(MONEY Magazine) – For Pamela Badgerow Adams, 53, and her husband Normer, 54, the past two years have been a medical nightmare. A rare intestinal ailment sent their elder son to the hospital, their younger son was hospitalized with a suspected case of meningitis, and Pamela underwent gynecological surgery. As if that weren't bad enough, the Fayetteville, Ga. couple, who pay $800 a month for comprehensive health insurance, were informed by the hospitals that they owed nearly $15,000 for unreimbursed expenses. Infuriated, Pamela and Normer, both lobbyists used to hard negotiations, were determined to fight back. Pamela took the lead, pressuring the insurance company to back down from its claim that her elder son's problems stemmed from a pre-existing condition, and therefore would not be covered. She combed through her other son's hospital bills to uncover and rectify more than $10,000 in false charges, ranging from minor coding mistakes to another erroneous rejection of coverage. And she identified more than $1,000 worth of overcharges and other errors on her own hospital bills. She says, "An oversight? One time, maybe; two times, possibly. But so many? Shame on them."

Now Pamela routinely inspects every medical bill, however small, for errors. "I shouldn't have to be a watchdog of the hospitals and doctors, but there's no alternative," Pamela says. "Money is tight, and health-care expenses are a biggie."

These days, health-care expenses are a biggie for almost everyone. In fact, 22% of Americans consider health care the single most critical issue facing the country today, ranked evenly with terrorism and national security and ahead of the economy, the war, education, the budget deficit and taxes, according to a recent survey by the Employee Benefit Research Institute (EBRI), a Washington, D.C. research group. People have good reason to worry: Since 2000, health-care costs have nearly doubled, rising at five times the rate of salary increases. The result is out-of-pocket expenses of several thousand dollars a year for the average American family. And that's among households that have health insurance—costs for the nearly 45 million people without coverage can be considerably higher.

The rapidly spiraling cost of care has forced many families to make hard choices. In the EBRI study, for instance, 25% of insured adults said they had reduced contributions to their retirement plan to help cope with higher medical bills. Nearly half reported that they were contributing less to other types of savings accounts as well. Many people are also changing the way they use health-care services. According to a Kaiser Family Foundation study, 15% of people with health insurance have postponed medical treatment because of the cost. Almost as many have left prescriptions unfilled or skipped treatment altogether.

Fortunately, you don't have to forgo the medical treatment your family needs to keep health-care costs in check. The following strategies can help you trim hundreds, perhaps even thousands, of dollars off your medical bills—without compromising the quality of your care.

The single biggest medical expense for most Americans is the cost of health insurance. The employee share of annual premiums for family coverage now averages $2,661, 59% higher than it was four years ago. Co-payments and deductibles have shot up as well. At the same time, companies are shifting more of the cost burden to employees and are bargain shopping for new policies to keep their own expenses in check: Fifty-two percent of employers say they will increase employee contributions next year, and more than half report that they are considering changes in their plan choices, according to a Kaiser study. All these shifting acronyms (HMO? PPO? HSA?) make choosing a health plan time-consuming and confusing, as well as costly. "It's an alphabet soup out there," says Mohit Ghose of America's Health Insurance Plans, which represents health insurance companies.

Here's what you shouldn't do to save money: reflexively pick the plan with the lowest premium or, worse, just throw your hands up in the air and choose whatever plan type you've had in the past. Lately the differences in premium prices among health plans have narrowed; the big cost differential now lies in the deductibles and co-payments. To find the best deal, then, you have to consider what your total annual costs are likely to be under each plan, depending on the kind of medical care you think you'll need throughout the year.

For instance, healthy families who use a lot of routine care, such as checkups and vaccinations, will probably do best with a health maintenance organization (HMO). As long as you use a doctor who is in the prescribed network, you probably won't pay a deductible, and the co-payments will be lower than with any other type of plan. On the other hand, if you have a medical condition that requires you to see a specialist or you have longstanding relationships with some doctors who aren't in your insurance network, you'll probably do better in a preferred provider organization (PPO). PPOs allow you to see specialists as well as out-of-network doctors, without a referral. If you go out of network, however, you'll have to pay a deductible, and you'll have higher co-payments. Point-of-service (POS) plans combine features of HMOS and PPOs. They offer more out-of-network coverage than HMOs, but with that flexibility come higher premiums and co-payments. (See "How Your Choices Stack Up," below, for a comparison of the various options.)

In the next year or two, you may have another choice to consider: a high-deductible insurance plan ($1,000 or more) combined with a health savings account (HSA) that allows you to save pretax money, which you can later tap to pay out-of-pocket medical costs. Only a handful of large employers are currently offering HSAs, but nearly half expect to start offering them next year. In exchange for the higher deductibles, premiums on these plans are considerably lower than on other health insurance policies, making them potentially the best choice of all for relatively healthy families that don't need a lot of routine care and preventive services.

