Money Essentials

Types of health insurance

There are two types of plans, each of which has far-reaching consequences.

There are two basic types of insurance: indemnity plans and managed care.

Indemnity insurance -- also called "fee-for-service" - generally gives you greater freedom and flexibility than managed care. However, you'll pay more out of pocket for the health care you get. With indemnity coverage, you can choose any doctor, hospital, laboratory, or other medical provider.

As long as your insurance contract includes the service performed, insurance will cover it, though it won't pay the entire charge. You'll have to satisfy an annual deductible - generally a few hundred dollars - before insurance even kicks in.

Then, you'll owe a portion of each bill, called a co-payment, normally 20%. If the provider you choose charges unusually high fees, your share may be considerably higher. That's because your insurer will base its 80% share on the "usual and customary" fee for the service in your area, not on the actual bill.

As a rule, indemnity insurance covers only illness or accidents; it doesn't pay for preventive care such as flu shots or birth control. Depending on your policy, it may or may not pay for prescription drugs or psychotherapy.

In its pure form, managed care flips indemnity coverage 180 degrees. With a health maintenance organization (HMO), deductibles are often smaller than with other plans and sometimes there are none. Co-payments are fixed and low, and preventive care, drugs, and mental health treatment are usually covered.

However, you can choose only among doctors, hospitals, and other providers who have contracts with your HMO, and you can receive only medical services authorized by the plan. If you use non-authorized providers or receive non-authorized care, your HMO will not pay any portion of the bills.

Because many people are uncomfortable with these restrictions, managed care has evolved to include hybrid plans that blend HMOs with some of the features of indemnity coverage.

With a point-of-service plan (POS), for instance, you can keep your costs low by using a network of doctors and hospitals that have contracts with your insurer. However, if you choose, you can go outside the network, but you'll pay a deductible and higher co-payments.

Competitive marketing has produced other permutations, such as the "open access" HMO that allows you to see a network specialist without a referral. The only way to know for certain what your options and costs are is to carefully read the descriptive materials and question anything that's not clear.

For general help in understanding health insurance, check the federal Agency for Health Care Policy and Research. Your state insurance department may also offer online help. Check this guide from CDC to find your state health agency's website. Websites like can help you to understand different types of health insurance.

Once you grasp the basics, you're ready to make informed choices. The next section tells you how to find the coverage that best suits your needs.

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