Kids and Health Care: What "indemnity" Means
Indemnity plans are the standard by which most health care plans are measured, even though managed care plans have become more common. Indemnity plans remain the choice of larger corporations and wealthier individuals -- including many people who work in the health care industry.
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 some or all of the medical bills for you and your family members. In some cases, it will reimburse you 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 insured people, who usually defer to the suggestions that their doctors make.
With 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.
With increasing health costs, insurance 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 doctors and hospitals 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 80 percent of all of the costs related to your child's medical care, 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 make sure you only take your kid to the doctor when he's really sick. The company figures that, if you have to pay $50, you're less likely to rush your child to the emergency room with a low-grade fever or a simple cut.
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 limit is designed 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 limit. The rest -- the other 20 percent -- you have to pay out-of-pocket.
This is a major compromise on 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 pay. Compare the annual premium for full indemnity coverage with the annual premium for indemnity with an 80/20 split. (Many companies 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 won'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.
Many indemnity policies have both a deductible and a co-insurance clause. In these cases, focus your negotiating efforts on lowering your portion of the co-insurance. The deductible doesn't usually impact the value of the policy as much.
If you choose a reimbursement insurance plan, you will have to pay for medical services up front, then fill out a claim form and send it to the insurance company. Between deductibles and co-insurance, indemnity coverage can seem like it doesn't pay for very much -- especially if you have more than one child. Because kids usually need more health care than working-age adults, a standard indemnity policy can easily require as much as $1,000 per month per child (this is in addition to the premium).
Another limit is that some indemnity policies don't cover specifically-named medical services. These may not cover prescription drugs or routine 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.
Many individual indemnity policies exclude coverage for pregnancy and childbirth. The companies look at this as an optional condition that has more complexities -- and hidden costs -- than most people realize.
