Health insurance: What to know before you enroll

Health reform is changing the insurance landscape, but certain caveats still apply.

It is important to choose a plan that fits the healthcare needs of you and your family, as well as your lifestyle. And those needs can change from year to year.

Plan type

The most popular plans include a consumer-directed, high-deductible health plan (HDHP); network-based plans like a preferred provider organization (PPO); point-of-service plan (POS) or health maintenance organization (HMO); and traditional fee-for-service (FFS) plans that have no network requirements. Most large employers usually offer a choice of two or three plan types.

doctors at computer

If freedom to visit the doctor of your choice without a referral is important to you, a traditional FFS or PPO will be more to your liking. The PPO, however, also offers cost-sharing savings if you stay within the plan’s provider network.

POS plans and HMOs require that you name a primary care physician and get referrals for specialists. Like the PPO, a POS allows you to go outside the network at a higher copayment or percentage of coinsurance, whereas HMOs restrict coverage to the network.

You may still be able to go outside the network if your state is one of the 34 that has passed “any willing provider” legislation. These laws require managed care plans to accept any appropriately licensed provider. The key is that the provider must be willing to accept the plan’s contract terms. Not all providers will.

An HDHP trades high premiums for high deductibles and offers a tax advantage. The plan usually provides catastrophic coverage that kicks in after the deductible is paid, although under health reform, certain preventive services must be covered at no cost. This year the IRS set the minimum deductible for single plans at $1,250 with the maximum amount to be paid out-of-pocket at $6,250. For family coverage, the amounts are $2,500 and $12,500, respectively.

HDHP participants contribute pretax earnings into a health savings account to pay for out-of-pocket medical expenses. Accounts are portable, meaning they go with you when you change jobs.

Under health reform, account funds can no longer be used to pay for over-the-counter drugs without a doctor’s prescription. Withdrawals for nonmedical purposes are subject not only to income tax but a 20 percent penalty.

For 2013, participants can contribute up to $3,250 tax free for single coverage or up to $6,450 for family coverage. Participants who are age 55 or older can sock away an additional $1,000. Money not used for medical expenses during the year can be rolled over.

Many plans offer an online tool to help consumers determine which type of plan is best for them.

Lifestyle considerations

When choosing a plan, consider your lifestyle and preferences:

  • A healthy high-earning individual may want to consider a high-deductible plan with a health savings account (HSA). It costs less and affords tax-free savings. Under health reform, it must provide certain preventive services at no cost. One caveat for older individuals: If you have dependents age 26 or under on your health plan, you cannot use HSA funds to pay for their out-of-pocket medical expenses if they cannot be claimed on your income tax return.
  • A comprehensive policy may be more suitable for family coverage or for older people. Small children, maternity or recurring medical issues, such as a chronic illness, may require a greater need for coverage of doctor’s visits and pharmacy costs.
  • Traditional fee-for-service plans are the most expensive but offer complete freedom of choice. However, costs can be unpredictable. The insurer pays only a percentage (normally 80 percent) of what it considers a usual and customary charge. For anything more, you pay the balance. If you prefer predictable costs, stick with a plan that features a set copayment for office visits.
  • If you or a dependent are taking prescribed medications, check the plan’s formulary to ensure those medications are included.
  • Some network-based plans pay only for emergencies outside the plan’s service area. Check whether the plan will cover routine care if needed when you are away, particularly if you travel a lot or own a vacation home, for example.

A working spouse’s plan might include richer benefits, or your spouse’s employer might offer a greater number of plan types from which to choose. Compare plans to determine the best one.

Remember that if you are covered under both plans, the insurance companies will coordinate benefits. One will be primary; the other, secondary. The secondary insurer will cover any amounts not covered under the primary insurer, such as deductibles, copayments and coinsurance.

Tax-saving accounts

Medical savings accounts offered should be part of your tax-planning strategy. A flexible spending account (FSA) provides high earners an opportunity to keep some money out of Uncle Sam’s reach. Pretax dollars contributed to the account are used to pay for out-of-pocket medical expenses, like deductibles, copayments and coinsurance.

Unfortunately, the FSA has taken a hit under health reform. Funds can no longer be used to purchase over-the-counter drugs without a doctor’s prescription, and beginning this year, contributions are capped at $2,500.

The FSA is a use-it-or-lose-it account. Money left at the end of the plan year cannot be rolled over.

Another tax-advantaged plan is a health reimbursement arrangement, which is funded solely by your employer to cover medical expenses not paid by insurance. The employer determines the contribution amount, eligible expenses and whether money left in the account can be rolled over year to year. Contributions are tax-free to the employee.