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Hassle-Free Health Coverage: What Indemnity Means

When insurance people talk about indemnity insurance, the thing that's being indemnified, 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/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 indemnity 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 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 make sure you only go to the doctor when you're 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 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 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.

A caveat: Many indemnity policies have both a deductible and a co-insurance clause. In these cases, you'll probably want to focus your negotiating efforts on lowering your portion of the coinsurance. The deductible doesn't usually impact the value of the policy as much.

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.

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