What Is Fixed Indemnity Health Insurance?
Fixed indemnity health insurance is a type of policy that pays the insured person a set amount of money based on the medical service that the person receives, regardless of the actual cost of the care. The plan can pay a fixed amount based on a particular type of service provided and/or pay a fixed amount based on a time period during which care is provided.
Fixed indemnity plans can include provider networks—this means the insured pays less if they use an in-network provider. However, the actual cash amount that the insurance plan pays is the same regardless of what medical provider the insured uses.
Though a common model used in the United States, such plans have fallen out of favor as health care costs have increased and insurers have focused on managing costs with the network arrangements they created with medical providers.
Fixed indemnity plans are now generally marketed to serve as supplemental coverage to people who have comprehensive major medical health coverage, but with fairly high out-of-pocket costs.
Some people choose to rely solely on fixed indemnity coverage. This saves money initially because total premiums are lower. However, it can result in very substantial out-of-pocket costs if a patient runs into a serious medical need.
By definition, fixed indemnity plans do not cap the patient’s out-of-pocket costs, since the amount that the insurance will pay is predetermined (based on the terms of the policy) and is based on factors such as the number of days the person is hospitalized, the number of doctor visits they have, the number of surgeries they have, and more. The total bill is not taken into consideration by a fixed indemnity plan.
Therefore, fixed indemnity plans are not compliant with the Affordable Care Act (ACA) since the ACA requires all compliant health plans to cap out-of-pocket costs for essential health benefits.
Fixed indemnity plans don’t have to cover all of the essential health benefits, they are not guaranteed to be issued, and they can limit the total amount they will pay in annual or lifetime benefits—in fact, limiting the total benefits is an integral part of the design of a fixed indemnity plan.
A fixed indemnity plan can consider an applicant’s medical history when determining eligibility for coverage.
It is true in most cases that all new plans sold with effective dates of January 2014 or later are required to comply with the ACA. However, the ACA’s regulations don’t apply to plans that are considered “excepted benefits.” Some of the regulations also do not apply to grand mothered or grandfathered plans.
Excepted benefits are plans that are specifically exempt from the ACA’s regulations. For the most part, these are plans that are not designed to serve as stand-alone coverage. They include things like dental and vision insurance (although paediatric dental coverage is subject to some ACA regulations), critical illness plans, accident supplements, short-term health plans, and fixed indemnity plans.
In 2014, the Department of Health and Human Services issued regulations prohibiting the sale of fixed indemnity plans to people who didn’t have other coverage providing minimum essential coverage. The department also made it a requirement that the plans be sold with a warning label informing applicants that the plan should not be considered an adequate substitute for major medical health insurance. A lawsuit on this matter resulted in the elimination of the ban on selling fixed indemnity plans to people without other coverage.
Although fixed indemnity plans must still include a disclosure noting that the coverage is not suitable to serve as a person’s only health insurance, insurers are not prohibited from selling fixed indemnity coverage to a person who has no other health insurance.
Consumers should be particularly wary of this approach, however. Actual medical costs can be excessive compared to the amounts that a fixed indemnity plan will pay, leaving the patient responsible for huge out-of-pocket costs.
Minimum Essential Coverage
Since fixed indemnity plans are considered excepted benefits, they do not provide minimum essential coverage. To be clear, plans do not have to be fully compliant with the ACA in order to provide minimum essential coverage—grand mothered and grandfathered plans are not fully ACA-compliant, and yet they are considered minimum essential coverage. Excepted benefits are never considered minimum essential coverage.
From 2014 through the end of 2018, people without minimum essential coverage were subject to the ACA’s individual mandate penalty, unless they qualified for an exemption. Therefore, people who rely on just a fixed indemnity plan (without another policy that provides minimum essential coverage) may find that they owe a penalty payment to the IRS.
However, the individual mandate penalty no longer applies as of the end of 2018. People who are uninsured in 2019 and beyond—or covered only by an excepted benefit that doesn’t provide minimum essential coverage—are no longer penalized, unless they are in a state that has its own individual mandate.
Covering Your Medical Bills
There are a variety of fixed indemnity plans on the market, and their benefits range drastically in how much they cover. The biggest concern with fixed indemnity plans is that they don’t cap out-of-pocket costs, and the amount they pay is based on their fee schedule, not based on the actual cost of the care that the patient receives.
It’s common to see fixed indemnity plans that will pay between $1,000 and $5,000 per day for inpatient hospitalization, a few hundred dollars for emergency room care, up to several thousand dollars for surgery, and perhaps $100 per physician visit while the patient is hospitalized. These sound like a decent amount until you realize how high hospital bills can get, no matter how brief the visit.
For instance, let’s say a person has a high-end fixed indemnity plan, with a $5,000 per day hospitalization benefit and $10,000 surgery benefit. If a brief stay in the hospital and surgery for a broken bone costs her $70,000, the amount the fixed indemnity plan will pay is not much in comparison. Part of the problem is that people are often unaware of just how high medical bills are when they’re not covered by insurance that caps the patient’s out-of-pocket costs.
Relying on a fixed indemnity plan on its own can be a recipe for financial disaster, due to the difference between the amount the hospital charges and the amount the plan pays. However, fixed indemnity plans can serve as an excellent supplement to a major medical plan that has fairly high out-of-pocket costs.
A fixed indemnity plan can help to cover some or all of that out-of-pocket cost, depending on what triggered the medical claim in the first place.
A patient who spends several days in the hospital could find that their fixed indemnity plan pays them enough to cover their full out-of-pocket cost. On the other hand, a patient who ends up in the emergency room and perhaps spends one night in the hospital might only get enough from their fixed indemnity plan to cover a small portion of the out-of-pocket cost, depending on the terms of the coverage.
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The most important thing to understand about fixed indemnity plans is that while they can be quite useful for offsetting out-of-pocket costs and helping to cover various expenses while you’re sick, they are not real health insurance plans. Relying on a fixed indemnity plan as your only source of coverage is not recommended, as you could still end up owing tens or even hundreds of thousands of dollars for your medical care if you have a serious illness or injury and you do not have major medical coverage.