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Indemnity Insurance

The rising cost of health care over the past 25 yearslargely shouldered by business-has driven the problems in the health care system. Until the early 1980s, most people received health coverage through a traditional indemnity or fee-for-service plan. Under this type of plan, your insurance company pays all or part of the bill for any doctor, hospital or other health care provider that you may choose.

Indemnity plans existed before the rise of HMOs, PPOs and other types of managed care plans. However, indemnity plans-with their focus on flexibility-aren't very effective at controlling costs. In the early 1990s, indemnity plans lost their leading position in the US. health coverage market. Starting in 1993 or 1994 (depending on which survey you believe) more Americans got their health coverage through managed ca1;e plans.

The conventional wisdom-within the medical profession and among consumers-is that people with traditional indemnity insurance get better treatment. And, most importantly, the traditional plans give policyholders the assurance that any decisions a health care provider makes are squarely in the patient's best interest. But, we we will see in this chapter, these distinctions are not as clear-cut as some people like to think. .

• What "Indemnity" Means

When insurance people talk about indemnity insurance, the thing that's being indemnified is "you, the policyholder." An indemnity insurance contract states that the insurance company will pay your medical bills. In some cases, it will reimburse the insured person for bills paid out-of-pocket. In other cases, it will pay bills directly to the doctor or hospital providing services. In either case, it pays fees for medical services after they are provided. This structure puts most of the decisions about health care and treatment on the shoulders of the policyholders, who usually defer to the suggestions that their doctors make.

With the service provider (the doctor) strongly influencing the decisions about how much and what kind of service should be provided, at least one truth emerges about indemnity coverage: It's not very effective for containing costs. Because indemnity coverage was just about the only kind of health insurance around in the United States during the first three-quarters of the twentieth century, doctors and hospitals made a lot of money for a long time.

Conceptually, the coverage is pretty simple. In practice, it comes with some qualifiers. Insurance companies recognized pretty quickly that orthopedists in Miami and ob/gyns in Seattle were driving Mercedes, building second houses and sending their kids to Harvard -often at the same time. So, the companies started to put limits on how much an indemnification contract would indemnify.

The first limit is the deductible. The deductible works this way: The insurance company will pay the doctor and hospital bills after you pay a small amount first. This small fee is defined at the start of the policy period, and it's usually structured to spread over the whole period.

For example, the insurance company might indemnify you for all medical costs after the first $500 each year or the first $50 each month.

The point isn't so much to get you to pay part of the cost as it is to wake sure you only go to the doctor whenyoure really sick.

Said another way: It's not that the insurance company needs you to pay the first $ 50 in medical bills each month. The company just figures that if you have to pay $50, you're less likely to go to the hospital with a low-grade fever. In health coverage, as in other kinds of insurance, these up-front fees are very effective at reducing bills generated by policyholders.

.Another limit is co-insurance. This modification is an effort to get you to bear part of the cost. In a contract with a co-insurance clause, the insurance company agrees to pay a certain portion (80 percent is common) of the medical bills you incur. This shared burden applies from the first dollar of coverage to the policy's absolute limit. The rest-the other 20 percent-you have to pay out-of-pocket. This is a major compromise for the concept of full indemnification. Insurance companies usually make it financially appealing to take the lesser coverage.

It's easy to calculate how much the insurance company wants you to share the burden. Compare the annual premium for full indemnity coverage with the annual premium for indemnity coverage with an 80/20 co-insurance split. (Many companies will sell both kinds of insurance.) The full indemnity coverage should be about 25 percent more expensive. If it's that much more or less, the company doesn't mind the risk-and you should buy the full coverage. If it's more than 25 percent more-and most will be-you may be better off with the cheaper coverage.

Another limit is that some indemnity policies don't cover specifically-named medical services. These may not cover prescription drugs or routine doctor visits.

The final limit is the category of exclusions the indemnity contract includes. Many companies will agree to pay medical bills except for those related to a list of specific illnesses or conditions.

The best example of this: Many individual indemnity policies exclude coverage for pregnancy and childbirth. The companies look at this as an optional condition which has more complexities-and hidden costs-than most people realize.

Usual, Customary; and Reasonable Fees

Most of the limits and conditions we've considered so far merely trim at the edges of indemnity health coverage. There are bigger changes that have impacted-and usually limitedcoverage.

Beginning in the 1970s, some indemnity insurance companies borrowed a few cost-saving tricks from the federal government's Medicare program arid started using schedules of usual, customary and reasonable (UCR) fees that they would pay for specific kinds of medical treatments.

Approved providers (a group slightly less rigidly defined than network providers in a managed care plan) would agree to accept these fees as full payment for each service provided-within the policy's limits, of course.

This trend has caught on with indemnity companies to the point they are quite common. UCR fees don't get a lot of attention in the insurance industry-which is curious. They are a big reason that the distinctions between indemnity insurance and managed care are beginning to blur.

If your indel1l11ity insurance company uses an VCR fee schedule-and if you don't use a participating provider-you maybe responsible for the difference between the VCR fee and what the provider charges for a service. Even if you adhere to the VCR fee schedule, you'll also be subject to any deductibles and co-insurance requirements.

