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Health insurance is one of the components of a sound financial plan. It provides financial security for your family by providing financial resources for health expenses in times of life’s uncertainties. Today, there are two primary forms of health insurance plans, indemnity and managed health care.

With an indemnity plan you can use any medical provider. The provider then sends the bill to the insurance company, which pays part of the costs. Usually you have a deductible, which is the amount of the covered expenses you must pay each year. Once you meet the deductible, most indemnity plans pay a percentage of what they consider the usual and customary charge for covered services. The insurer generally pays 80 percent of the usual and customary costs and you pay the other 20 percent, which is known as coinsurance.

Indemnity plans can be purely indemnity or they can be coupled with Preferred Provider Organizations (PPO). PPOs simply trade a network for volume. That is, you agree to limit yourself to a set universe of providers in exchange for lower premiums (usually 15-20% lower). If you go outside the set network for elective care, you are penalized. However, unlike an HMO (where there would be no coverage), PPO penalties are quite limited.

Managed Care

Managed care plans generally provide comprehensive health services to their members and offer financial incentives for patients to use the providers who belong to the plan. HMOs are the oldest form of managed care plan. In an HMO, instead of paying for each service that you receive separately, your coverage is paid in advance. For a set monthly fee, HMOs offer members a range of health benefits, including preventive care. HMOs will give you a list from which to choose a primary care physician.

Typically, the plan may charge a copayment for certain services. For example, $10 for an office visit, or $5 for every prescription. So, if you join this HMO, you may find that you have few out-of-pocket expenses for medical care—as long as you use doctors or hospitals that participate in or are part of the HMO. Your share may be only the small copayments; generally, you will not have deductibles or coinsurance.

What is not Covered?

While HMO benefits are generally more comprehensive than those of traditional fee-for-service plans, no health plan will cover every medical expense.

Very few plans cover eyeglasses and hearing aids because these are considered budgetable expenses. Very few cover elective cosmetic surgery, except to correct damage caused by a covered accidental injury. Some fee-for-service plans do not cover checkups. Procedures that are considered experimental may not be covered either. And some child birth plans cover complications arising from pregnancy, but do not cover normal pregnancy or childbirth.

Health insurance policies frequently exclude coverage for preexisting conditions, but federal law now limits exclusions based on such conditions.