The ABC's Of Health Insurance Plans

In today's health insurance marketplace, three primary types of healthcare coverage are available. They are the Indemnity plan, the Preferred Provider Organization (PPO), and the Health Maintenance Organization (HMO). Each approach offers consumers the opportunity to choose between flexibility and control in their healthcare choices vs. the expense of their healthcare coverage. Almost universally, healthcare plans that offer more consumer flexibility and control are also more expensive, while plans allowing the insurance company to control healthcare delivery choices are usually more affordable. Let's look at each of these plans.

The Indemnity plan approach represents healthcare as it was offered in the days before managed care. In an Indemnity plan, the policyholder is free to go to any doctor, specialist, hospital or laboratory to pursue the medical care they believe they need. These healthcare services are billed to the insurance company at the individual rate set by the healthcare provider. The insurance company pays a fixed proportion of the fees (usually 80%) and the consumer pays the remaining percentage (usually 20%) of the billed medical fees. Each healthcare provider is free to set their fees at a level they choose, and the consumer has little incentive to consider overall medical expenses. While Indemnity plans are still available today, they are not widely utilized since they are too expensive for the average consumer. The monthly premium for an Indemnity plan is generally 50% to 100% higher than premium for a PPO or HMO plan.

On the opposite end of the spectrum, Health Maintenance Organizations or HMOs were introduced by insurance companies as a way to combat the rising costs of healthcare being experienced by employers providing health benefits to their employees. In an HMO, the policyholder selects or is assigned to a Primary Care Provider (PCP) such as a family practitioner, internist or pediatrician. The PCP is responsible for coordinating all healthcare services delivered to the policyholder (except for emergency care). The policyholder can only see a specialist, use a lab service or check into a hospital if they are referred for such services by the PCP. Any services that are not referred by the consumer's PCP are not reimbursable under the health insurance policy. Within the HMO network, healthcare providers agree with the insurance company on negotiated rates for specific services. Once approved, these healthcare providers become part of the network available to the PCP for referring patients when additional care is required. Based on the insurance company's strict control of the healthcare providers used and the rates they will charge, an HMO is usually the least expensive alternative for a healthcare plan.

In the middle between the wide-open Indemnity plan and the strictly-controlled HMO, insurance companies also offer a third alternative called a Preferred Provider Organization or PPO. In a PPO plan, a policyholder is free to go to almost any healthcare provider they choose, including doctors, specialists, labs and hospitals, and usually without a medical referral. However, the amount reimbursed by the insurance company for the delivered medical services will vary depending on whether the healthcare provider is within their negotiated network or not. As with an HMO, the insurance company negotiates fees in advance with selected healthcare providers and approves them for inclusion in the plan's preferred provider network. Healthcare services delivered by these in-network providers are generally reimbursed to the consumer at high rates of 70% or more. On the other hand, when the consumer uses a non-network healthcare provider, the reimbursement will be much lower, ranging from 0% to 50% of the incurred medical expenses. Since the vast majority of PPO policyholders use in-network providers to reduce their out-of-pocket expenses, PPOs are very cost-effective for insurance companies. As a result, PPOs are somewhat more expensive than HMOs, but are still very reasonably priced for the average person.