Types of medical insurance

Traditional indemnity or fee-for-service

Commercial insurance companies began offering accident and sickness insurance (disability insurance) as early as the mid-1800s. Hospital and medical expense policies were introduced during the first half of the 20th century. The first group medical plan was purchased from The Equitable Life Assurance Society of the United States by the General Tire & Rubber Company in 1934.

Early hospital and medical plans offered by insurance companies paid either a fixed amount for specific diseases or medical procedures (schedule benefits) or a percentage of the provider's fee. The relationship between the patient and the medical provider was not changed. The patient received medical care and was responsible for paying the provider. If the service was covered by the policy, the insurance company was responsible for reimbursing or indemnifying the patient based on the provisions of the insurance contract ("reimbursement benefits"). Health insurance plans that are not based on a network of contracted providers, or that base payments on a percentage of provider charges, are still described as indemnity or fee-for-service plans

Blue Cross & Blue Shield plans

During the 1920s, individual hospitals began offering services to individuals on a pre-paid basis. The first group pre-payment plan was created at the Baylor University Hospital in Dallas, Texas. This concept became popular among hospitals during the Depression, when they were facing declining revenues. The Baylor plan was a forerunner of later Blue Cross plans. Physician associations began offering pre-paid surgical/medical benefits in the late 1930s Blue Shield plans. Blue Cross and Blue Shield plans were non-profit organizations sponsored by local hospitals (Blue Cross) or physician groups (Blue Shield). As originally structured, Blue Cross and Blue Shield plans provided benefits in the form of services rendered by participating hospitals and physicians ("service benefits") rather than reimbursements or payments to the policyholder.

Health Maintenance Organizations

The Ross-Loos Clinic, founded in Los Angeles in 1929, is generally considered to have been the first health maintenance organization (HMO). Henry J. Kaiser organized hospitals and clinics to provide pre-paid health benefits to his shipyard workers during World War II. This became the basis for Kaiser Permanente HMO. Most early HMOs were non-profit organizations. The development of HMOs was encouraged by the passage of the Health Maintenance Organization Act of 1973. Benefits are provided through a network of providers. Providers may be employees of the HMO ("staff model"), employees of a provider group that has contracted with the HMO ("group model"), or members of an independent practice association ("IPA model"). HMOs may also use a combination of these approaches ("network model").

Managed care

The term managed care is used to describe a variety of techniques intended to reduce the cost of health benefits and improve the quality of care. It is also used to describe organizations that use these techniques ("managed care organization"). Many of these techniques were pioneered by HMOs, but they are now used in a wide variety of private health insurance programs. Through the 1990s, managed care grew from about 25% US employees with employer-sponsored coverage to the vast majority.

Rise of managed care in the US

Year	Conventional plans	HMOs	PPOs	POS plans	HDHP/SOs
1998	14%	27%	35%	24%	~
1999	10%	28%	39%	24%	~
2000	8%	29%	42%	21%	~
2001	7%	24%	46%	23%	~
2002	4%	27%	52%	18%	~
2003	5%	24%	54%	17%	~
2004	5%	25%	55%	15%	~
2005	3%	21%	61%	15%	~
2006	3%	20%	60%	13%	4%
2007	3%	21%	57%	15%	5%
2008	2%	20%	58%	12%	8%

Network-based managed care

Many managed care programs are based on a panel or network of contracted health care providers. Such programs typically include:

• A set of selected providers that furnish a comprehensive array of health care services to enrollees;
• Explicit standards for selecting providers;
• Formal utilization review and quality improvement programs;
• An emphasis on preventive care; and
• Financial incentives to encourage enrollees to use care efficiently.

Provider networks can be used to reduce costs by negotiating favorable fees from providers, selecting cost effective providers, and creating financial incentives for providers to practice more efficiently. A survey issued in 2009 by America's Health Insurance Plans found that patients going to out-of-network providers are sometimes charged extremely high fees.

Network-based plans may be either closed or open. With a closed network, enrollees' expenses are generally only covered when they go to network providers. Only limited services are covered outside the network—typically only emergency and out-of-area care. Most traditional HMOs were closed network plans. Open network plans provide some coverage when an enrollee uses non-network provider, generally at a lower benefit level to encourage the use of network providers. Most preferred provider organization plans are open-network (those that are not are often described as exclusive provider organizations, or EPOs), as are point of service (POS) plans.

The terms "open panel" and "closed panel" are sometimes used to describe which health care providers in a community have the opportunity to participate in a plan. In a "closed panel" HMO, the network providers are either HMO employees (staff model) or members of large group practices with which the HMO has a contract. In an "open panel" plan the HMO or PPO contracts with independent practitioners, opening participation in the network to any provider in the community that meets the plan's credential requirements and is willing to accept the terms of the plan's contract.