The Podnos family of Merritt Island, Fla. saved thousands of dollars last year by switching from a traditional indemnity plan ($14,000 a year for family coverage) to a high-deductible policy ($3,600 a year in premiums, with a $5,000 deductible). Mary, 49, a physician, and Steven, 48, a part-time physician and a financial planner, also put aside $5,000 in an HSA to pay out-of-pocket medical costs for the family, which includes daughters Rachel, 18, and Lauren, 16, and son Jacob, 14. Even though Jacob broke his arm skiing last winter and racked up nearly $3,000 in medical bills, the couple still have almost $2,000 left in their HSA. Their net savings: $7,000.

You can cut the cost of medications—up 28% since 2000—by taking advantage of financial incentives offered by a growing number of employers to encourage the use of less expensive prescription drugs. Nearly nine in 10 workers now participate in a plan with a tiered cost-sharing formula for medicine. Usually they face one co-payment for generic drugs, a higher one for preferred drugs (brand-name medicine without a generic substitute) and an even higher one for nonpreferred drugs (brand-name drugs for which there are generic alternatives). Increasingly, companies are adding a fourth layer as well, with even steeper co-payments, for certain drug categories such as lifestyle drugs (like Viagra and Rogaine).

To keep drug costs down, consciously seek out the lowest-tier drug whenever possible. Always check with your doctor or pharmacist to find out if a generic equivalent is available before filling a prescription. Generics cost 30% to 70% less than brand-name drugs out of pocket, with an average co-payment of just $10, vs. $33 for brand-name nonpreferred drugs. If no generic equivalent is available, ask your insurer or company HR department whether there is a substitute drug that costs less under your health plan. "In every major category, there are at least two drugs that do the same thing," says Donald Kemper, CEO of medical information provider Healthwise.

If you take a prescription drug regularly, also find out if your insurer offers a mail-order discount option. Now available through 84% of PPO plans and about three-quarters of HMOS and POS plans, mail-order services allow you to receive several months' worth of drugs at once, with co-pays that are usually about 30% less than you'd shell out at the retail counter (plus, you don't have to keep running back to the pharmacy).

To further reduce your costs, ask your doctor if you can safely split in half a higher-dosage version of any pills you take on a regular basis, which would mean 50% fewer refills. Your physician may also be able to help you out by providing samples so you won't need to fill prescriptions as often. For instance, Nicolle Lewis, 32, a senior administrative assistant in Canton, Ga., estimates that samples save her thousands of dollars on medications each year. On a recent visit to the doctor, she left with five months' worth of allergy drugs that would have cost her at least $300 if she'd filled the prescriptions. Says she: "I never leave the office empty-handed."

Lewis also looks for online rebate offers at drug manufacturers' websites. Recently she found a $15 rebate offer for the allergy drug Allegra, nearly equivalent to the co-payment on her prescription plan. Some retail chain pharmacies, such as CVS, also have loyalty cards that will give you discounts on prescription drugs.

Flexible spending accounts, which allow you to deduct pretax money from your paycheck to cover out-of-pocket medical expenses, have long been one of employees' best weapons against rising health-care costs. Now a good deal has gotten a whole lot better. The list of expenses you can cover using your fsa expanded dramatically last year to include most over-the-counter drugs, while new services have been launched that make it easier to spend down the accounts. Yet despite these benefits, less than 20% of eligible employees currently contribute to their flexible spending plans at work.

If you're not among them, consider what you're missing. While limits vary by company, you can often contribute as much as $5,000 a year. You'll save about 30% on your federal income taxes, or $300 for every $1,000 you put in (your exact savings depends on your tax bracket). "That's twice what we got in the tax cut two years ago that everyone was so happy with," notes Jon Kessler, chairman of WageWorks, a benefits provider in San Mateo, Calif. Your contributions are also free from Social Security and Medicare taxes, resulting in even bigger savings.

In addition to covering insurance deductibles and co-pays, the account can be used to pay for such usually unreimbursed expenses as acupuncture, contact lenses, flu shots and LASIK surgery (a list of eligible items is available at irs.gov), as well as nonprescription medicines such as aspirin, antihistamines and cold remedies. The only catch: If you don't use up the money within the calendar year, you lose it. For most people, though, that's not a problem. Studies have shown that less than 5% of FSA users end up with more than $30 left in their accounts by the end of the year.

To help consumers figure out which of their purchases are eligible—and, of course, to garner a share of their FSA business—drugstore chains like CVS and Walgreen's now provide receipts or customized lists of purchases that show which items qualify. Drugstore.com stocks a whole section of its website with FSA-eligible products. A growing number of employers also now make it easier for employees to spend down their accounts by automatically debiting co-pays and deductibles to providers who participate in their health-care plans, thereby eliminating the paperwork hassle of submitting claims.

