How does a traditional insurance plan work?

Dr. Michael Roizen, MD
Internal Medicine

Traditional health insurance, also known as an indemnity plan or a fee-for-service plan, generally pays for only part of your health care costs. The split is often 80/20 -- in other words, your insurer pays 80% of the costs and you’re responsible for the rest. A traditional health insurance plan also usually has a deductible you must reach before the benefits kick in.

Indemnity plans can be the best choice for people who want ultimate freedom and are willing to pay the higher premiums and co-payments, and don’t mind dealing with extra paperwork.
A traditional insurance plan is known as indemnity or fee-for-service (FFS). It provides basic coverage for doctor visits, hospitalization, surgery and other medical expenses. For serious illness or injuries, major medical coverage is available. It pays the big bills when basic coverage has run out. Comprehensive coverage, typical of what's offered in employer-sponsored group plans, combines basic and major medical.
FFS plans allow you to see the doctor, clinic or hospital of your choice. You pay the bill and then submit forms to your insurer for reimbursement. 
But before that happens, you must have already paid the full deductible amount for the year. Deductibles are usually about $250 for an individual, but they can be as high as $10,000. The higher the deductible, the lower the premium. Very healthy people without potentially dangerous hobbies can get away with a really low monthly premium by choosing a higher deductible. But should such a person get seriously sick or injured, it could mean paying a big chunk of cash.
Most FFS plans pay 80 percent of the total doctor bill once the deductible is met. That leaves 20 percent for you to pay, called the co-insurance.
Because costs for procedures vary by geography, what your doctor charges for a procedure may not be what your insurer is willing to pay. What the insurer doesn't pay is your responsibility.
Most FFS policies include an annual maximum out-of-pocket amount for you. They also have a lifetime cap, meaning that when your bills reach that amount (usually $1 million or above) the insurance company won't pay any more.
In many cases, FFS plans focus on treating health problems and not preventing them. As a result, they don't usually cover annual check-ups and other "well" doctor visits that can quickly amass costs, especially for families. FFS plans may also limit the number of days you can stay in the hospital and still receive coverage.
FFS plans tend to be more versatile than other varieties, largely because the participant can go to any doctor. Other benefits include not needing referrals before going to a specialist and not worrying about being "out of network."
While premiums are low compared with most managed care plans, FFS plans can be more expensive for those who tend to use preventative health measures.

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Important: This content reflects information from various individuals and organizations and may offer alternative or opposing points of view. It should not be used for medical advice, diagnosis or treatment. As always, you should consult with your healthcare provider about your specific health needs.