Insurance 101

As healthcare has evolved tremendously since the family doctor of the Norman Rockwell era made house calls, the business of insuring American’s health/medical has also continued to evolve. At that time, nearly all Americans had indemnity insurance coverage, paid cash or bartered. A person with indemnity insurance could go to any doctor, hospital or other provider, and the insurance company (there were thousands) and the patient would each pay part of the bill.

But today, with the high cost of prescriptions, new diagnostics and the rising cost of technology, insurance has changed to respond to patients and business’ expectations of health insurance. More than half of all Americans who have insurance today are enrolled in some kind of managed care plan, an organized way of both providing services and paying for them. Originally, managed care was designed to contain costs and consolidate several insurance company’s resources. As you are probably aware, increases in healthcare costs have far outpaced increases in inflation throughout the 80's, 90's and into this millennium. Over time, however, insurance companies have reacted to compete on both cost and quality-of-care and the distinctions between managed care and indemnity plans have begun to blur.

Today there is range of health insurance choices with really four basic plans. They are as follows: HMO’s, POS’s, PPO’s and the traditional Indemnity Plan. HMO’s and Indemnity Plans are the span of health plans with POS’s and PPO’s as hybrids between HMO’s and Indemnity plans. HMO’s offer the least freedom when choosing a provider or clinic and with increasing freedom (in order) would be POS’s, PPO’s and lastly Indemnity Plans. Cost wise, HMO’s may be the least expensive with POS’s, PPO’s and Indemnity Plans following in order.

You've probably heard these terms before. But what do they mean, and what are the differences between them? And what do these differences mean to you? 

The following descriptions should help.

HMO’s are the oldest form of managed care plan. In an HMO, instead of paying for each service that you receive separately, your coverage is paid in advance (through monthly premiums). This is called prepaid care. For a set monthly fee, HMO’s offer members a range of health benefits, including preventative care. There are many kinds of HMO's. Doctors are usually employees of the health plan and you visit them at central medical offices or clinics, it is either a staff or group model HMO. Other HMO’s contract with physician groups or individual doctors who have private practices/offices. These are called individual practice associations (IPA's) or networks. HMO's will give you a list of doctors/providers from which to choose a primary care physician or provider (such as a Nurse Practitioner or Physician’s Assistant). This provider coordinates your care, which means that generally you must contact him or her to be referred to a specialist. Typically, with most HMO's there is a co-payment for office visits, hospitalizations, and other health services.

Point of Service - POS

Many HMO’s offer plan members the option to self-direct care, as one would under an indemnity plan, rather than get referrals from primary care physicians. An HMO with this opt-out provision is known as a point-of-service (POS) plan. How the plan functions (i.e., like an HMO or like an indemnity plan) depends on what individual plan members decide to do at the "point-of-service."

For example: when medical care is needed, the individual plan member essentially has three choices. The plan member can choose to go through his or her primary care physician/provider, in which case the services will be covered under HMO guidelines (i.e., usually a co-payment will be required). Alternatively, the plan member can access care through a PPO provider and the services will be covered under in-network PPO rules (i.e., usually a co-payment and co-insurance will be required). Lastly, if the plan member chooses to obtain services from a provider outside of the HMO and PPO networks, the services will be reimbursed according to out-of-network rules (i.e., usually a co-payment and higher coinsurance charge will be required). Because people who belong to POS plans are responsible for deciding where to seek care, it is important that they understand the financial implications of these choices.

A PPO is a form of managed care closest to an indemnity plan. A PPO negotiates arrangements with doctors, clinics, hospitals, and other providers of care who accept lower fees from the insurer for their services. As a result, your cost sharing will be lower than if you go outside the network of providers.

If you go to a doctor/provider within the PPO network, you will pay a co-payment (which is a set amount you pay for certain services such as an office appointment or a prescription). In addition, your co-insurance will be based on the lower charges for PPO members. For example, the insurer may reimburse you for 90 percent of the cost if you go to a provider within the network. If you choose to go a provider out of the network, the insurer might only reimburse you for 70 percent of the cost. In addition, with an out-of-network provider, you may have to pay the difference between what the provider charges and what the plan will pay.

Another characteristic of PPO's is the ability to make self-referrals (increased freedom to see any physician/provider vs. an HMO or POS). Plan members can refer themselves to doctors of their choice, including specialists inside and outside the network. However, as described above, plan members may incur additional charges for using out-of-network providers.

With an indemnity plan (sometimes called fee-for-service), you can use any medical provider (such as a doctor/provider, clinic and hospital). You or they send the bill to the insurance company, which pays part of it. Usually you have a deductible, which is the amount of the covered expenses you must pay each year before the insurer starts to reimburse you (usually $200 but does vary from plan to plan).

Once you meet the deductible, most indemnity plans pay a percentage of what they consider the usual and customary care for covered services. The insurer generally pays 80 percent of the usual and customary costs and you pay the other 20 percent, which is known as "co-insurance". If the provider charges more than the usual and customary rates, you will have to pay both the co-insurance and the excess charges.

For example, if the usual and customary fee for a medical service is $100, the insurer will pay $80. If your doctor charged $100, you will pay $20. But if the doctor charged $105, you will pay $25 (the $20 plus the difference which in this case is $5). Note that many fee-for-service plans pay hospital expenses in full; some reimburse at the 80/20 level as described above.

Indemnity Policies typically have an out of pocket maximum. This means that once your expenses reach a certain amount in a given calendar year, the usual and customary fee for covered benefits will then be paid in full by the insurer and you no longer pay the coinsurance (If your doctor bills you more than the usual customary charge, again you may still have to pay a portion of the bill.).

There also may be lifetime limits on benefits paid under the policy. Most industry experts recommend that you look for a policy whose lifetime limit is at least $1 million. Anything less may prove to be inadequate.