Fee-for-Service (Indemnity) Health Insurance

Also known as indemnity plans, fee-for-service plans are traditional insurance plans that give you absolute freedom in choosing physicians and medical facilities. In return, insurance companies require patients to fulfill a yearly deductible and, after that deductible has been fulfilled, the insurance company will pay at a certain coinsurance rate. Generally the coinsurance is 70 percent/30 percent or 80 percent/20 percent, where the insurance company pays the higher percentage and the insured pays the lower.

Fee-for-service plans are the dinosaurs of the health insurance world. Some employers still offer them because they want to give their employees the freedom to choose their medical services, unfettered by networks and co-payments. However, these plans still require the use of patient claim forms and reimbursement checks. The insurance company pays the claims using usual, customary, and reasonable charges (UCR) for covered services, a fixed schedule of fees (for example, a fixed dollar amount per day for hospital care or a schedule of payment by procedure), or both.

Adverse selection. Another interesting trend has emerged over the years for some fee-for-service plans. They are the most expensive health insurance plans because they have few managed care or cost-control measures in them. As the price of indemnity plans started to rise, many of the relatively young and healthy people left to join PPOs or HMOs, leaving the people generating the most cost in these indemnity plans. This causes what is known in the industry as "adverse selection" or a "death spiral." When an indemnity plan goes into a death spiral, only the most ill individuals with the most expensive medical needs are left in it. They stay because they have serious medical needs and do not want to have to change doctors in the middle of treatment. As the costs for the care continue to exceed what the insurance company is collecting in premiums, the price of the indemnity plan rises and rises. At a certain point, these plans become cost-prohibitive.

Who will like fee-for-service plans? Individuals with serious medical conditions that need frequent treatment (who want to go to their doctors) and those who are well-paid and can afford the deductibles and premium payments will like fee-for-service plans because they have complete freedom of choice to see whomever they wish, whenever they wish.