Private Payers Serving Individuals with Disabilities and Chronic Conditions. C. Indemnity Plan versus POS Plan: An Example

01/01/2000

There is a common misperception that enrollees will necessarily have lower out-of-pocket expenditures in managed care plans than in indemnity plans. In general, managed care plans will cost less only to the extent that the enrollee receives care from providers within the plan's network. The following example uses data on Employer A's plans to illustrate how the decision to seek care outside a provider network can substantially raise out-of-pocket expenses.

Employer A's indemnity plan had a 20 percent coinsurance rate, meaning that the employee paid 20 percent of covered health care expenses beyond the deductible. The 20 percent coinsurance rate applied to pharmacy expenses as well. The deductible ranged from $125-$300 for individual coverage to $300-$600 for family coverage, depending on the employee's salary. The annual contribution (or premium) ranged from $175-$487 for individuals and $300-$599 for families, again scaled to income.

Employer A's POS plan had a $15 copayment for care received within its network. Outside the network, there was a 20 percent coinsurance rate beyond a deductible of $250-$850 for individual coverage and $500-$1700 for family coverage, scaled to the employee's salary. That is, an employee seeking care outside the POS network had to pay the entire deductible before the POS plan contributed anything; beyond the deductible, the employee paid 20 percent of remaining out-of-network costs. The annual premium varied from $148-$462 for employees with individual coverage to $249-$548 for those with family coverage, based on salary.

Consider the hypothetical situation illustrated in Table 2-4. A chronically ill, female employee has family coverage and $1650 of eligible expenses. These include $250 for four 90-day prescriptions purchased at a pharmacy, five visits to specialists and five visits to general practitioners or other providers. Assume she has an average salary and thus has midpoint values for the deductible and premium that she faces. Under the indemnity plan, her annual expenses would be the sum of the premium ($449), the deductible ($450) and the copayment ($240), a total of $1139. Now suppose that the woman belongs to the POS plan and receives all of her care within its network. Then her annual expenses would be the sum of the premium ($399), the deductible ($0) and the copayments (which are the sum of $150 for ten in-network visits and $48 for four prescriptions), a total of $597. This is little more than one-half the cost for care under the indemnity plan.

Suppose instead that the woman prefers to receive care by a specialist who does not belong to the POS plan list of preferred providers. Let the five visits to the specialist account for $1000 of the $1400 in non-prescription expenses. What will the total yearly cost be now? Assume that her deductible for out-of-network providers is $1100, the midpoint between $500 and $1700. The $1100 deductible exceeds the $1000 in actual out-of-network specialist costs, so she will pay the entire $1000 out of her own pocket. Her total yearly expenditures will be the sum of that deductible ($1000), copayments for the five remaining in-network visits ($75) and copayments for the four prescriptions ($48), a total of $1522. This exceeds the cost of care under the indemnity plan by 34 percent. Thus we see that the cost difference between POS and indemnity plans depends on the employee's willingness to visit only those providers in the POS network.

TABLE 2-4: Expenditures under Indemnity and POS Plans: An Example
  Hypothetical Situation
  • Employee with family insurance option
  • Utilization:
    • five specialist visits totaling $1000
    • five other visits totaling $400
    • four prescriptions totaling $250
 
INDEMNITY Premium:
Deductible:
Coinsurance:  
Total
$449
$450
$240
$1139
[ = 0.20 * ($1650 - 450)]
POS
IN-NETWORK ONLY
Premium:
Deductible:
Coinsurance:
Total
$399
$0
$198
$597
[ = (10 * $15) + (4 * $12)]
POS
SOME CARE OUT-OF-NETWORK  
Premium:
Deductible:
Coinsurance:
Total
$399
  $1000
$123
$1522
[ = (5 * $15) + (4 * $12)]

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