How do the two major types of private health insurance work?

As complicated as it gets when it comes to the private health insurance, there are two major types of private health insurance: fee-for-service and managed care.

1. Fee-for-service. The provider (such as a doctor or hospital) gets paid for each covered service. With this type, you go to a doctor of your choice, then the doctor or hospital submits a claim to your insurance company for payment. The insurance company will only pay the provider for "covered" services. Most fee-for-service plans have a deductible amount that you must pay each year before the insurance company will begin to pay for medical services. Many plans also require you to pay a portion of the medical expense—called "coinsurance."

2. Managed care. Managed care plans have contracts with certain doctors, hospitals and other providers to provide medical services to plan members. The three main types of managed care plans are:

• Health Maintenance Organizations (HMOs). They provide health services for a fixed monthly payment, called a "premium." This monthly premium is the same whether you use the plan's services or not. The plan may charge a copayment for some services—for example $10 for an office visit or $5 for a prescription. HMO plans usually require you to select a primary care physician (PCP), who manages your care. As long as you use the doctors and hospitals that participate in the HMO, your out-of-pocket costs should be very small. The HMO Act of 1973 created this alternative to traditional health plans as a more affordable option.
• Preferred Provider Organization (PPO). This option offers more choices than an HMO, but premiums often are higher. Most PPO plans do not require you have a PCP to manage your care. You can keep your out-of-pocket costs low by using "in-network" providers.
• Point of Service (POS). This plan is similar to a PPO, but your care is managed by a PCP. For example, with a POS plan, you would need a referral from your PCP to see a specialist.