(MONEY Magazine) – This fall, the annual ritual of picking a health plan will be more challenging than ever. Set aside, for a moment, people's heightened sense of financial vulnerability since September's attacks on the World Trade Center and the Pentagon. Even before Sept. 11, we were all looking at higher health insurance costs.

If nothing else motivates you to look at your health plan carefully this season (the average consumer spends a mere 16 minutes making a selection), maybe the increasingly hefty price tag will. This year, average monthly premiums for employer-sponsored health insurance rose 11%, the sharpest increase since 1992, according to the nonprofit Kaiser Family Foundation. Premiums could rise another 14% in 2002, according to a recent Lehman Bros. survey of large corporations. As companies look to cut expenses, you can expect them to pass those rising costs on to employees. Now, more than ever, it's important to be a savvy consumer.

To help you do that, we've prepared this step-by-step guide using the health plans offered by AOL Time Warner (MONEY's parent company) as examples. Depending on how many plans your company offers, the whole process should take only a few hours. So open your enrollment packet, and let's go.

STEP 1: Decide what type of plan you want

First, here's a quick rundown of the important differences between plans. With HMOs, only visits to the plan's network of doctors qualify for coverage. Open-access HMOs, also called POS plans, give you the option of bypassing the network for an extra fee plus a deductible. The most liberal plans, called PPOs, are like old-fashioned indemnity insurance with a managed-care twist. You can see any doctor anytime, but "preferred providers"--that is, network members--are cheaper, and if you go outside the network, you'll have to pay a deductible.

We've had it drummed into us that HMOs are best for families with young children, since they offer free or low-cost well-baby care and vaccinations. But HMOs also offer more care, for less money, to people with chronic conditions that require frequent maintenance visits, says Pat Schoeni, spokeswoman for the National Coalition on Health Care in Washington, D.C.

Some HMOs offer special programs tailored to chronic disease sufferers: Group Health Inc. of New York has its Diabetes Management Solutions program; Highmark Blue Cross Blue Shield, a Pennsylvania plan, offers the Dr. Dean Ornish Program for Reversing Heart Disease. "HMOs used to be a one-size-fits-all product, but now they're recognizing that people have different needs," says Steve Richter, senior consultant for benefits consultancy Watson Wyatt Worldwide. To look up special programs, go to each plan's website.

Yet HMOs still fall short in mental-health care, a facet of overall well-being that is often overlooked. "HMOs spend a much smaller percentage of their money on mental-health care than PPOs do," notes Mary Graham, senior policy adviser for the National Mental Health Association. (Discrete data on POS plans are not available.) Anyone insuring a family whose members could be at risk for depression, eating disorders or substance abuse--adolescent children, for example--should make sure they have adequate mental-health coverage.

The other serious issue with HMOs is that doctors have started leaving them. If you want to maintain a relationship with a particular doctor, it's safer to go with a PPO or POS. "Many people are pretty dedicated to their provider," says Marcia McCarty, a health-care consultant at William M. Mercer in Minneapolis. "HMOs are constantly in negotiations with providers, and sometimes those go sour."

AOL Time Warner allows me to choose among 10 plans: seven HMOs and three POS plans, but no PPOs. My primary consideration is to make sure that I can see out-of-network specialists, because I have chronic allergies. Since I'm single, have no children and can handle the financial risk of a deductible, a POS appeals to me. I eliminate the HMOs right off, keeping just three possible choices: Aetna U.S. Healthcare, Oxford Health Plans and United Healthcare.

STEP 2: Check the limits on coverage

The next step is to make sure you're buying enough insurance to take care of you when you need it most. So check each plan's annual and lifetime caps. Many HMOs have no ceiling on their coverage, but some PPOs do, and they can be as low as $500,000 per person. "No one should get a policy that pays less than

$1 million for the lifetime," says Schoeni. "That may sound like a lot of money, but if you had a heart condition, you could hit that limit in a couple of years." Also check for restrictive caps on mental-health care. Federal law requires that dollar limits be the same for mental-health as for medical care but doesn't regulate limits on hospital stays or outpatient visits for mental-health diagnoses. Several states do have laws requiring such parity. The NMHA Resource Center hotline (800-969-6642) can give you specifics for your state. My company's POS plans contract out their mental-health coverage to United Behavioral Health. Each one covers up to 100 outpatient visits a year if I go out of the network, which seems reasonable to me.

STEP 3: Estimate your real costs

It's hard to say, even when looking at two plans side by side, which would be more expensive to use. You can't total up the premiums alone. A recent Kaiser Family Foundation study found that, on average, employees now pay about the same for all types of plans: A family policy costs employees $158 a month for an HMO, $157 for a PPO and $142 for a POS. The significant difference shows up in employers' contributions, which range from $387 for HMOs to $443 for PPOs. And there lies trouble. As companies pass on more costs, that difference in premiums will become more meaningful.

After the premiums, look at the co-payments and deductible (if any) and estimate what's actually going to come out of your pocket. The best place to start: last year's appointment calendar and checkbook. How often did you go to your doctor? To specialists? Did you visit practitioners who weren't covered by your plan, such as nutrition counselors and acupuncturists? Add up the visits--and what you shelled out. (To organize yourself, use the worksheet on page 153.)

