Basics of Medical Insurance.

Today, buying health insurance is anything but simple. With a growing array of new policy choices, the arrangements you make for funding health care expenses will directly affect the way your care is delivered. Along with new scientific discoveries that have improved the detection and treatment of illnesses, the cost of care has risen astronomically in recent years.

Protecting against the financial consequences of an enormous medical bill is imperative for everyone. Without adequate medical insurance, your assets could be seriously depleted if you become ill or injured. Even a relatively short stay in the hospital can cost $20,000 or more.

Fortunately, most people are covered by some form of medical insurance issued through their employer or their spouse's employer. However, a "typical" group medical insurance policy is impossible to describe because of the many coverage variations found in today's marketplace.

The Move to Managed Care

Because of increasing medical care costs under the traditional indemnity system, in recent years many employers have sought more cost-effective ways to finance care for their employees. This trend resulted in a movement toward "managed care" plans, which promote more efficient use of medical services in order to contain treatment costs.

The two major types of managed care systems are health maintenance organizations (HMOs) and preferred provider organizations (PPOs). These organizations contract with physicians and medical facilities to control care quality and costs; create financial incentives for subscribers to use the contracted physicians and facilities; and require providers to bear some financial risk for care.

HMOs

HMO patients pay fixed costs for medical care from health care providers belonging to the HMO. Instead of paying every time a service is delivered, HMO subscribers agree to pay periodic fees. In return, HMOs take care of all their subscribers' health care needs.

HMOs offer several cost advantages when compared with traditional indemnity plans. They rely on economies of scale to see that resources are used efficiently and that care is coordinated at one location. They also involve less administration, thereby reducing expenses. Since they emphasize preventive care,

HMOs tend to offer broader coverage such as routine physicals and medical screenings. HMOs also generally offer lower hospitalization rates. The downside to HMOs is that they require members to get treatment within the designated provider network. If you decide to obtain medical treatment outside the network, the HMO will not cover your care, except in certain emergencies. Even then, a member must notify the plan about the emergency as soon as possible. If you are on vacation in another country, you might not be covered -- even in an emergency.

Finally, some HMOs have been criticized for limiting their patients' medical options in order to control costs, or for impersonal treatment and "assembly-line" care.

Many HMO members tolerate these drawbacks because their out-of-pocket expenses are lower. Unlike traditional indemnity plans, HMOs do not require you to pay a deductible or coinsurance. Instead, you pay a fee (your "copayment"), typically no more than $15 for an office visit, and there is usually a minimal charge for preventive care such as routine physical exams and blood screenings.

PPOs

PPOs are contractual arrangements that provide services at a discount to a volume group of patients. Unlike HMOs, which are prepaid systems, PPO providers operate on a fee-for-service basis, similar to traditional indemnity arrangements. The rates, however, have been prenegotiated with those who contract for the providers' services, such as employers, unions, and insurance companies. In return for their discounted rates, the "preferred" group of doctors is guaranteed a specific volume of patients.

Unlike HMOs, PPOs allow you to use primary care providers outside the PPO network. Patients are given financial incentives to use doctors in the preferred group, however. These include small or no deductibles and lower coinsurance payments.

A variation of a PPO is called a point-of-service (POS) plan. With a POS, the medical care is channeled through the patient's primary care physician. Since only this doctor may refer the patient to other medical professionals, medical care decisions and their cost are under stricter control.

In choosing among HMOs, PPOs, and POSs, consider these issues:

Does the plan exclude preexisting conditions and require waiting periods for specific benefits? What are the out-of-pocket costs you must bear for each plan alternative? What is the plan's history of rate increases? (Some organizations may quote low prices at first.) Is the organization financially stable?

Group and Individual Insurance

Most private health insurance is sold as group medical insurance, which is provided by either employers or certain other organizations. Because many people and their families are covered by one overall policy, insurers discount the premiums. If your employer doesn't offer group coverage, you may be eligible to join a group organized by a fraternal, professional, or trade association.

If you become unemployed, you may be able to retain your group health insurance by converting it to an individual medical expense policy. However, your coverage may not be as extensive as under the group policy. If you leave a job or switch to reduced hours, you can continue your employer's coverage through the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA). Under COBRA, this coverage is for you, your spouse, and qualified dependents for up to eighteen months. For your spouse and dependents only, this period can be extended for up to thirty-six months if you die or become divorced. Once you become eligible for another group plan, the continued coverage will end. Once you leave a job, your employer must provide you with information describing your options under COBRA.

If you decide on an individual policy, coverage can be as much as 15 percent to 40 percent higher than comparable group coverage. Deductibles, copayments, and out-of-pocket expenses also will be higher. On the other hand, you are allowed to pick the deductibles, coinsurance arrangements, and health care providers.

Before you enroll in any health plan, determine which services are covered and how much you will pay in deductibles and coinsurance. If you are unable to get an individual policy because of a preexisting medical condition, many states offer health insurance risk pools, which provide coverage for high-risk groups.