As you can see, taken together, these coverage limitations begin to erode the impression of blanket coverage that indemnity plans have for most people. They are the tools that even indemnity plans use for denying or only partially paying claims.

Traditional Insurance vs. Managed Care

If you want to share in the decision-making, greater flexibility and direct access to providers, you'll want to look into an indemnity plan. If you want lower premiums, managed care will usually work better.

Most people know this much about health insurance. But how do these two main versions of health coverage compare in a more detailed way? Here are some quick comparisons:

Choice

: You can select any doctor, hospital or other health care provider.

Managed Care: You can select any health care provider in the network. If you use a provider outside of the network, you pay some or all of the bill.

Seeing a specialist

Indemnity Insurance: You can use any specialist. However, some plans require preapproval for certain procedures performed by specialists.

Managed' Care: Your primary care doctor determines if and when you need to see a specialist. (Sometimes you can see a specialist who is part of the network without permission.) If you use a specialist without HMO approval (or outside the approved list), you will have to pay the entire bill.

Out-of-pocket costs

Indemnity Insurance: You may have to pay an annual deductible of $200 to $1,000. You also may be responsible for co-insurance payments of something like 20 percent of your medical bills, up to a certain limit (the stop-loss amount) each year. Sometimes, you pay for routine doctor visits and prescription drugs.

Managed Care: You may have to pay co-payments (usually $3 to $10) for network doctor visits and prescription drugs. When you use a provider outside of the network, you may have to pay a deductible after which the plan will pay part of the total charges.

The indemnity plan may not cover you for any routine care-annual checkups and other preventative treatments- . either.

Some of these preventative treatments include:

• blood tests
• prostate exams genetic trait tests hearing and sight loss electro-cardiogram (stress tests) mammograms CAT scans (if you have a history of problems).

Choosing a Doctor have to pay the larger portion while your insurance company pays a smaller share for your medications. However, you will have the option to choose either the brand name or the generic drug. Preventative Care As we've noted, one major difference between an indemnity plan and a managed care plan is that under the first, there are typically no wellness educational programs. Usually, when" you gave indemity coverage, you only when it is needed for a particular condition. And bills are paid only after the care is delivered.

Managed care plans stress prevention and offer programs to help people learn about their conditions. This applies to facilities as well as physicians. The indemnity plan lets you choose to go to any hospital you wish, but it doesnt let you choose any service from that hospital. If you submit bills from a hospital's wellness program, they will likely be denied.

During the 1970s and early 1980s, some indemnity insurance companies did pay for certain wellness programs affiliated with hospitals. They stopped doing this in the late 1980s and early 1990s. However, the pe9-dulU1ll,se~ms to be swingingas some Jndemnity plans are allowing preventativ~ care claims again.

Disputing Decisions

Unlike HMOs (which usually have to respond within six months), traditional indemnity plans are not required to respond to your complaints within a set time frame or have provisions for a formal hearing or appeals process. But if you are not satisfied with your insurer's willingness to pay a claim, you can ask for a reconsideration of the decision.

If you have problems getting reimbursed, an indemnity plan allows you to choose your method of recourse, i.e., the court system or mediation. In addition, you have the option to appeal any decision by your insurance company to payor deny a claim.

You can also me a complaint with your state's Department of Commerce (or equivalent agency), and you don't have to tell your insurance company first. You will have to fill out a complaint form and supply any information needed to support your position to the Department.

Department investigators will usually then contact your insurance company, and, if the problem cannot be resolved within about 10 days, they will investigate whether the insurance company followed the terms of your policy.

Summary

In today's business world, employers have come to rely on managed care at the expense of traditional indemnity insurance. In fact, many employers no longer offer traditional insurance indemnity at all.

But economic realities and employee preferences clearly show that, despite its dramatic growth, people want freedom to choose their doctors and hospitals, and the networks that include them.

While cost will be one of your biggest concerns in choosing a plan, quality should also be an important consideration.

One of the advantages of the indemnity plan is that there are typically no limits to which providers you can use or how often you see them.

The concept behind an indemnity plan is to reduce your share of the costs as much as possible-without compromising the quality of the care you receive. Some insurance companies do this more aggressively than others.

Generally, you have to shell out more for this type of plan-in deductibles, co-payments, premiums and out of pocket expenses-but you have an unlimited amount of choices. So, if you don't have financial limitations holding you back and you want to be able to go to the doctor you want, when you want and wherever you want, you may want to look into an indemnity plan.

To recount, what are the advantages of traditional indemnity insurance over an HMO?

• You can choose any doctor.
• You can go to virtually any hospital, anywhere in the country.
• You can continue seeing the same doctor you always have even if you change jobs or insurance companies.
• You have some assurance that your doctor's medical recommendations are being made in your best interest -and not the insurance company's.

Even if you choose an indemnity health coverage plan, you can't rest assured that everything will be covered. It's important to investigate and learn as much about the types of policies available, the companies offering insurance, the agent and the local company represented, what the policy will or will not pay for, and how you will be reimbursed for visits, prescriptions, etc.

Be sure to review your policy at least once a year. Today's health care system continues to change at a rapid pace, and you wouldn't want to be }making up the difference yourself in order to meet these changing demands.