Navigating Health Insurance Plan Types
Health insurance is consistently ranked as the most valued employee benefit and represents the largest benefits expenditure for most employers. Understanding the different plan types and their characteristics is essential for HR professionals who design benefits packages and advise employees during enrollment. For SHRM exam preparation, candidates should be familiar with how each plan type works, its cost implications, and its impact on employee access to care.
Managed Care Plan Types
Health Maintenance Organization (HMO)
HMO plans provide comprehensive health coverage through a network of contracted providers. Members must select a primary care physician (PCP) who coordinates all care and provides referrals to specialists. Services received outside the network are generally not covered except in emergencies.
- Lower premiums and out-of-pocket costs compared to PPO plans
- Emphasis on preventive care and wellness
- Limited provider choice and flexibility
- Requires PCP selection and specialist referrals
- No out-of-network coverage (except emergencies)
Preferred Provider Organization (PPO)
PPO plans offer greater flexibility by allowing members to see any provider without a referral. The plan provides higher reimbursement levels for in-network providers and lower (but still available) reimbursement for out-of-network services.
- Greater provider choice and flexibility
- No PCP or referral requirements
- Out-of-network coverage available at higher cost-sharing
- Higher premiums than HMO plans
- Most popular plan type among large employers
Exclusive Provider Organization (EPO)
EPO plans combine elements of HMOs and PPOs. Like PPOs, they do not require referrals to see specialists. Like HMOs, they do not cover out-of-network care except in emergencies. EPOs typically offer lower premiums than PPOs while providing more flexibility than HMOs.
Point of Service (POS)
POS plans blend HMO and PPO features. Members choose a PCP who manages referrals for in-network care (similar to an HMO), but they also have the option to seek out-of-network care at higher cost-sharing levels (similar to a PPO). POS plans are less common than other plan types.
Consumer-Directed Health Plans
High Deductible Health Plan (HDHP)
HDHPs feature higher deductibles and lower premiums than traditional plans. They are designed to encourage consumers to be more cost-conscious about their healthcare spending. The IRS sets minimum deductible and maximum out-of-pocket limits that must be met for a plan to qualify as an HDHP.
Health Savings Account (HSA)
HSAs are tax-advantaged savings accounts available only to individuals enrolled in a qualifying HDHP. Contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are tax-free. HSAs are portable and roll over from year to year, making them a powerful savings tool for both current and future healthcare expenses.
Health Reimbursement Arrangement (HRA)
HRAs are employer-funded accounts that reimburse employees for qualified medical expenses. Unlike HSAs, HRAs are owned and funded solely by the employer. Various types of HRAs exist, including the Qualified Small Employer HRA (QSEHRA) and the Individual Coverage HRA (ICHRA).
Flexible Spending Account (FSA)
FSAs allow employees to set aside pre-tax dollars for eligible medical or dependent care expenses. Healthcare FSAs are subject to annual contribution limits set by the IRS and have limited rollover provisions. Unlike HSAs, FSA funds generally must be used within the plan year (with possible grace periods or limited carryover).
Employer Considerations
When selecting health plan offerings, employers must weigh several factors: workforce demographics and preferences, geographic provider availability, cost management objectives, competitive positioning, and administrative complexity. Many employers offer multiple plan options to accommodate diverse employee needs, often pairing a traditional PPO with an HDHP/HSA option.
ACA Compliance
The Affordable Care Act requires applicable large employers (those with 50 or more full-time equivalent employees) to offer affordable, minimum value health coverage to full-time employees or face penalties. HR professionals must understand the employer shared responsibility provisions, affordability safe harbors, and reporting requirements under Sections 6055 and 6056.
SHRM Exam Tips
Be prepared to compare plan types on dimensions such as cost, flexibility, provider access, and administrative requirements. Understand HSA eligibility rules, ACA employer mandate provisions, and the differences between HSAs, HRAs, and FSAs. Scenario-based questions may ask you to recommend the most appropriate plan design for a given workforce profile.