How to Choose Between An HMO and a High-Deductible Health Plan

So many acronyms! It's easy to get lost in the land of healthcare plan options. For this post, we'll tackle a frequent question: what's the difference between a health maintenance organization (HMO) plan and a high-deductible health plan (HDHP)?

If you're moving from an HMO plan to a high-deductible plan (or the other way around), prepare for a noticeable change in your experience and coverage. For both plans, you should ask your insurer what is covered in your state. You should also identify your in-network providers.

Now, let's move on to a high-level description of each plan and the main ways they differ.

Health Maintenance Organization (HMO)

A health maintenance organization (HMO) typically provides integrated care and focuses on prevention and wellness. Coverage is generally limited to care from in-network doctors/hospitals/medical providers (who work for or contract with the HMO). An HMO generally won't cover out-of-network care except in the case of an emergency. And an HMO may require you to live or work in its service area to be eligible for coverage.

• You are required to select a primary care physician through which all of your health care services filter. This system requires a referral from your primary physician to see a specialist except in an emergency.
  • An exception to this rule is that women are not required to have referrals to visit an OB/GYN for routine services.
• You will need a referral from your primary care doctor to see an in-network specialist.
• The amounts of your premiums and deductible depend on your specific plan.
• Full charge costs, copays, and coinsurance count toward your out-of-pocket maximum. The maximum is set by your plan. After you reach your maximum amount, you do not need to pay for most covered services for the rest of the year.
• Depending on your plan, you may have to pay copays or coinsurance before meeting your deductible.
• Those on a family plan have a deductible and out-of-pocket maximum for the family, as well as for each family member.
• You can take the coverage with you if you switch jobs if the new employer offers the same insurer.
• You have to pay out-of-pocket for items your plan doesn't cover.
• You may, or may not, have to pay for wellness and preventive care. If you have to pay, it's usually at a reduced cost, and you may only have to make a copay.
• Your plan usually does not cover dental care except if the dental concern is affecting your overall health. For example, an abscess in the gum causing an infection that makes you dizzy.
• Health care plans may cover vision care, but this depends on the plan.
• You typically receive no coverage for out-of-network provider care unless you can show there was a medical necessity for such care.

High-Deductible Health Plan (HDHP)

As its name implies, this plan has a higher deductible than a traditional insurance plan, but the monthly premium is usually much lower. You pay more health care costs yourself—until you hit your deductible and insurance kicks in and shares the cost.

A high deductible plan (HDHP) is the only plan that can be combined with a health savings account (HSA), allowing you to pay for certain medical expenses with money free from federal taxes. (More about on this in the next section).

• You pick which in-network provider you want to see. This encourages you to compare prices for health, dental, and vision care and prescriptions.
• You still have premiums to pay every month, but they are low compared to the deductible. The annual deductible is high (often $5,000 or more), and you must pay this amount before your insurer covers any costs. (To help keep costs down, see The Importance of Staying In-Network)
• Spending for prescription drugs applies to the deductible. Copays and premiums don't.
• For family coverage, the family deductible must be met before there is reimbursement.
• There is a maximum limit on your out-of-pocket cost (deductibles, copayments, and other qualified medical expenses). For 2018, the out-of-pocket maximum is $6,650 for individuals and $13,300 for a family.
• The insurance plan may offer some services for "free" (included as part of your plan) or with a deductible that is lower than the annual deductible:
  • Wellness and preventive care, such as visits related to prenatal and child wellness care
  • Immunizations
  • Screening services like mental health and cancer screening
  • Annual physicals
  • Smoking cessation and weight loss
  • Dental and vision care, and
  • Expenses resulting from accidents
• You may receive more coverage for out-of-network provider care. This depends on the situation that calls for out-of-network care, your insurer’s policies, and your plan.

Health Savings Account (HSA)

Many employers offer high-deductible health plans (HDHPs) to control premium costs and then pair this coverage with health savings accounts (HSAs) to help employees reduce their health care expenses.

• A health savings account (HSA) is a personal bank account.
• Your employer may also choose to contribute funds into your HSA.
• It's yours to keep even if you change jobs or insurers.
• Funds are available to pay for qualified medical expenses, tax-free, so you pay less out-of-pocket. (It can even cover things that your health plan doesn't, like fertility treatment).
• You can also think of them as a "medical 401k." Since HSA funds rollover from year to year, HSAs are a great way to build your retirement savings.
• There's no time limit to reimburse yourself, so long as you had an HSA when you incurred the qualified medical expense.
• If you lose your employer medical coverage, you can even use HSA dollars to pay for premiums while you are between jobs (this is a special exception; usually premiums are not a qualified medical expense).

An HSA has “triple tax” power

THE PROS

You can put aside, invest, and withdraw money on a pre-tax basis for qualified health expenses. A HSA can also earn interest. In addition, your employer can match your contributions to it through a 401(k). You do not have to use the money in an HSA by the end of the year. You can roll over the money, saving the total amount until you retire.

After you retire, you can use the money in the HSA for health costs. Allowable expenditures include prescription medications, wheelchairs, therapy, in-home nursing care, nursing home fees, and modifications to your home like entrance and exit ramps and handrails. You can pass an HSA account on to a beneficiary.

THE CONS

The downside of an HSA is you must have money in the account to grow it. It is hard to benefit from an HSA if you have a low amount in the account, are constantly withdrawing money from it, or make poor investments. The investments you can make through an HSA are typically more limited than those you can make with a 401(k).

Setting up an HSA

Preparation for setting up an HSA involves reviewing your medical expenses for the past two years and your projected medical expenses for next year. A spreadsheet of the amounts you have spent will help you estimate how much to deposit from your paychecks into an HSA, the timing of your contributions, and the amount you expect to have in the account at the end of the year.

After you do these calculations and learn how to avoid common pitfalls of HSAs, you will be in good shape to talk with a financial advisor about investing the sum. You have many options, from mutual funds and stock to small businesses and real property.

Learn more about HSAs