Co-Insurance Percentage

Co-insurance is the percentage of a medical bill that the health plan will pay after you have met the deductible. Most plans pay about 80%. A few plans pay as high as 100% and others pay as low as 50% of covered charges. With Indemnity plans the co-insurance percentage does not usually change regardless of the medical providers you choose. With Preferred Provider Organization plans (PPO), the co-insurance percentage is usually quite good if you use the PPO providers, but it will drop considerably if you use non-PPO providers.

If an insured has to pay 20% co-insurance of a $100 claim that is usually not a large financial hardship. If, however, you run up a $500,000 medical claim, you might feel uncomfortable having to pay 20% of so large a figure. That is why insurance plans change their co-insurance percentages to 100% after an insured has incurred a certain level of paid expenses (in most cases). This provision is called the "Out of Pocket Maximum".

Indemnity Plans

Indemnity plans allows you to choose any doctor or hospital when seeking medical care. These plans typically have a deductible which must be met before any benefits are payable to the insured. After this deductible the plans pay a co-insurance percentage, typically 70% to 90% of billed charges. The remainder of the bill is paid by the insured.

Choosing a Plan

Managed care occurs when insurance companies actively get involved in negotiating fees for medical services and set guidelines for treatment. While virtually no medical provider enjoys accepting less payment for services or being told what to do, most providers agree that managed care saves the consumer money. In fact, Preferred Provider Organizations (PPOs) and Health Maintenance Organizations (HMOs) have successfully reduced medical insurance premiums for millions of people in the United States.

Preferred Provider Organizations (PPOs)

PPOs negotiate with medical providers to reduce their charges. The providers in turn, are referred business from the PPO. Often PPOs will negotiate fee reductions in excess of 25%. These reductions are usually reflected in much lower premium rates for PPO plans, relative to the indemnity plans. If buying a medical insurance plan that uses a PPO, check to see if the providers you would like to see are on the provider list of that PPO. If they are, you will usually be better off purchasing a PPO plan rather than an indemnity plan.

PPO plans can immediately save you money, even if you do not meet your plan deductible. Assume you have a $1,000 deductible program, and run up a $1,000 claim. Obviously, the insurance company will pay nothing since you have not exceeded the deductible. However, under many PPO plans, the claim would be discounted by the PPO, and you would only need to pay the doctor $750 (assuming a 25% PPO fee reduction). You would have saved $250 without the insurance company paying anything! The main disadvantage of PPOs is that they usually pay a far lower benefit percentage if you select a provider from outside the network.

Health Maintenance (HMOs)

Health Maintenance Organizations (HMOs) have a different way of saving money. Doctors are paid a fixed amount per month (capitation). This means they get the same amount of money whether you are healthy or sick. This gives the doctors less incentive to do unnecessary surgeries, lab work, etc. Studies have shown that billions are spent annually on unnecessary tests, surgeries, and hospitalization. An HMO definitely cuts down on the financial incentives to do unnecessary surgery or over treat patients.

With HMOs you usually name one doctor, or group of doctors, to be your primary care doctor. In order to go to a specialist you must be referred by your primary doctor. This referral system saves money because unnecessary (and costly) visits to specialists can be avoided. HMOs also have the advantage of discounting doctor and hospital fees. Most HMOs have deep discounts negotiated with hospitals. In order to get the referrals from the HMOs, the hospitals have to cut their fees. This, in turn, saves the insured money in premium savings.

While HMOs can, and do, save you money, there are some potential disadvantages. In an HMO, you must select a primary care doctor from a limited list. Consequently, if you do not like the listed doctors, an HMO may not work for you. Also, many HMOs compensate primary care doctors in a way that will reduce their compensation if they send you to a specialist. This may cause a primary care doctor to attempt procedures that should be done by a specialist. It is important to understand this compensation method clearly before selecting an HMO medical insurance plan.

Deductible

The deductible on a health insurance plan is the amount of money that an insured must pay before the insurance company pays anything. Usually the deductible accumulates throughout the calendar year. This means that any eligible medical bills that you run up between January 1 and December 31 count toward the deductible. Once you have met your deductible, the insurance company starts paying benefits. You should be aware that there is usually a family deductible and sometimes a deductible carryover. Our consultants generally recommend that you save yourself premium by obtaining as high a deductible ($1,000 to $2,000) as you can afford to pay.

Family Deductible

The family deductible is the maximum amount of money that your family must pay in deductibles before the insurance company begins to pay. If your plan has a $500 deductible and you have five family members, you could potentially incur $2,500 of deductible expenses, assuming everyone ran up just $500 worth of claims. To avoid this, most plans have a family deductible limit equal to two or three times the individual deductible. So, the family mentioned above would only have to pay $1000 (2x) or $1,500 (3x) before the insurance company began to pay benefits. Expenses incurred beyond the family deductible limit would be eligible for reimbursement at the co-insurance percentage.

Some family deductibles specify that two or three family members have to meet the individual deductible completely. Others only require that the family, in aggregate, accumulate the family deductible limit before benefits are paid. Obviously, the requirement that individuals meet their deductible entirely is not quite as good as the cumulative family deductible provision. The family deductible is important because it can limit the total amount of deductible that can be charged to your family.

Deductible Carryover

Many plans offer a provision called a deductible carryover. This provision allows you to carry over to the next year any unmet portion of the deductible that you, or your family, run up in October, November and December. For example, assume you had no medical claims in the first part of the year. In November, you run up $350 worth of claims. If your deductible were $500, you would start the next year with $350 of your $500 deductible already met.

High Deductible Plans and Saving Money

If selecting an indemnity or PPO plan; our analysts recommend selecting plans with high deductibles. Consider plans with deductibles as high as $1,000 or $2,000 (when making this assessment, also take into account the maximum out of pocket limit). When considering which deductible plan represents the best value, calculate how much you will save by purchasing the higher deductible. Often the amount saved will be enough to pay the difference between the deductibles. For example, it would not be unusual for an individual's $1,000 deductible plan to cost $50 per month less than a $500 deductible plan. In this example, the deductible difference is $500 and the cost difference is $600. This means that even in the unlikely event that you met your deductible, you would still save $100 by selecting a higher deductible!

Out of Pocket Maximum

Assume you were unfortunate enough to run up a $1,000,000 claim. If your health insurance plan pays 80% of claims, your remaining 20% could be $200,000. Most people can't afford this big of loss. Consequently, good health insurance policies might pay 80% of the first $10,000 of billed charges and then pay 100% beyond that. In this example the most you would be liable for is 20% of $10,000 ($2,000) plus your deductible. In this example, if your deductible were $1,000 your "Out of Pocket Maximum" would be $3,000 ($1,000 deductible plus 20% of $10,000).

There are slight terminology differences in referring to the Out of Pocket Maximum. Some companies use the term "Stop Loss" and other companies use the term "Co-insurance Maximum". Nevertheless, it is imperative to have a maximum loss provision in any medical insurance you purchase. Keep in mind that on many Preferred Provider Organization plans, you could have an unlimited out of pocket expense if you do not go to preferred providers.

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