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.
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
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.
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
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.
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
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
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