Deductibles. If you're considering a plan with low premiums but a high deductible, try to guesstimate how much you would have paid in cash last year. If you've never spent much time at the doctor's office, chances are good that such a plan would save you money. "What most young, healthy people really need is coverage for catastrophic illness or accidents," says the National Coalition's Schoeni. "Their odds of getting sick are not so great. And if they do go to the hospital, they can pick up the first $500." In my case, all plans have the same premium and deductible.

Co-payments and discounts. Six of my seven HMO options charge a $10 co-payment and one charges $15, as do all three POS plans. That $5 difference can add up: If I had three kids who went to the doctor monthly--say, for allergy shots--the higher co-pay would cost me $180 extra for the year. But since it's just me, and I've already ruled out the HMOs, once again I can't eliminate anything.

Zipping over to the POS websites, though, I notice that some give big discounts on complementary and alternative medicine, which I like. Aetna and Oxford offer reduced rates for selected acupuncturists; I can't find acupuncture on United's site. I don't eliminate United, but I take this into consideration.

Infertility: a special case. If you are encountering difficulties starting a family, infertility coverage should be a make-or-break issue, because treatment costs can quickly run to the tens of thousands of dollars. Although no federal law mandates coverage, 13 states require insurers to offer coverage of infertility diagnosis and assisted-reproductive technologies. Your employer, however, is not always required to buy the coverage. Infertility is not a concern for me, but I do notice stark differences between plans: Among my POS providers, Oxford covers only one cycle of treatment and caps payment at $10,000; the others cover three attempts at artificial insemination plus three cycles of in vitro fertilization.

Three of the HMOs in my plan book cover infertility diagnosis but not treatment. One pays for three attempts at artificial insemination. But I'm surprised to find a great deal from Aetna U.S. Healthcare's HMO--100% coverage for three attempts each at artificial insemination and in vitro. Plans will vary widely, depending on your geographical area and the deals negotiated by your employer.

Drug coverage. Prescription-drug prices rose 15.5% last year, making that the fastest-rising element of health-care costs. Insurers are passing those hikes along to you by boosting co-payments for brand-name drugs and tightening up formularies (lists of drugs that your plan will cover fully). For example, Empire Blue Cross Blue Shield of Downstate New York, an HMO, now has three co-payments for prescriptions: $5 for generics, $15 for preferred brand-name medications and $25 for other brands. With that policy, if I had to take a brand-name drug daily--say, Zocor--that wasn't on my plan's formulary, I'd pay an extra $240 a year.

It's important to talk to your doctor before switching to a less expensive version of your prescription. "There are drugs that have what is called a narrow therapeutic index, which means the amount that causes a good effect is not much different from that causing a toxic effect," says Dr. Paul Gitman, an internist at Long Island Jewish Medical Center in New Hyde Park, N.Y. If your body absorbs the new formulation differently, you could risk developing side effects.

Many employers offer drug coverage as a separate plan. That's the case for me--all three POS plans contract with PCS Health Systems. But if you do have a choice, check the restrictions within each plan--and be warned that formularies do change. "Prescriptions are the biggest area of consumer dissatisfaction," says Watson Wyatt consultant Richter.

STEP 4: Look at plan ratings

The National Committee for Quality Assurance, a nonprofit agency, issues report cards on insurers based on access to care, quality of service, preventive programs and more. Logging on to www.ncqa.org to check out my three finalists, I see that Aetna U.S. Healthcare is rated "excellent." Oxford Health Plan gets a respectable "commendable." I knock out United Healthcare, though it too was rated "commendable," because the report card said it lagged in two important categories: monitoring doctors' qualifications and preventive care. That leaves Aetna and Oxford.

STEP 5: Check hospital access

It's important to have access to regional research hospitals as well as the local medical center. If your enrollment booklets don't have detailed info, call the toll-free member-services numbers. The specifics negotiated by your employer will vary, but many POS plans cover a significant percentage of costs at an out-of-network hospital and may also limit your total out-of-pocket expense. HMOs are likely to be more restrictive.

In cases of grave illness, the ideal plan would send you to what HMOs call a "center of excellence," a hospital renowned for treating a particular condition. Pat Schoeni suggests calling each plan and asking how sick you'd have to be, and how you'd apply, to go to a research center such as Johns Hopkins or the Mayo Clinic. The POS plans I'm weighing would let me go without a referral, but I would have to pay about $5,600 before I qualified for 100% coverage--a risk I'm willing to take.

STEP 6: Talk to your own doctor

Ask if your doc has had problems with referrals to specialists or ordering tests. Can you get your bloodwork done in the office? Is he or she thinking of dropping the plan? If you'll need a new primary-care doc, make sure the physicians in the directory will accept new patients; directories are frequently out of date.

I hear from my primary-care doctor and learn that he accepts both plans I'm considering. But then my allergist tells me that he has dropped Oxford. He does take Aetna. Folks, we have a winner.