Indemnity Plans
An indemnity health plan, often called a fee-for-service plan, pays a set portion of the cost of medical care regardless of which doctor or hospital the individual chooses. It's also known as the oldest form of health insurance plan in the U.S. but now a day a large amount of indemnity plans are replaced by managed care plans due to their cost effectiveness however, many still exist and serve people.
Features & working structure:
It allows policy holder & eligible dependent to visit any doctor including a specialist or hospital without needing referrals or staying within the network. (freedom from network and PCP)
The insurer (insurance company) reimburses a percentage of the bill (e.g. 80%) or fixed amount (depending on plan type), and patient pays the rest (e.g. 20%) + any charges above the insurers Usually Customary and Reasonable Charges / limits (UCR).
There are two types of Indemnity Plans i.e. Major Medical Indemnity Plans & Fixed Indemnity Plans.
Traditionally, patients often paid upfront bill and submitted a claim for reimbursement or provider (doctor) can submit the claim for reimbursement if patient has assign AOB (Assignment of Benefits) rights to provider for major medical indemnity plans. However, for fixed indemnity plans, insurance only paid amount to policy holder (patient) and policy holder is responsible to pay charges directly to provider.
The key feature is freedom of provider choice, as there are no networks or referrals required. However, this freedom can expose patients to higher and less predictable costs, often cause balance billing.
UCR (Usually Customary & Reasonable) Charges
UCR (Usually Customary and Reasonable) charges are the maximum amount that insurance companies consider acceptable for a specific medical service or procedure in a given geographical area. Health plans use UCR to set the allowed amount as well as determine how much the plan pays and how much is patient responsibility.
Let's break it down:
- Usual Charges:
The standard fee a provider charges for a service, according to the provider's chargemaster or standard price list.
- Customary Charges:
The maximum fee that a payor (like an insurance company) considers reasonable for a specific service in a particular market or area.
- Reasonable Charges:
The maximum fee that makes sense given the nature of the service and the circumstances of the provider and patient.
Key Points to Rememeber:
- Varying Rates:
UCR rates can differ significantly between insurance companies, plans, and geographic locations.
- Allowed Amount:
The UCR amount is used to determine the allowed amount, which is the total payment the health plan will cover for the service.
- Provider Charges vs. UCR (formation of Allowed Amount):
If a provider's charge is at or below the plan's UCR amount, the provider's charge becomes the allowed amount.
If a provider's charge is higher than the plan's UCR amount, the UCR amount will be the allowed amount, and the patient may be responsible for the difference (if provider is out of network) or otherwise difference will be adjusted.
In short, we can say "Allowed amount is the maximum allowable UCR amount that insurance company considered to pay for specific service according to geographical area and provider type, it includes insurance paid amount + patient responsibility (deductibles, coinsurance & copay)
What is Adjustment Amount?
The difference between provider charge amount and insurance's UCR (allowed amount) is called a adjustment. If provider is in-network with insurer, then amount will be adjusted otherwise provider has right to bill adjustment amount to patient under certain circumstances.
Example:
Scenario Alex have a traditional indemnity plan which covers 80% of UCR charges for outpatient surgery. Alex go to an out of network surgeon for a procedure. Costs Surgeon’s bill: $3,000 Insurance UCR for that procedure in Alex's area: $2,500 Plan pays: 80% of UCR = 80% × $2,500 = $2,000 Now Alex is responsible for: 20% coinsurance on UCR: $500 + the amount above UCR: $500 ($3,000 – $2,500) Total out-of-pocket = $1,000
Note if surgeon is in-network then, surgeon has to adjust $500 as per agreement which is called adjustment while in above scenario, surgeon do balance billing and billed different to Alex. (we will discuss about balance billing in non-covered service chapter later)
How Common Are Indemnity Plans?
Indemnity plans were the standard form of health insurance, before managed care models (HMOs, PPOs, POS, EPOs) became widespread. That time indemnity plans often called a Traditional Indemnity Plans (older plans).
- Today, they are very rare: in the employer-sponsored health insurance market, they account for about 1% of enrollment (2024).
- The ACA Marketplace (HealthCare.gov and state exchanges) does not offer indemnity plans. All marketplace options are managed care plans.
