Managed Care vs. Indemnity Plans

Traditional major medical insurance plans come in two basic varieties: Indemnity plans and managed care plans.

Managed care plans are further subdivided into health maintenance organizations (HMOs), preferred provider organizations (PPOs), exclusive provider organizations (EPOs), and point-of-service plans (POS plans).

How Does Payment Work?

Unlike managed care plans, indemnity plans do not have limited networks of care providers. Patients in indemnity plans are free to use any licensed provider. As a result, they don’t negotiate discounted rates in advance. 

This is why premiums for indemnity plans tend to be much higher than premiums for managed care plans. 

With indemnity plans, you typically need to pay for medical services up front, or make arrangements with your provider. You then send proof of your expenses to your insurance company, which reimburses you for your covered costs, minus your deductible.

With managed care plans, you must generally pay your copay and any deductibles or co-insurance  up front. Your provider then typically bills your insurance company directly. 

In today’s market, true indemnity plans are very rare. Most modern health insurance policies include managed care features. Nearly all ACA-qualified health insurance plans eligible for subsidies are managed care plans of one type or another.

If you’ve ever had to choose a doctor from a provider network, get prior authorization for a procedure, or pay less for generic prescriptions, you’ve probably already experienced managed care in action!

Types of Managed Care Plans

As we mentioned, managed care plans come in three types: HMOs, PPOs, and EPOs.

There’s also a hybrid plan type called “point-of-service” plans.

Each has advantages and disadvantages. Here’s a closer look at each of these options:

1. Health Maintenance Organizations (HMOs)

A Health Maintenance Organization, or HMO, is one of the most common examples of a managed care plan.

With an HMO, members are typically required to seek care from a local, in-network provider group. This network is made up of doctors, specialists, hospitals, labs, and clinics that contract with the insurer to deliver services at reduced rates.

In addition, most HMO plans require patients to select a Primary Care Provider (PCP). Your PCP serves as the gatekeeper for your care, managing your overall health and referring you to in-network specialists when needed. This structure helps eliminate duplication, avoid unnecessary procedures, and ensure more efficient use of healthcare resources.

2. Preferred Provider Organizations

A Preferred Provider Organization (PPO) offers more flexibility than an HMO.

You can visit providers both in and out of the network without a referral. However, going out-of-network will cost you more, and premiums are generally higher than with an HMO, unless you qualify for a subsidy under the Affordable Care Act.

PPOs are ideal for people who want the freedom to see any doctor or specialist without jumping through hoops.

3. Exclusive Provider Organizations (EPOs)

Exclusive Provider Organization (EPO) plans are similar to PPOs in that you typically don’t need a referral to see a specialist.

However, like HMOs, EPOs limit coverage to in-network providers only.

EPOs offer more freedom than HMOs. But they typically have lower costs than PPOs, making them a good fit for people comfortable staying within a specific network. If you don’t have a strong preference about what providers you want to use, and want to keep your monthly out-of-pocket premiums low, an EPO can be a good choice.

4. Point of Service Plans (POSs)

Point of Service (POS) plans combine features of both HMOs and PPOs.

Like HMOs, POS plans usually need a referral to see a specialist. You may be required to choose a PCP and route all your care through him or her. But like PPOs, point-of-service plans allow, you to go out-of-network if you’re willing to pay more. POS plans offer a middle ground between cost savings and provider flexibility.

LEARN MORE: HMOs and PPOs in Health Insurance

Key Features of Managed Care Plans

Managed care plans use a number of tools to help control costs while still promoting quality health outcomes.

Here are a few of their most common features:

Provider Networks for Managed Care Plans 

A provider network is a group of healthcare professionals and facilities that agree to deliver services at negotiated rates.

Insurance companies work with these providers to keep costs predictable for both themselves and you, the policyholder. If you receive care from a provider in the network, you’ll typically pay much less than if you go out-of-network. 

Some plans, especially HMOs and EPOs, won’t pay anything for services outside the network except for emergencies.

It’s very important to maintain awareness of your plan’s care network when you get care. Otherwise you could get charged extra money for going out of network.

Primary Care Physicians (PCPs)

Many managed care plans require members to designate a primary care physician, or PCP.

This doctor becomes your first point of contact for nearly all healthcare services.

Your PCP performs check-ups, treats common illnesses, and in the case of HMOs, determines whether you qualify to see a specialist. If you want to see a specialist, your PCP typically must approve and write a referral.

This system ensures that your care is coordinated and that each step is medically necessary, saving on costs, overall. However, sometimes it requires an additional PCP visit, which can add to your out-of-pocket costs, in some circumstances.

Preventive Care Coverage

Preventive care plays an important role in managed care.

Services like annual physical exams, vaccinations, mammograms, and cholesterol screenings are often covered at 100%, meaning you pay nothing out of pocket. These services are intended to detect problems early and reduce the need for more expensive treatment later on.

Encouraging regular screenings and checkups benefits both patients and insurers.

Prior Authorization Requirements

Most managed care plans require prior authorization for certain high-cost services, such as MRI scans, surgeries, and some prescription medications.

This process requires your provider to submit documentation to the insurance company showing the medical necessity of the proposed treatment. The insurer reviews this information before approving or denying the request.

Prior authorization serves two purposes: It ensures the service is appropriate, and it helps prevent unnecessary spending. This, in turn, helps keep premiums low.

Prescription Drug Tiers

Managed care plans usually divide medications into tiers:

Tier 1 includes generic drugs, which offer the same active ingredients as their brand-name counterparts at a fraction of the price.

Higher tiers include preferred and non-preferred brand-name drugs, and specialty medications, which come with higher copayments.

The lower the drug tier, the lower your out-of-pocket cost for the drug. This tier system encourages the use of cost-effective treatment options while preserving access to more expensive drugs when needed.

You can see the drugs your plan covers, as well as their pricing tiers, by looking at your plan’s formulary.