Healthcare is one of the largest expenses in the United States, representing 17 percent of the nation’s GDP. Yet, despite this cost, many people have only a basic knowledge of how health insurance works, and little understanding of their own personal healthcare plan. It’s important to understand your health plan because your choice may have many different financial and health care consequences for you and your dependents.
This first in a series of articles to help Penn State faculty and staff understand their medical benefit plans, provides an overview of health insurance and how it works.
Health insurance has traditionally been a way for a group of people to pool their money so that individuals who accrue medical expenses — in particular, expenses related to catastrophic medical claims — can pay for them using funds from the pool of money. With this system, some people may need to tap into the fund frequently, while others may not ever use it.
Health insurance began in the United States as a way for people to purchase coverage for hospital care in the event they would need to be hospitalized at a later date. After that, medical insurance expanded to cover the costs of other medical services, such as doctor appointments and laboratory testing, and eventually it became a benefit that was offered to employees by their employer.
Employer-sponsored plans, as opposed to individual plans, make sense because there are more people to contribute to the pool of money than with individual plans. In addition, when the workforce is diverse, the risk pool can also be diverse, meaning that it may contain a mix of healthy and ill individuals, which keeps costs in check.
Smaller employers typically buy into fully-insured plans, where premiums are paid to an insurance company. Larger organizations, like Penn State, are frequently self-insured, meaning that the employer provides health benefits with its own funds, and with those funds, pays for the health claims submitted by the plan members. Under a self-funding arrangement, when medical claims in the insured population rise, the employer must pay more for the insurance. Self-funding allows for the employer to have more control over the plan design, however, and can lead to the creation of plans that are geared toward what the employee population wants and needs.
Penn State’s two health plans, the PPO Blue and the PPO Savings plans, are preferred-provider organizations (PPO), which means that the insurance company contracts with medical providers, such as physicians, hospitals, laboratories and allied health specialists, who agree to a negotiated fee that is generally lower than their standard fees. This negotiated fee appears as the “allowable charge” on a plan member’s Explanation of Benefits form, which is sent to the member following a visit to a provider.
Under a PPO plan, the providers who agree to the negotiated fee structure are considered to be “in-network” providers. Any health plan member who obtains services from a network provider will have less out-of-pocket expense than if that member visited an out-of-network provider.
The two PPO plans available to Penn State employees offer the same level of medical coverage and the same provider network. The difference in the two plans lies with the out-of-pocket expenses related to each.
The specific qualities of Penn State’s two plans will be discussed in the next article.