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.
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