Types of Health Insurance

Health insurance plans can be broadly divided into two large categories: (1) indemnity plans (also referred to as "reimbursement" plans), and (2) managed care plans.

Indemnity plans
An indemnity plan reimburses you for your medical expenses regardless of who provides the service, although in some cases your reimbursement amount may be limited. The coverage offered by most traditional insurers is in the form of an indemnity plan.

How is the benefit amount calculated with an indemnity plan?
Different plans use different methods for determining how much you will receive for your medical expenses. Following are descriptions of the most common methods.

Reimbursement--actual charges
Under this type of plan, the insurer will reimburse you for the actual cost of specified procedures or services, regardless of how much that cost might be.

Reimbursement--percentage of actual charges
Under this type of plan, the insurer pays a percentage of the actual charges for covered procedures and services, regardless of how much those procedures and services cost. A common reimbursement percentage is 80%. This has the same effect as a 20% co-payment.

Indemnity
Under this type of plan, the insurer pays a specified amount per day for a specified maximum number of days. Although your reimbursement amount does not depend on the actual cost of your care, your reimbursement will never exceed your expenses.

Managed care plans
There are three basic types of managed care plans: (1) Health Maintenance Organizations (HMOs), (2) Preferred Provider Organizations (PPOs), and (3) Point of Service (POS) plans. Although there are important differences between the different types of managed care plans, there are similarities as well. All managed care plans involve an arrangement between the insurer and a selected network of health care providers (doctors, hospitals, etc.). All offer policyholders significant financial incentives to use the providers in that network. There are usually specific standards for selecting providers and formal steps to ensure that quality care is delivered.

Health maintenance organizations (HMOs)
HMOs provide medical treatment on a prepaid basis, which means that HMO members pay a fixed monthly fee, regardless of how much medical care is needed in a given month. In return for this fee, most HMOs provide a wide variety of medical services, from office visits to hospitalization and surgery. With a few exceptions, HMO members must receive their medical treatment from physicians and facilities within the HMO network.

Preferred provider organizations (PPOs)
A PPO is made up of doctors and/or hospitals that provide medical service only to a specific group or association. Rather than prepaying for medical care, PPO members pay for services as they are rendered. The PPO sponsor (usually an employer or insurance company) generally reimburses the member for the cost of the treatment, less any co-payment. In some cases, the physician may submit the bill directly to the insurance company for payment. The insurer then pays the covered amount directly to the healthcare provider, and the member pays his or her co-payment amount. The price for each type of service is negotiated in advance by the healthcare providers and the PPO sponsor(s).

Point of service (POS) plans
A point of service plan is a type of managed healthcare system where you pay no deductible and usually only a minimal co-payment when you use a healthcare provider within your network. You also must choose a primary care physician who is responsible for all referrals within the POS network. If you choose to go outside of the network for healthcare, you will likely be subject to a deductible (around $300 for an individual or $600 for a family), and your co-payment will be a substantial percentage of the physician's charges (usually 30-40%).

So which is better?
In general, managed care plans are better suited for the average individual because they end up being more cost effective in the long run. In contrast, indemnity/reimbursement plans usually hit you with more out-of-pocket charges (in the form of deductibles and co-payments) and often place caps on the amount of benefits you can receive over your lifetime. Indemnity plans do give you more freedom, however, than managed care plans in terms of using the healthcare provider of your choosing. So, as with anything else, the choice between managed care and indemnity plans ultimately depends on your personal circumstances and preferences. If your goal is to minimize costs, you're probably better off with a managed care plan. On the other hand, if your goal is maximum flexibility and cost is not a major factor, you should consider an indemnity/reimbursement plan.