Merritt Personal Lines Manual: What Indemnity Means
When insurance people talk about indemnity insurance, the thing that's being indemnified is...the insured, the policyholder. An indemnity insurance contract states that the insurance company will pay the insured's 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/gyn's 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.
Another limit is that some indemnity policies don't cover specifically-named medical services. They 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 as a preexisting condition. Pregnancy cannot be excluded from a group policy and must be covered the same as any other medical condition.
