Difference Between Health Insurance And Health Maintenance Organizations

Many individuals are poorly informed about health insurance. At least five different types of health care plans exist in the United States, with many variations within those categories. Educating yourself about conventional types of insurance such as indemnity plans and health maintenance organizations (HMOs) can guide you in choosing the best plan to meet your needs.

Organized Medicine History

From the late 19th to the early 20th centuries, American health care evolved into what is now referred to as "organized medicine." During this period, the physiological origin of disease became better understood, and science-based treatments emerged. Physicians gained eminence as respected professionals, and the American Medical Association (AMA) gained increasing political influence.

Origin of Health Insurance

In the 1930s, labor unions demanded health benefits for the nation's workers. Blue Cross was the first to introduce private health insurance. By the 1940s, employers offered health insurance as an incentive to lure qualified workers in a competitive labor market. As health care usage increased and costs surged, the call for national health reform gained momentum. The federal government enacted Medicare and Medicaid heath programs for typically unemployed, and uninsured, populations in 1965.

Conventional Fee-for-Service Insurance

In the 1970s, employers offered indemnity, or "fee-for-service" insurance, to their workers. This conventional health insurance coverage was expensive to offer as it was nearly limitless in coverage. Thus, the monthly premiums for indemnity insurance were commonly shared between the employer and employee. No cost containment methods were built into indemnity policies. As a result, widespread abuse led to skyrocketing health care costs.

Benefits and Hazards of Indemnity Insurance

Indemnity health insurance offered comprehensive coverage with low patient co-pays. Because fee-for-service benefits guaranteed payments to providers for each billable service, neither patient nor physician felt fiscally responsible for health care costs. Overuse of high-end emergency room services and unnecessary medical tests was common. An excessive demand for health care, or moral hazard, prevailed.

Managed Care

Due to extravagant health care spending and waste of medical resources, managed care emerged in the 1980s. Managed care plans restricted access to specialized services through "gatekeepers" such as primary physicians. Managed care health plans limited provider networks, negotiated discounts for services, approved drug formularies and introduced utilization management, or mandated pre-authorizations for care. Health economist Paul Feldstein noted the extinction of traditional indemnity insurance and dominance of managed care by 2005.

HMOs

Health Maintenance Organizations (HMOs) are the most restrictive of the managed care plans. Advantages to HMOs include lower monthly premiums, small co-pays and no deductibles. However, HMOs limit choice of provider by only paying for expenses incurred by providers in a designated network. HMOs usually require referral by a primary physician gatekeeper for specialists' services. HMOs must pre-authorize hospital care and nonemergency procedures, such as outpatient services.