The Loop

The Alphabet Soup of Medical Plans

Filed under: Benefits

Every industry tends to have its own language. In the healthcare industry, there's a veritable "alphabet soup" of acronyms that stand for health plans with long names that are meant to describe what they offer. Unfortunately, most people shorten these names into acronyms, so the description gets lost in the shorthand. If you don't work in the healthcare or benefits management industry, you can get completely lost trying to figure out which option best suits the needs of your company and your workforce. When you're a worker trying to evaluate insurance plans for your family, it can be all but a lost cause.

Here's a primer to help you understand the fundamental difference between healthcare insurance options.

One of the more common plans is that of a Health Maintenance Organization, better known as an HMO. For a regular monthly premium, this type of plan provides comprehensive medical care for members who live within a particular geographic service area. To have their medical care covered, members must receive all nonemergency services within the HMO's network, which generally means a limited choice. New employees coming from a wider network may be chafed that they must change physicians in order to receive coverage.

The health maintenance organization acts as both insurer and healthcare provider, and therefore assumes the financial risks of insurance and service. HMOs generally provide comprehensive care from a single multi-specialty medical group in return for a fixed, prepaid fee, although some offer "open access" – which means the HMO will cover non-emergency care outside its network for an extra cost.

The following are different HMO provider models:

  • Group Model HMO – This type of HMO contracts with one practice group or healthcare system to provide care to the HMO's membership. These providers may be exclusive to the HMO or provide services to non-HMO patients as well. Typically the HMO pays the medical group a negotiated rate per covered member, which is then distributed among providers on a salaried basis.
  • Staff Model HMO - This HMO provides coverage only when patients visit an HMO-owned facility where the physicians are employed by the HMO. Kaiser Permanente is certainly the most well-known example of a staff HMO.
  • Network Model HMO - This model contracts with multiple, non-exclusive physician groups to provide services to HMO members, including large single and multispecialty groups.
  • Individual Practice Association (IPA) HMO- The HMO contracts with a non-exclusive healthcare provider organization comprised of independent physician practices who see HMO patients at their own offices.

The PPO, or preferred provider organization, typically offers a larger network of providers than an HMO. This type of plan contracts with several different hospitals, physician and specialist practices to create a provider network. Patients pay less if they see providers within the network, but they have the option to see a provider outside the network in exchange for paying a higher share of the cost. In addition to the monthly premium, PPO costs are shared with the worker via a deductible, coinsurance percentage, and/or point-of-service co-pays.

An EPO stands for an exclusive provider organization. As far as coverage goes, it works similar to an HMO in that members are covered only if they seek medical care from a limited, or "exclusive", network of providers. If a member visits a physician or hospital that is not a part of this network, he must pay for the full cost of treatment out of his own pocket – except in an emergency situation. However, an EPO does not own the medical facilities or employ physicians like a staff model HMO; it operates strictly with a limited network of contracted providers and facilities.

POS stands for a point-of-service plan, which is sort of an HMO/PPO hybrid. In other words, the member's healthcare coverage and potential cost share will vary depending on the "point of service" where he receives medical care. For example, if the member stays within the plan's limited network, he may receive a higher level of coverage. If he goes to a 2nd tier level of the network, which is broader but the providers have negotiated a higher level of reimbursement, the member may pay higher out-of-pocket fees. Moreover, if the member sees a physician completely out of any of the plan's networks, he will pay a much higher share of the cost – but he at least has the option to do so. Sometimes this type of service is offered within an HMO, in which case it is referred to as an "open-ended" HMO. Coverage for healthcare services received by a provider outside of the plan's network are usually reimbursed based on a fee schedule or what is considered customary and reasonable charges.

A high deductible health plan (HDHP) works just as its name implies– assuming someone actually cites the full name. Otherwise you'll need to know that coverage kicks in only after the member pays out of pocket up to the deductible limit, and it's usually much higher than for traditional insurance plans. These days, a high deductible can range anywhere from $1,200 to $10,000 or more. The higher the deductible selected, the lower the monthly premium.

Many HDHPs can be combined with a health savings account (HSA) or a health reimbursement arrangement (HRA) that enables the member or the member's employer (or both)
to set aside income tax free contributions to pay for qualified out-of-pocket medical expenses.

Because monthly premiums tend to be lower for HDHPs than other types of healthcare plans, a member can funnel the additional savings into a health savings account to help pay for his care up until he meets the deductible. This type of account is unique in that it is portable. If a worker leaves his employer, the account and all of its funds are his to keep, subject to the ongoing rules of the account. HSAs offer the following tax breaks:

  • Contributions are not subject to income taxes
  • Assets have the potential to grow tax free
  • Funds used to pay for qualified medical expenses may be withdrawn tax free

Starting in 2016, HSA holders may contribute up to $3,350 for individual plan coverage or $6,750 for a family coverage plan. Participants age 55 and up can contribute an additional "catch-up" contribution of $1,000.

An HRA, also known as a health reimbursement arrangement, is similar to an HSA but it is retained by the employer, not the worker. With an HRA, an employer funds an individual reimbursement account for each participating employee and defines what those funds can be used for – generally copays, coinsurance, deductibles, and services not fully covered by the insurance plan. It's up to the plan sponsor to determine how much to contribute each year (there is no annual limit) and whether or not the funds will roll over from year to year. However, it is not portable when a worker leaves the company.

A Flexible Spending Arrangement (FSA) is a tax-advantaged account that enables a worker to defer some of her pretax salary to pay for qualified medical expenses. The healthcare version of a flexible spending account is referred to as an HCFSA, differentiating it from a similar plan designed to pay for dependent care expenses. The tricky part is that the worker must try to estimate how much to contribute regularly from his paycheck. That's because if, by the end of the year, he hasn't fully used up the account balance to reimburse medical expenses incurred that year, he will lose the money. However, in recent years this "use-it-or-lose-it" rule has been altered a bit. Presently, plan sponsors have the option to permit a "grace period" of up to two and a half months after the year ends for workers to use remaining funds for qualified FSA expenses. Alternately, the sponsor can allow workers to roll over up to $500 of unused funds from the previous year. Note that an organization can allow the grace period or the rollover in its plan, but not both.

Unlike an HRA, the FSA is funded only by the worker and salary deferrals are not taxed. As long as the money is used to reimburse qualifying expenses, contributions are never taxed. While the annual contribution limit is determined by the plan sponsor, in 2016 the maximum allowed will remain the same as 2015: $2,500. Note that an FSA is not portable; it is retained by the employer.

Cafeteria Plan
Speaking of alphabet soup, one of the traditional platforms to serve up these healthcare options is a cafeteria plan. Technically known as an IRS Section 125 Plan, this type of flexible benefits plan initially launched in the 1970s. It enables a combination of employer and worker contributions to fund a selection of benefits from which the worker can customize his own healthcare plan. This type of funding arrangement is still available today, and can be used to fund the current trend of defined contribution plans. In fact, this type of platform can offer any combination of taxable and nontaxable benefits such as health and life insurance, retirement plans, and child care. Although the employer may mandate a common core of benefits, the worker can determine how his or her remaining benefit dollars are allocated.

Private Exchange
Today's new private exchanges offer a similar type of menu of benefits as the cafeteria plan. To take advantage of a defined contribution model, employers contribute a specific amount to worker savings accounts and provide a private version of a healthcare exchange from which workers buy their own insurance benefits. The employer contracts with a private exchange to offer a wide range of health insurance and other benefit options.

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