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Understanding Health Plans

HMO Plans

Health Maintenance Organizations, or HMOs, are health plans that offer a wide range of services exclusively through a network of contracted providers.  Though premiums and costs for the member are lower, flexibility in provider selection is limited.

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PPO Plans

Preferred Provider Organizations, or PPO plans, come with great flexibility in terms of choosing a provider, as well as a way for employees to manage healthcare expenses by offering both in- and out-of-network benefits.

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HSA Plans

Health Savings Accounts (HSAs) and HSA plans (also called high-deductible health plans) come with great flexibility in terms of choosing a provider and the opportunity to save money in a tax-free Health Savings Account.

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HMO Plans

Health Maintenance Organizations, or HMOs, are health plans that offer a wide range of services exclusively through a network of contracted providers. Though HMO premiums and out-of-pocket costs for the member are typically lower than a PPO, flexibility in provider selection is limited to those who participate in the HMO network.

HMO benefits for employers include:

  • Offers employees a comprehensive health plan with lower out-of-pocket costs when seeking services from in-network providers
  • Typically lower healthcare premiums for HMO plans compared to PPO plans

HMO benefits for employees include:

  • HMO plans do not have a deductible, meaning the HMO plan’s benefits are immediately available to the employee. The member will only be responsible for the copay amount set by the carrier for any service received from an in-network provider.
  • Copay amounts for all services are available in the plan summary provided by the HMO plan carrier, which means that costs for any particular procedure are transparent and more predictable.
  • Annual healthcare costs are controlled by an Out-of-Pocket Maximum that resets every year. After the employee reaches the Out-of-Pocket Maximum, the health plan picks up all costs for eligible services.

Considerations for Employees Choosing an HMO

  • Limited flexibility – HMOs do not offer any out-of-network benefits except in cases of emergency. Therefore, if you have a history with any particular provider and would like to continue seeing this doctor, make sure you confirm his or her participation in the HMO network first before selecting the HMO option.
  • Single point-of-contact for medical care – You must select a Primary Care Physician, who will act as your single point-of-contact when seeking care. For example, if you develop a skin rash, you will not be able to go directly to a specialist.  Your Primary Care Physician will examine your symptoms first and refer you to an in-network dermatologist if needed.

PPO Plans

Preferred Provider Organizations, or PPO plans, come with great flexibility in terms of choosing a provider, as well as a way for employees to manage healthcare expenses by offering both in- and out-of-network benefits.

PPO benefits for employers include:

  • Offers employees a comprehensive health plan that allows for flexibility in terms of provider selection when seeking care

PPO benefits for employees include:

  • Employees who choose to see providers in the PPO network will benefit from the greatest cost savings. All participating providers in the PPO network must agree to a discounted rate for PPO plan members seeking services.
  • Employees will still receive benefits, though at a lower level, for services received from a provider who does not participate in the PPO network.
  • Annual healthcare costs are controlled by an Out-of-Pocket Maximum that resets every year. After the employee reaches the Out-of-Pocket Maximum, the health plan picks up all costs for eligible services.

Considerations for Employees Choosing a PPO

  • Less predictable medical expenses – The cost for services in a PPO plan are not as clearly defined as they would be in an HMO plan, which are often set copay amounts. Most PPO services are subject to a coinsurance, which is the employee’s responsibility.  The coinsurance is a percentage of the discounted rate the provider can charge under the PPO agreement.  This discounted rate varies depending on the type of service and provider.
  • Flexibility comes at a cost – Employees with PPO plans can see any provider, in- and out-of-network, at any time without needing to obtain referrals from a primary physician. However, benefit levels are lower for out-of-network services, and out-of-network providers are not bound by the discounted rate set by the PPO plan.

HSA Plans

Health Savings Accounts (HSAs) and HSA plans (also called high-deductible health plans) come with great flexibility in terms of choosing a provider and the opportunity to save money in a tax-free Health Savings Account.

