Medical expense plans pay for the cost of care — doctor visits, hospital stays, surgery, prescriptions, and more. The market has shifted from old-fashioned "pay any provider" plans toward managed care networks that trade some freedom of choice for lower cost. This guide explains the two big philosophies (indemnity vs. managed care), the alphabet soup of plan types, how cost-sharing works, and the consumer-driven HDHP/HSA combination.

Indemnity vs. managed care

The two foundational approaches differ in how much they steer your choices.

• Indemnity (fee-for-service) plans: the insured can use any provider, and the insurer reimburses a portion of "usual, customary, and reasonable" charges. Maximum freedom, but typically higher cost and more paperwork. These plans pay after care, on a per-service basis.
• Managed care plans: the insurer contracts with a network of providers who agree to discounted rates and cost controls. In exchange for using the network, the insured pays less. Managed care emphasizes prevention, cost control, and coordination of care.

The managed care plan types

These four are tested constantly. Focus on two questions for each: Do you need a primary care physician (PCP) and referrals? and Is out-of-network care covered?

• HMO (Health Maintenance Organization): the most restrictive and usually cheapest. You choose a PCP who acts as a gatekeeper; you need a referral to see specialists. Out-of-network care is generally NOT covered (except emergencies). HMOs stress preventive care and often use capitation.
• PPO (Preferred Provider Organization): the most flexible managed care option. No PCP or referral required, and you can go out-of-network — but you pay more for doing so. Higher premiums than an HMO in exchange for freedom.
• POS (Point of Service): a hybrid. You pick a PCP like an HMO and need referrals for in-network specialist care, but you can still go out-of-network at a higher cost like a PPO. "Point of service" means you decide HMO-style or PPO-style each time you need care.
• EPO (Exclusive Provider Organization): like a PPO in that you usually don't need referrals, but like an HMO in that out-of-network care is not covered (except emergencies). You must stay "exclusive" to the network.

How HMOs pay providers: capitation

Under capitation, the HMO pays a provider a fixed amount per member per month regardless of how many services that member uses. This flips the incentive: providers earn the same whether or not a patient comes in, which encourages prevention and discourages unnecessary treatment. Contrast this with fee-for-service, where providers earn more by doing more.

Gatekeepers, referrals, and networks

• A gatekeeper is the primary care physician who coordinates a member's care and must approve (refer) visits to specialists. Gatekeeping controls costs by preventing unnecessary specialist use.
• A network is the set of doctors, hospitals, and facilities under contract with the plan. In-network providers cost less; out-of-network providers cost more or aren't covered at all.
• A referral is the PCP's authorization to see a specialist — required in HMOs and POS plans, not in PPOs or EPOs.

Cost-sharing terms

These define how the bill is split between the insured and the insurer.

• Premium: the recurring amount paid to keep coverage active (separate from cost-sharing at the point of care).
• Deductible: the amount the insured pays out of pocket each year before the plan starts paying.
• Copayment (copay): a flat dollar amount paid at the time of service (e.g., $25 per office visit).
• Coinsurance: the percentage split after the deductible is met (e.g., 80/20, where the insurer pays 80% and the insured pays 20%).
• Out-of-pocket maximum: the most the insured will pay in a year. Once reached, the plan pays 100% of covered expenses. Deductibles and coinsurance count toward it; premiums do not.

A quick walk-through: you pay the deductible first, then share costs through coinsurance (and pay flat copays for certain services), until you hit the out-of-pocket maximum, after which the plan covers the rest.

Basic vs. major medical

Older plan designs split coverage into layers:

• Basic medical plans cover specific expenses (hospital, surgical, physician) with no deductible but low, capped limits. They are "first-dollar" but run out quickly.
• Major medical plans cover a broad range of expenses with a deductible and coinsurance and high maximums, protecting against catastrophic bills.
• A comprehensive major medical plan combines basic and major medical into one policy, often with a corridor deductible bridging the two layers.

HDHP + HSA: consumer-driven coverage

A High-Deductible Health Plan (HDHP) pairs a high deductible and lower premium with a tax-advantaged savings account.

• A Health Savings Account (HSA) lets the insured set aside pre-tax dollars to pay qualified medical expenses. To open one, you must be enrolled in a qualifying HDHP and have no other disqualifying coverage.
• HSA funds roll over year to year (no "use it or lose it"), are owned by the individual, and are portable when changing jobs.
• Triple tax advantage: contributions are tax-deductible, growth is tax-free, and qualified withdrawals are tax-free.
• Compare to a Flexible Spending Account (FSA), which is employer-based and largely use-it-or-lose-it, and a Health Reimbursement Arrangement (HRA), which is employer-funded and employer-owned.

Key terms at a glance

Common exam traps

• HMO vs. PPO. HMO = PCP, referrals, in-network only, cheapest. PPO = no referrals, out-of-network allowed, more expensive.
• POS vs. EPO. POS uses a PCP/referrals and allows out-of-network; EPO skips referrals but blocks out-of-network.
• Copay vs. coinsurance. Copay is a flat dollar amount; coinsurance is a percentage.
• What counts toward the out-of-pocket max. Deductibles and coinsurance count; premiums do not.
• HSA eligibility. You must have a qualifying HDHP to contribute to an HSA, and the funds roll over and are portable (unlike a use-it-or-lose-it FSA).
• Capitation direction. Providers are paid per member, not per service — the opposite of fee-for-service.

Quick recap

• Indemnity plans let you use any provider; managed care trades choice for lower cost via networks.
• HMO (PCP + referrals, in-network only), PPO (flexible, out-of-network OK), POS (HMO/PPO hybrid), EPO (no referrals but in-network only).
• Capitation pays providers a fixed amount per member per month, encouraging prevention.
• Cost-sharing flows from deductible → copay/coinsurance → out-of-pocket maximum (then the plan pays 100%).
• Basic medical is first-dollar but limited; major medical has deductibles but high catastrophic limits.
• An HDHP pairs a high deductible with a portable, triple-tax-advantaged HSA.