You can only elect to contribute to an FSA for a particular calendar year during open-enrollment benefits season, or if you've had a life-changing event, such as marriage or the birth of a child. In determining how much money to put in, estimate the amount you paid out of pocket last year and consider whether you anticipate any major expenses during the coming year, such as the need for orthodontics or oral surgery. If you're concerned that you'll end up forfeiting some money, opt to start off with just a few hundred bucks—it's better than nothing, and you can always contribute more next year.

That's what Benjamin Green, 45, an administrator for a cable-TV network from Glen Ridge, N.J., did when he funded his FSA for the first time in 2004, putting in just $500, the exact amount of his insurance deductible. He was surprised to find that he used up the funds within the first three months of the year. For 2005, he's opted to double his contribution, so the account will cover his co-pays and regular chiropractic visits as well as any unexpected medical costs. "It's really helped out with my expenses," he says.

Auditors have found that about 80% of medical bills contain at least one error, ranging from a complex insurance coding problem to a simple typing mistake. The overcharges can cost an unsuspecting consumer thousands of dollars. Nora Johnson, a trained bill auditor with Medical Billing Advocates in Salem, Va., recently saw a hospital bill that charged a patient $15,533, for 49 vials of Pepcid. The correct bill: $317, for one vial. "Typos are one of the more common errors, especially on hospital bills," says Johnson.

To avoid paying more than you should for care, keep a list of all lab tests, medications, procedures and specialists you see during any hospitalization. Then, before you pay your bill, ask in writing for a copy of your itemized statement from the accounting department. The hospital is required by federal law to provide it to you within 30 days of your request. Check the statement against your log to spot such common errors as incorrect dates of service and duplicate or incorrect orders for medication. If you see an error, call the hospital billing department as well as your insurance company to have it corrected.

If you have a particularly complex situation, you may want to hire a medical billing advocate to help you. (You can find one in your area at billadvocates.com or claims.org.) The initial consultation is usually free. Prices thereafter run about $30 an hour and up, depending on the problem, or are a percentage of the amount recovered.

Typically the most expensive mistake of all is being erroneously rejected for an insurance claim. If you've been turned down for coverage, don't just take no for an answer. Relatively few patients appeal such decisions, but those who do often win. A Kaiser Family Foundation report found, for example, that 45% of patients who appeal denials ultimately get the decision reversed.

Consider the experience of Susan Douglas, 59, a nonprofit executive in Greenville, S.C. who was able to persuade her insurance company to pay the $800 bill for her son David, 20, who had been treated in the emergency room for a severe migraine. Her insurer initially refused to cover the charge on the grounds that his condition didn't meet its definition of an emergency. But when David had tried to reach his physician earlier that day, he had gotten an answering machine directing him to the emergency room for treatment. So Susan felt she had grounds for an appeal. "I wrote directly to the medical director of the insurance company, requesting a review of all relevant medical records, since I knew that he would be the one to ultimately make the decision," she says. The insurance company saw it her way and covered the bill in full.

As consumers struggle to find new ways to rein in costs, the number who try to negotiate lower prices with their health-care providers will increase substantially over the next two years, according to a 2004 Harris Interactive poll. Already, 17% of the public report that they have bargained with their pharmacists over the past year, and smaller but still substantial numbers have played "Let's Make a Deal" with their doctors, dentists and hospitals. The technique is surprisingly successful: Patients who negotiate will nab a lower fee in about half of all instances.

Of course, you're not going to stop to haggle if, say, you've just rushed your 10-year-old into the E.R. with a broken leg or you're experiencing chest pains. But for routine, scheduled care, particularly expensive services like orthodontia or LASIK surgery that are not fully covered by insurance and are likely to make a serious hole in your wallet, negotiating is perfectly acceptable.

You'll probably get the most favorable response from young doctors who are just starting a practice and from providers with whom you have longstanding relationships, says Barbara Vester, a spokeswoman for the American Private Physicians Association. Before you open the discussion, call your insurer to find out what it considers a reasonable and customary charge for the procedure. Then try to get your doctor to limit the bill to that amount—providers' sticker prices often run 25% to 50% higher than covered levels. If possible, offer to pay your portion of the bill in cash. Says Vester: "Many doctors practice loyalty to their patients and really want to work with you to give you good medical care."

But you have to ask to get the deal—no provider is going to hand you a discount unsolicited. As with all aspects of health care these days, you have to be your own best advocate.

AT A GLANCE

To choose the right kind of health insurance for your family, you'll want to evaluate the kind of medical care you're likely to need, as well as the cost of coverage. Here are some facts to consider about each type of plan

Note: Average payments for family coverage, based on survey data from 3,017 firms with three or more employees. Sources: Kaiser Family Foundation, MONEY research.