HSA benefits for employers include:

  • Offers employees a comprehensive health plan that allows for tax-free funds to be used on eligible medical expenses
  • Reduced health insurance premiums for high deductible plans compared to traditional health plans (PPO and HMO)
  • Reduced payroll taxes by decreasing matching social security and Medicare taxes

PPO benefits for employees include:

  • Contributions to an HSA are tax-deductible and earnings grow tax-free.
  • Pay for medical, dental, vision, alternative medicine, long-term care premiums, COBRA, and other covered services tax-free.
  • HSA funds can be used for a variety of medical services that may not be covered by traditional health plans such as alternative therapies and specialist treatments.
  • Accounts are portable and stay with the account holder for life.
  • HSAs do not have a “use it or lose it” rule. If not used in any given year, money in an HSA can be used in future years.
  • Deposits can be invested for long-term growth.

Considerations for Employees Choosing an HSA

  1. Plan ahead – Make sure you have enough savings on hand to cover the higher annual deductible, which applies to all health care services immediately upon the plan’s effective date.  The HSA plan will not pay out any benefits until the individual or family’s medical expenses have reached the annual deductible amount.
  2. Invest the money you save on premiums into the HSA – HSA plans generally have lower premiums than traditional plans (such as PPO and HMO plans), which could save hundreds of dollars each year. To maximize savings, employees can consider using the money that would have been spent on premiums to fund the HSA.
  3. Know the tax benefits and implications – Funds are deposited on a tax-free basis into the HSA, and distributed on a tax-free basis when used to pay for eligible healthcare expenses. Funds in an HSA never expire, rolling over from year to year until it is used by the account holder. Any withdrawals taken for non-qualified medical expenses are subject to penalties and taxes.  Note: California does not allow for a State Tax Deduction on contributions to an HSA.
  4. Invest your HSA funds – HSA funds can be invested for increased earning potential. Some HSA banks offer investment options that include mutual funds, stocks, bonds, and more.  At any time, invested funds can be withdrawn to pay for medical expenses if needed.

HSA FAQ

What are the 2018 contribution limits for an HSA plan? Individual – $3,460, Family – $6,900, and Catch Up Contributions – $1,000

What is a Catch Up contribution? Account holders age 55 or older may add an additional $1,000 to their annual amounts each year as their catch up contribution.

Are there income restrictions for opening or contributing to an HSA? No.  There are no income restrictions for opening or contributing to an HSA.  

Are there any fees related to HSAs that I should be aware of? Possibly.  Some banks charge a fee depending on the balance of the account, while others charge fees for investments or for performing certain activities with the account such as ATM transactions or opting for paper statements.  Check account documentation for specific fees related to your bank and account.

I currently have an HSA.  Can I also have a Flexible Spending Account (FSA)? When you enroll in a High Deductible Health Plan with an HSA, you can still enroll in a Limited Purpose Health Care FSA.  The Limited Purpose Health Care FSA allows you to set aside pre-tax dollars from your paycheck to pay for qualified dental and vision expenses only. Also available to you is a Dependent Care FSA, which can be used for eligible dependent care expenses.

Can I use my HSA to pay for my domestic partner’s medical expenses? No.  Because the IRS does not consider domestic partners to be eligible dependents under IRS Code Section 152, medical expenses incurred by a domestic partner cannot be paid from an HSA on a tax-free basis.

Can I be covered under an HSA plan if I’m simultaneously covered by another health plan (i.e., dual coverage)? It depends.  You are eligible for an HSA plan if your second health plan is also compatible with HSAs.  You will not be eligible for an HSA plan if you are covered by another health plan that is not compatible with HSAs.

If I enroll in an HSA plan in the middle of the calendar year, how much can I contribute to my HSA? HSA contributions are regulated by “monthly limitations,” which is the annual contribution limit divided by 12 months.  You will only be able to contribute up to the monthly limitation based on the number of months you are eligible for the HSA plan.


Sample List of HSA Eligible & Ineligible Expenses

Ineligible Expenses
Allergy and sinus medication
Cosmetic surgery
Cold, cough, and flu medications
CPR class
Diaper service
Electrolysis or hair removal
Funeral expenses
Hair transplant
Health club dues
Maternity clothes
Over-the-counter medication without a prescription
Pain relief medications
Sleep aids and sedatives
Teeth whitening
Veterinary fees
Eligible Expenses
Acupuncture
Chiropractors
Christian Science practitioners
Contact lenses
Crutches
Dental treatments
Doctor’s fees
Drug addiction treatment
Hearing aids
Hospital services
Insulin
Laboratory fees
Prescription medication
Nursing home
Surgical services
Psychiatric care
Therapy or counseling
Transplants
Wheelchair
X-rays