Ron Shepherd, Shepherd & Associates
Confused by PPO, HMO, FSA, HSA, etc, etc? Hopefully we can help sort it out for you. When medical insurance was first sold, the insured (purchaser) would go to their physician or hospital (provider), receive treatment, and submit the billing to the insurance company that issued the policy for either payment to the provider or
reimbursement to the insured. To reduce the cost of treatment and make their product more cost-effective insurers established Preferred Provider Organizations (PPO). To establish a PPO the insurer would approach health care providers offering to send business their way if they reduce their charges. Providers who agree to do so are known as the network. Insurers would induce their insureds to obtain services from the network by paying a greater percentage of the billing. The initial effect of PPOs was to reduce the cost of medical care. The insured had to be careful to make sure the providers they wanted to use were part of the network. If they were not, the insured would pay a greater portion of the provider’s billed fees.
The next step in cost reduction was to establish Health Maintenance Organizations (HMO). The economic effect was to turn the providers into insurance vehicles. There are many different ways in which HMO’s can be administered; a defining feature is the primary care physician (PCP). The PCP acts as a “gatekeeper” for the medical needs that the PCP can not provide. If the insured needs to see a specialist, he or she must first see their PCP to obtain a referral. The advantages to HMO plans are that they focus on keeping the member healthy as opposed to treating them when they get sick and ultimately spend less money on health care. In addition, members generally pay very little out of pocket when accessing care in a HMO. The primary disadvantage is that there is generally no benefit when seeing a healthcare professional that is not part of the HMO, so the member is restricted to seeing providers in the HMO network. As the cost of healthcare increases and many employers are forced to reduce benefits more employees are starting to use Flexible Spending Accounts (FSA) to save on their
out-of-pocket healthcare expenses. Section 125 of the IRS tax code allows employers to offer their employees FSA plans in which participants set aside money on a pre-tax basis to pay for certain qualified expenses. The main disadvantage to these plans is the
“use it or loose it rule”. Another health insurance strategy is a High Deductible Health Plan HDHP used in conjunction with a Health Savings Account (HSA).
The HDHP is a PPO plan that provides catastrophic coverage for the member in the event of an emergency, but no coverage for more minor, day to day, or preventative medical expenses. The member pays for these expenses out of the HSA, which is similar to a FSA with one key difference. The member can roll over any unused amount at the end of the year and earn interest on it. Adoption of FSA, HDHP and HSA should involve consultation with your tax advisor. Should you have any questions about health benefits or commercial property/casualty insurance please contact us (Shepherd & Associates) at 650-329-8111.
DISCLAIMER
The above information is provided
to give you an elementary under-
standing of insurance coverages so
that the reader can approach the
purchase of insurance with a basic
knowledge. The actual scope of
your insurance coverage can only
be determined by reading and
understanding the terms and
conditions stated in the policy.
Your broker should explain to you
the exact coverage/s you are
purchasing.