lab test that might cost $75 to a hospital stay for major surgery that could cost thousands of dollars. It gives you peace of mind of knowing that no matter what kind of care or procedure you or a family member might require, you won’t have to worry about shouldering the cost on your own.

As important as health insurance is, it can also be very confusing. To make smart health insurance choices, you need a basic understanding of all the key terms, acronyms and concepts. This section answers common questions about health insurance, provides information about different types of policies, and discusses how to compare one policy with another. There’s also an interactive healthcare cost estimator that lets you view the average cost of common medical procedures, making it clear that health insurance coverage is a necessity for.

Who Needs Health Insurance?

Health insurance is one type of insurance you're pretty much guaranteed to use. We all need medical attention from time to time, and some of us need it quite frequently. When care is needed, you want to focus on getting better  not on how you're going to come up with the money to pay your medical bills. A good health insurance plan allows you to focus on what's most important, your physical well being.

Is there anyone who doesn't need health insurance? Not really. Even if you're young, healthy and haven't had to see a doctor in years, you never know when you might be involved in an accident or be diagnosed with a serious medical condition. While your health insurance coverage will pay for things that aren't too costly like routine doctor's visits or lab tests, the main reason to have coverage is to have protection against the potentially catastrophic expenses of serious illness or injury

What are the Different Types?

There are five main types of health insurance plans. Traditional indemnity plans are at one end of the spectrum, and health maintenance organizations (HMOs) are at the other. Preferred provider organizations (PPOs) and point-of-service plans (POS) combine features of both indemnity plans and HMOs, but are generally considered managed care plans. A new option, created by Congress in 2003, is a Health Savings Account (HSA). It combines a high-deductible health plan (HMO, PPO or Indemnity) with a tax-advantaged savings account.

It's important to understand the differences among the types of plans, and we encourage you to read through this section to familiarize yourself with each. But the most affordable and popular plans are PPO plans with Co-pays or PPO plans that are considered a Health Savings Account plan.

HSAs

A Health Savings Accounts (HSA) is a type of medical savings account that allows you to save money to pay for current and future medical expenses on a tax-free basis. In order to be eligible for a HSA, you must be covered by a high-deductible plan and not have any other health insurance. HSAs are a good option for individuals who want to protect themselves from catastrophic health-care costs, but don't anticipate many day-to-day medical costs. They also can serve as a lower-cost alternative to more traditional health plans for small businesses.

Here's how the program works. You can sign up for an HSA if your employer offers such a plan (individuals can buy these plans as well, though not in every state). An HSA must be paired with a health insurance plan that requires an annual deductible of at least $1,100 for individuals or $2,200 for families. Total out-of-pocket costs for these plans, including deductibles and copayments, can't exceed $5,600 for an individual or $11,200 for a family in 2008, though these amounts change from year to year. Despite the high deductibles, some plans still offer full coverage or require only a small copayment for preventative care, such as an annual physical or a well-child checkup.

High-deductible health plans typically have lower premiums than HMOs, PPOs or POS plans, but they come with the potential for higher out-of-pocket costs. To offset that risk, you (or your employer) can contribute up to a certain amount to a tax-advantaged HSA account (contact our office, as this changes yearly). These contributions reduce your taxable income (or they are tax-free if made by your employer), and money in your HSA can be used to pay any qualified medical expense now or in the future. An attractive feature of HSAs is that they can pay for expenses that your regular health plan ordinarily doesn't cover, such as eyeglasses and hearing aids. In addition, while the money is in the account, it can be invested, and the investment gains are tax-free as long as they are used for qualified medical expenses.

PPOs

A preferred provider organization (PPO) is the form of managed care closest to an indemnity plan, which typically allows you to see any doctor, any time. A PPO negotiates discounts with doctors, hospitals and other providers, who then become part of the PPO network.

When you see a physician in the network, you typically make a copayment, a fixed fee for service, such as $25. When you see a physician out-of-the-network, you'll still receive coverage, but your insurance will only cover only a portion of the bill, usually 60, 70, 80 or 90 percent. The remaining amount, known as coinsurance, is your responsibility. For example, the insurer may reimburse you for 80 percent of the cost of the doctor’s visit if you go to a provider outside the network. So, after an office visit, you’ll owe 20 percent of the total bill, plus your copayment.

In addition to the coinsurance, PPOs may also have deductibles. These are amounts of covered expenses you must pay before the insurer will start reimbursing you for your medical bills. These might range from $100 to $300 per year per individual, or $500 or more per family. Generally, the higher the deductible, the lower the premiums, which are the monthly, quarterly, or annual payments for the insurance.

One of the things people like about PPOs is the ability to make self-referrals. That means you can see any doctor you want, including specialists inside and outside the PPO network, without a referral. Also, premiums are usually lower than indemnity plans because of the negotiated provider discounts.

Key Terms

Agent

Advisors who work with you to assess your insurance needs and help plan for long-term financial security and stability.

Balance billing

A bill for the difference between what your insurer will pay and what the physician charges for a service.

Coinsurance

The amount you are required to pay for medical care in a fee-for-service plan and certain managed care plans after you have met your deductible. The coinsurance rate is usually expressed as a percentage. For example, if the insurance company pays 80 percent of the claim, you pay 20 percent.

Coordination of benefits

A system to eliminate duplication of benefits when you are covered under more than one group plan. Benefits under the two plans are usually limited to no more than 100 percent of the claim.

Copayment

A way of sharing medical costs. You pay a flat fee every time you receive a medical service (for example, $10 for every visit to the doctor). The insurance company pays the rest.

Covered expenses

Most insurance plans, whether they are fee-for-service or managed care plans, do not pay for all services. Some may not pay for prescription drugs. Others may not pay for mental health care. Covered services are those medical procedures the insurer agrees to pay for. They are listed in the policy.

Deductible

The amount of money you must pay each year to cover your medical care expenses before your insurance policy starts paying.

Exclusions

Specific conditions or circumstances for which the policy will not provide benefits.

Managed care

The way a health care system manages costs, use, and quality. All HMOs and PPOs, and even many fee-for-service plans, apply managed care techniques.

Maximum out-of-pocket

The maximum amount money you will be required pay a year for deductibles and coinsurance. It is a stated dollar amount set by the insurance company, in addition to regular premiums.

Noncancellable policy

A policy that guarantees that you will receive insurance as long as you pay the premium. This is also known as a guaranteed renewable policy.

Preexisting condition

A health problem that existed before the date your insurance coverage became effective.

Premium

The amount you or your employer pay, in addition to copayments, coinsurance and deductibles, in exchange for insurance coverage.

Primary care physician

A primary care physician monitors your health, diagnoses and treats minor health problems, and refers you to specialists if another level of care is needed. This is often a family physician or internist, but some women prefer to use their gynecologist.

Provider

Any person (doctor, nurse, dentist) or institution (hospital or clinic) that provides medical care.

Third-party payer

Any payer for health care services other than you. This can be an insurance company, an HMO, a PPO, or the Federal Government.