By Maggie Johnson
Medical plan terminology such as HMO, EPO, PPO, etc. can be confusing if you’re unfamiliar with health insurance abbreviations. Understanding the meaning of these and other health insurance terminology can be helpful, especially when you are deciding which health benefits are best for your company. Below is a simple explanation for several health insurance terms, beginning with medical plan acronyms:
HDHP/CDHP (High Deductible Health Plan/Consumer Directed Health Plan): This plan type typically has significantly lower premiums than other plan types, but also requires much higher deductibles with a minimum deductible of $1,350 for single coverage and $2,700 for family coverage for both 2018 and 2019. A health savings account (HSA) can be used in conjunction with an HDHP/CDHP to pay for any qualified out-of-pocket medical expenses, including deductibles. (Also see HSA below.)
HMO (Health Maintenance Organization): An HMO is a network of healthcare providers. If you are enrolled in an HMO, you are restricted to using the in-network medical services to receive coverage. HMOs normally require you to obtain a referral from your primary care doctor (sometimes called a “Gatekeeper”) to see a medical specialist.
EPO (Exclusive Provider Organization): An EPO is similar to an HMO in that it is comprised of a network of healthcare providers, and usually does not cover out-of-network healthcare. However, unlike an HMO, a referral to see a specialist may not be required.
PPO (Preferred Provider Organization): This plan type also has a network of healthcare providers, but you may also use an out-of-network provider, but with lower coverage for the out-of-network healthcare cost.
POS (Point of Service): A POS plan has components of both HMOs and PPOs. Enrollees in a POS plan are generally required to choose a primary care physician from within the plan’s network. This primary care physician is the “Point of Service.” The primary care physician may make referrals to in and out-of-network providers, but there will be less coverage for out-of-network expenses.
Fully Insured Plan: With a fully-insured plan, the insurance carrier maintains most of the risk. The company pays an annual premium, paid monthly, which has normally been established based on the number of enrolled employees and the “experience” or the number and type of claims over the past year by the group. One of the advantages for the employer is the fixed premium for the plan year, simplifying budgeting for health plan costs.
Self-funded Plan: The employer who opts for a self-funded plan assumes most of the risk. This means that the company pays for all claims in addition to fixed costs for administration of the plan by the insurance carrier. The employer can choose to obtain additional stop loss insurance that would cover the cost of any claim after it reaches a certain cost point. There are several benefits to self-funded plans, especially if the company typically experiences a low number of claims. As such, a self-funded plan can save money for the company. In addition, self-funded plans can be customized, but self-funded plans are not right for every company. Discuss whether such a plan is right for your company with your broker or benefits consultant.
HSA (Health Savings Account): An HSA is a type of account in which you can save pre-tax monies for the purpose of paying qualified healthcare expenses. You may establish an HSA if you are enrolled in an HDHP/CDHP plan (see above). The unused monies in an HSA roll over from year to year. In other words, unlike an FSA (see below), they are not subject to loss. In addition, the funds belong to the person who owns the HSA account, not the company. Therefore, the funds remain the property of the employee when the employee leaves the company. Many companies contribute to employees’ HSA accounts, which may be an added incentive to enroll in an HDHP or CDHP plan.
The IRS sets the cost-of-living adjusted limits for HSAs each year. For 2019, the contribution limit is $3,500 for single coverage and $7,000 for employees with family coverage, increased by $50 and $100, respectively, over 2018 limits.
FSA (Flexible Spending Account): An FSA permits a set dollar amount for the year (in accordance with IRS limits) to be deducted pre-tax from the employee’s paycheck for healthcare expenses. An FSA may appear similar to an HSA, but the big difference is that FSA monies must be used during the plan year, or they are lost. However, there are three options that can extend using FSA funds for qualified healthcare expenses: A plan may have an optional grace period of 2½ months after the plan year-end to pay for the new expenses with the prior plan year’s FSA funds. Alternatively, an FSA plan may choose to adopt a carryover feature which permits FSA participants to roll over up to $500 of unused FSA funds to the following plan year. In addition, an FSA plan may have a three-month “run-out” period which gives plan participants up to 90 days after the end of the plan year to obtain reimbursement for the healthcare expenses incurred during the prior year. So, if the plan year ends December 31, the run-out would expire on March 31 of the following year.
FSAs are subject to the “Use It or Lose It” rule. For example, employees who leave the company before they have used all of their FSA funds are not permitted to take the remaining funds with them. Those unused funds are forfeited and remain in the FSA plan. Conversely, if any employees use all of their FSA funds early in the plan year, and then leave the company before an equal amount of payroll deductions have occurred, it creates a loss for the FSA plan. The IRS healthcare contribution limit for 2018 is $2,650. It is projected to increase to $2,700 for 2019.
HRA (Health Reimbursement Arrangement): An HRA is funded by the employer. HRA funds pay for qualified out-of-pocket medical expenses. Unused funds may roll over from year to year. When the employee leaves the company, any unused HRA funds remain in the HRA plan.
I have more than 25 years of experience in HR Leadership that spans the healthcare,education and financial services industries. I also hold a law degree (LLB) with honors from the University of London and have SPHR and SHRM-SPC designation from HRCI and the Society for Human Resource Management, respectively.
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