Despite this, consumers can still purchase fixed indemnity plans, a narrower type of indemnity coverage, usually sold as supplemental insurance (secondary) to complement a major medical policy (primary).
What is Fixed Indemnity Health Insurance?
A fixed indemnity plan is a limited-benefit plan that pays a specific cash amount per service or per period, regardless of the actual cost of care.
Examples:- $200 upon hospital admission.
- $100 per day of hospitalization.
- $50 per doctor visit.
These benefits are paid directly to the insured, who can use the money toward medical bills or other expenses.
Fixed indemnity plans are not major medical insurance like regular indemnity plans. They are intended only as supplemental coverage.
Indemnity Plans and ACA
Fixed Indemnity plans are exempt from ACA rules and regulations. These plans can exclude certain ACA coverages like Short-Term Medical Plans or Grandfathered Plans. However, Traditional /modern Indemnity plans must follow the ACA rules and regulations same like individual ACA plans as these plans are count as major medical plans.
Traditional Indemnity (Older form) vs Modern Indemnity Plans:
Here are the upgradations, must be followed:
- Traditional Indemnity (Older Form)
- Very common before the rise of HMOs and PPOs.
- Pure “freedom of choice” with no networks.
- No built-in cost control → high premiums and out-of-pocket costs.
- Modern Indemnity Plans
- Still provide broad provider choice, but often incorporate managed care features.
- May offer preferred provider discounts (like a hybrid with PPO features i.e. patient has to pay less if sees in-network provider but still can go out of network no restrictions).
- Use deductibles, coinsurance, and copays similar to managed care plans. And also applies out of pocket maximum for cost controlling.
In short: Traditional indemnity = old-style, unlimited freedom, no cost control. Modern indemnity = freedom of choice but with cost-sharing and some managed-care features.
Indemnity Plans and ERISA
ERISA (Employee Retirement Income Security Act) applies to any employer-sponsored health plan, whether indemnity, PPO, or HMO.
ERISA regulates:
- How plans are administered.
- Disclosure of plan details to employees.
- Claims and appeals processes.
- Fiduciary responsibilities of employers/plan administrators.
ERISA does not dictate what benefits must be covered (that’s ACA and state law). Instead, it ensures employer health plans are run fairly and transparently.
Examples- US-Health Group indemnity plans
- UnitedHealthcare fixed indemnity plans
- Allstate fixed Benefits Plans
Per-Period vs. Per-Service Coverage in Fixed Indemnity Plans History
- Original Rule (Pre-2014)
- To be exempt from ACA rules, fixed indemnity plans had to pay benefits on a per-period basis (e.g., per day in hospital).
- They could not pay per service (e.g., per doctor visit, per surgery).
- Regulatory Changes (2014–2016)
- In 2014, HHS proposed relaxing this restriction to allow per-service payments, but only if the enrollee had minimum essential coverage.
- A federal appeals court struck down this limitation in 2016.
- As a result, individual-market fixed indemnity plans can pay on either a per-period or per-service basis.
- Employer-Group Market
- In the group market, fixed indemnity plans are still restricted to per-period benefits only.
- Recent Developments (2023–2024)
- In 2023, the federal government proposed tightening rules again, limiting individual-market fixed indemnity plans to per-period benefits only.
- The goal was to reduce consumer confusion, since some per-service indemnity designs resemble major medical insurance but lack comprehensive protections.
- That proposal was not finalized, but regulators noted they may revisit the issue in future rulemaking.
- As of 2024:
- Individual market → per-period or per-service allowed.
- Group market → per-period only.
Key Points to Remeber
- Indemnity health plans: Traditional fee-for-service insurance, now rare, offering maximum provider choice but high financial risk.
- Fixed indemnity plans: Limited-benefit supplemental products, not ACA-regulated, designed to complement—not replace—major medical coverage.
Till now we have learn a lot about what is federal and state rules and regulations for private health insurance sector and go through each plan type and explore benefits, for easy to remembering we have prepared flowchart as following:
How to read it?
- ERISA → Always tied to employer-sponsored coverage (except government/church - HCSM).
- ACA → Always applies fully in individual and small group markets; applies partially in large group.
- State laws → Always regulate short-term plans, sharing ministries, and limited indemnity because those fall outside ERISA/ACA.
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