Health Insurance, Simplified. Part 1.

Someone asked me the following question the other day:

"I'm starting a new job and have to choose between 20 different health insurance plans and I'm very confused. What should I look for?"


My answer to him started with an explanation of the different types of plans available.

Health Insurance, Simplified. Part 1. Today: Traditional Major Medical Plans.

The world of health insurance is getting ever-more confusing. As an aside, I'm totally against a socialized health care plan. The government simply can't be trusted to administer such a plan with competency, quality, or cost-efficiency. However, I do believe something has to change. The current system is far too costly and confusing. It is, though, better than socialized medicine. Since it's the system we're stuck with now, let's try to cut through some of the confusion.

There are 4 basic types of health insurance plans available--traditional major medical indemnity, PPO, POS, and HMO. Today I'll discuss the traditional plans.

Traditional Major Medical Indemnity: One of the first types of medical insurance ever offered, this is a type of plan that is difficult to find today. It was the most popular type of plan until around 1980. These plans pay for catastrophic losses, typically never doctor or specialist visits. It works by reimbursing a claimant losses after a deductible is satisfied. The insured also pays a portion of the charges, called co-insurance, up to a specified maximum. For example, Jim gets hit by a bus and fractures 14 bones. He has a major medical plan with a $500 deductible and an 80/20 split with a $2,000 maximum out of pocket expense. His bills total $9,000. His plan would cover $6,800 (which is 80% of the total bills minus the deductible, or $8,500). He pays the balance of $2,200 ($500 deductible plus his 20% share of the remaining $8,500, or $1,700.)

One of the main attractions of this type of plan is that the insured is free to choose any doctor or hospital he or she wants, as this is an "indemnity" contract. Indemnity is the compensation for a loss sustained. Thus, the medical provider will not file a claim for the insured, the insured is responsible for filing claims, and will be the one to receive the check (beneficiary). Claims are processed quickly and efficiently as the coverage is usually black and white as to which conditions are covered and which are excluded. Claims are rarely turned down.

These types of plans do little to curb unnecessary medical costs, put a check on quality of care, or encourage preventative health care. As a result, these plans started to die off in the 70s and were largely replaced with managed care plans. 90% of medical plans in the US are some type of managed care plan. I'll try to simplify those for you tomorrow.

- finance guy

Tomorrow: Health Insurance, Simplified. Part 2: The Rise of Managed Care.