Indemnity Plans Making A Comeback, Is That Good?

I’ve noticed a trend lately that has me worried. I have seen an increase in the number of agents pushing Limited-Liability Indemnity Plans (LLIP) instead of Major-Medical. I first raised my eyebrows when the agency I was working for decided it was the way to combat falling commission due to health care reform and continues today with blogs showing up discussing its virtue. As a full disclosure where I stand, I left the agency and went independent to avoid focusing on selling them.

A number of things are driving this trend, but Health Care Reform is at the center of it all. Because LLIP are not covered by health care reform, Insurance Companies have been able to pay much higher commissions. Sometimes as much as 40% when Major-Medical is paying between 4%-12%.

Many rookie agents think they found the panacea. On the surface these plans look good, they cost much less, making the sale easier. Many seasoned agents have turned to them because they are struggling with lower commissions Healthcare reform caused in the Major-Medical market and feel they have to in order to make a living. Shame on them both.

Limited-Liability Indemnity Plans work differently than Major-Medical because they pay a set (or max) amount per procedure, rather than pay on what is billed. So, for instance, if you spend a night in the hospital they pay X number of dollars per day. If you have an X-ray, they pay a set amount for that procedure. If you have surgery, there is a set amount they pay depending on the surgery. Major-Medical on the other hand pays based on a pre-negotiated bill rate.

The difference looks subtle on paper, but in practice they cause major risks. LLIPs come in many different versions, some pay a fixed daily rate, some pay an “up to” amount. Some you select a daily room rate, then they pay an additional amount for miscellaneous expenses at some multiple of that. So you might have a room rate of $800 and have a payment of up to 3 times that, or $2,400 for miscellaneous expenses.

Here are some of the problems. Many times medical expenses are front loaded, think Heart Attack. Most tests and treatment are in the first day, the rest of the days are recuperation. The national average in 2009 ( the latest statistics are available from US Department of Health & Human Services) for a heart attack, runs around $77,000 and the average stay is 5 days. Let’s say you have the $800/day plan with $2,400/day, and there are no “Up To”s in it. That means the insurance will pay you $16,000 and you would owe $61,000. To make it worse, most LLIPs are not part of a network, so you won’t get any network discounts, which would drive your costs even higher. If you have some “up to”s in your policy, think even more. Consider what a cancer diagnosis would mean. You usually don’t have overnight hospital stays for it to pay on. Then what?

One other misconception is Major-Medical plans also pay a set amount per surgery, so there is some equality there. Major-Medical plans pay a pre-negotiated price and you won’t be responsible for any more. However, LLIPs pay a set amount, usually based on Medicare rates. This may or may not cover the surgery, and any cost above what the insurance pays you are responsible for.

There are other problems, such as filing claims and the paperwork involved, but we’ll leave that for another day.

Bottom line, if you can afford it, when something big happens, you will always be better with a Major-Medical Plan, even if you have a $10,000 deductible.