Under fee-for-service, you choose the doctor or the hospital or the clinic, and the insurance pays for part or all of the cost according to a schedule laid out in the policy. The "Blues" -- Blue Cross and Blue Shield -- are the best-known providers of this kind of health insurance, although not the only ones. It may be offered at group rates through an employer or an affinity group such as a trade association. Or it may be offered at individual rates. Either way, it is the most expensive kind of health insurance around.

Fee-for-service policies are usually divided into two parts:

• Basic coverage includes the cost of visits to the doctor, hospitalization, surgery and other medical expenses. When that runs out, the major-medical part of the policy takes over.


• Major medical pays the bulk of the bills in case of a lingering illness or serious injury, often protecting you against huge medical bills that climb to $250,000 or more.

Comprehensive major medical is a policy that combines basic and major-medical insurance in one plan so there are few gaps in coverage. Increasingly, both employer-sponsored and individual plans combine coverage into comprehensive policies.

Different ways policies pay

Most every policy, no matter how good it is, limits the benefits it will pay. The trick is to make sure the benefit limits you choose keep pace with the ever-rising cost of medical care. There are two basic types of benefit payout methods:

• Usual, customary and reasonable. The plan probably will limit coverage to "medically necessary" treatments and to "usual, customary and reasonable" fees for that treatment in your area, as determined by the insurance company. Some services may be fully covered within these guidelines, others only partially covered. For example, 100% of your hospital bills may be paid but only 75% of your medical and surgical costs. If your doctor's fee is above the usual range for your area, you'll have to make up the difference. Benefits may be paid directly to the doctor or hospital. But, in the case of routine visits, you may have to pay up front and file paperwork for reimbursement. Often, the doctor's office will do the filing for you.



• Predetermined costs, with limits. An indemnity, or scheduled, type of policy pays specific dollar amounts for each covered service according to a predetermined schedule or table of benefits. These schedules tend to become out of date even before the ink is dry on the policy. That means you could wind up digging deeper into your pocket to make up the difference between what the insurance company pays and what the doctor or hospital charges. Perhaps for this reason, this kind of policy is less common than it used to be.

Dealing with deductibles and co-payments

A deductible is the amount you pay -- say, $1,000 a year -- before the insurance company makes any payments at all. The co-payment, also called co-insurance, is the share of the bill you pay above the deductible, with the insurance company paying the rest, up to the policy limits. Say you incur a $6,500 hospital bill. Your policy has a $500 deductible and a 20% co-payment on bills up to $2,500. Your out-of-pocket cost would be $1,000 -- the $500 deductible (assuming you hadn't already met it), plus 20% of $2,500, or another $500. The insurance company would pay $5,500.

The co-payment terms of major-medical plans are typically 80/20 or 75/25. That means that the company pays 80% or 75% of the cost of a claim, and the policyholder pays 20% or 25% of costs above the deductible. Deductibles typically range from $200 to $4,500, or even more. Today it's very easy to run up a $100,000 hospital bill. With 80% coverage you'd have to pay $20,000.

Court cases in recent years have involved policyholders have been forced to pay their share of medical bills based on the full price of the treatment, while the insurance company paid its share based on a privately negotiated reduced rate. Say your policy requires you to pay 20% of your medical bills, you have a medical procedure that costs $1,000 and you pay $200 (your 20% share). You assume that the insurer has paid the remaining $800. But your insurer has privately negotiated a deal with the hospital that reduces the cost of the procedure to $800, so the company pays only $600. Your 20% copayment just turned into a 25% co-payment.

If you suspect that this is going on, ask both the insurer and the doctor or hospital to tell you the negotiated rate, then figure your share from that figure. Send that amount to the provider with a letter explaining that you are paying your portion of the "actual" fee, and send a copy of the letter to your insurer. If the insurer balks, file a complaint with your state's insurance department.

The higher your deductibles and co-insurance, the lower your premium. Deductibles can vary within a policy, with certain services having higher deductibles than others. Deductibles that apply to the family as a whole are usually preferable to individual deductibles for each family member. With the former, once one or two members have met the deductible, any illness or injury striking other family members is covered immediately. In an employer-sponsored group policy, you may not have a choice.

Dealing with policy limitations

Various limits and exclusions are written into every policy. For instance, there may be a limit to how many days you can stay in the hospital for a particular treatment and still be covered. There is a limit to how long you can take to meet the deductible and reach the point at which the insurance begins to pay. If you don't reach that point within a stated time -- often a year -- you have to start counting all over again.

Most policies put a ceiling on the amount they will pay for a single claim, or during a single year or during your lifetime. For family coverage, an annual limit of $500,000 or $1 million is worth a few more dollars a month in premiums than a policy with a $100,000 limit.

Many plans also dictate the hospitals or doctors you can go to or require you to pay more for visiting a provider not under contract with the policy. That's what's called managed care (see "Preferred-Provider Organizations" and "Health Maintenance Organizations").

You are not covered for care in military or other government hospitals or for illnesses and accidents covered by worker's compensation.

Keeping the policy in force

A group plan will renew automatically as long as your employer pays the premium and the insurance company chooses to keep the policy in force. But you have to be careful about the renewability terms of an individual policy. Some companies retain the right to terminate your coverage when your policy period is over-as they might, for instance, if you have a lot of expensive claims.

Your best bet is a noncancelable type of health policy that will cover you at the same premium and benefit level up to a certain age -- say, 65 -- as long as you pay the premiums.

Your next-best bet is a guaranteed-renewable policy. It's like a noncancelable policy in that the company can't refuse to cover you as long as you pay your premiums and no acts of fraud are involved. But it differs in that premiums can be raised if the entire class to which you belong -- meaning your occupation, age group or gender -- gets a premium increase.

What to Consider When Picking a Plan

Health Maintenance Organizations

EMAIL ARTICLE | PRINT | REPRINT ARTICLE | SUBSCRIBE TO KIPLINGER MAGAZINE |

FIND THIS ARTICLE HELPFUL?

SIGN UP FOR DELIVERY OF COLUMNS AND SITE UPDATES