What Is Indemnity Health Insurance?

Indemnity health insurance pays a portion of your medical bills but does not replace major medical insurance. With indemnity health insurance, the coverage amount is predetermined. Depending on the type of indemnity plan you have, your insurer may reimburse you a fixed amount based on the healthcare service you accessed, or it may pay a percentage of the “usual and customary” fees for that service.

Key Takeaways

Some indemnity health insurance plans may offer low premiums and the opportunity to see any doctor. While the flexibility can be appealing, indemnity plans are less regulated than other plans and come with limitations that could leave policyholders with unaffordable costs.
Indemnity health plans are only recommended as a supplement to major medical coverage, rather than a replacement. An indemnity health plan can help cover your out-of-pocket costs, but it isn’t sufficient on its own.
Indemnity health insurance policies are exempt from the Affordable Care Act, so insurers can deny coverage entirely to people with pre-existing conditions or refuse to cover treatment for pre-existing conditions.

How Indemnity Health Insurance Works

The word “indemnity” in insurance means a contractual arrangement where the insurance company agrees to pay for damages suffered by you, the person paying the premium, or others covered by your policy.

Fixed indemnity health plans are the most common type of plan available and have come under regulatory scrutiny. As of September 2024, updated regulations will require issuers to prominently display a notice highlighting the differences between fixed-indemnity coverage and major medical coverage. Rules implemented in 2024 also require the insurer to pay a fixed dollar amount for services or events, no matter how much the service actually costs or what your other insurance plans pay.

The goal is to make sure consumers don’t mistake fixed-indemnity plans for a sufficient replacement for major medical coverage. You should not purchase a fixed-indemnity plan as your only form of health insurance. Most fixed indemnity health insurance doesn’t need to comply with the Affordable Care Act (ACA), so your insurer isn’t required to pay for essential health services or treatment associated with a pre-existing condition. You’ll need to review your plan documents carefully to understand what’s covered.

The reimbursement amount is not based on the actual cost of care. For example, the insurer might pay $100 per day if you are hospitalized. Typically, you can choose how much coverage or the limitations of the plan, up to a set maximum.

Plans typically feature term or annual limits, requiring you to pay for 100% of services after you reach the cap.

Fixed-indemnity health insurance plans are designed to fill in gaps in other health insurance such as Original Medicare, an employer’s group health plan, or an individual plan purchased on the Health Insurance Marketplace. Payments from an indemnity plan can help with out-of-pocket expenses or provide extra money you can use for income replacement or other health needs.

Other indemnity health insurance plans are also available and work slightly differently, but are not as common.

You can typically apply for a fixed indemnity plan at any time and don’t need to wait for open enrollment.

Types of Indemnity Health Insurance

Accident and Accidental Death and Dismemberment Insurance

Accident insurance is one of the most broadly available types of accidental health insurance. Depending on the insurance company, it may go by other names such as simply “supplemental insurance.” This insurance helps pay costs for some accidents. Benefits are paid directly to you, without restrictions on how you use the money.

However, it’s important to note that not every type of accident or treatment is covered by the policy—only the ones that the policy lists. These may include blood transfusions, emergency exams and treatment, and hospital admission and confinement. But policies can also cover the accident itself, including burns, coma, and dislocated body parts.

The covered treatments may be limited by the policy. For example, the policy may only cover two or three ambulance rides per person, per year.

Benefits are typically paid at a flat rate per incident or treatment, often set at the amount you buy in advance. For example, a broken toe could provide a benefit of $150 to $250.

Note

Accidental death and dismemberment policies may include the above, plus lump-sum payment if you die or lose specific body parts. For example, a payment could be based on whether you lose one or both hands, feet, arms, or legs, or one or several fingers or toes.

Cancer Insurance and Other Critical Illness Insurance

Some common conditions and diseases require expensive, extensive treatments and hospital stays. Most special indemnity health insurance policies are sold for two specific diseases: cancer (diagnosis, recurrence, and ongoing treatments) and heart attack and stroke. These policies can help defray your costs but are unlikely to pay for the entire, very expensive cost of disease treatment.

These policies may also be sold as a life insurance rider, known as a dread disease rider or terminal illness rider, or as stand-alone policies. More broad-based critical illness plans may also help cover multiple, specific diseases and organ transplants.

Hospital Indemnity Insurance

Hospital indemnity insurance is a type of fixed-indemnity plan that provides fixed dollar amounts for hospital stays. This insurance differs from an accident policy in that it covers both accidents and illnesses. The policy sends you a cash benefit in the event of:

Overnight and extended hospital stays
Emergency room visits
Intensive care unit visits
Ambulance transportation
Skilled nursing care
Rehabilitation facility

Hospital insurance policies typically pay a flat rate per day, based upon the care needed. You can choose the amount in advance, although a higher rate will likely cost more. For example, you might choose between $150 to $500 per day for a hospital stay.

Traditional Indemnity Health Insurance Plans

Indemnity health insurance policies, also known as fee-for-service plans, are typically available via group (employer) insurance. Traditional indemnity plans typically come with a deductible and cover a percentage of the “usual and customary” fees associated with a wide range of healthcare services.

These plans can be a good fit for a company that employs someone who travels often or lives in a rural area and can’t stay within a geographically restricted network.

Note

These plans are relatively rare—only 1% of insured workers were covered by these plans in 2023—and they’re not commonly available for individuals to purchase.

Once your plan is active, you can typically see any provider, pay for services, then submit a claim for reimbursement to your insurance company. However, you’ll also pay coinsurance, and the difference if the provider charges more than the “usual and customary” fee.

Some plans waive pre-existing condition limitations and increase coverage amounts after the first year of coverage. However, they may only cover a certain number of services each year. It’s important to weigh the benefits against the additional premium you’ll pay for a fixed-indemnity plan.

Indemnity Health Insurance vs. ACA Plans

	Indemnity Health Insurance	ACA Plans
Which health benefits are covered?	Coverage benefits vary by plan	At a minimum, all ACA plans must cover 10 essential health benefits, including preventive care, emergency services, and prescription drugs; other coverage varies by plan
Is preventive care covered 100%?	Varies by plan	Yes, when you see an in-network healthcare provider
Will my pre-existing conditions affect my coverage?	Yes—you may either be denied enrollment in the plan, or your plan may not cover healthcare services related to your pre-existing condition, at least initially	No—ACA plan providers can’t deny coverage, charge you more, or refuse to cover essential services for your pre-existing condition
Does the plan qualify for the individual mandate under the Affordable Care Act?	No	Yes
How do limits work?	Insurer can set limits and sublimits on care, and you’re responsible for remaining costs	Plans place limits on how much you must pay out of pocket for in-network care; plans can’t cap coverage for essential health benefits but may limit coverage for other services

Frequently Asked Questions (FAQs)

Is Fixed-Indemnity Insurance Worth It?

Fixed-indemnity insurance may be a worthwhile add-on to an employer-sponsored group health plan, individual Marketplace plan, or Medicare. However, it shouldn’t replace any of these forms of major medical coverage entirely. It’s important to weigh the cost of a fixed-indemnity plan against the benefits it provides.

For example, if the annual premium for the fixed-indemnity plan exceeds your out-of-pocket maximum for your regular health plan, it’s probably not worth having. Or, if you have a Medigap plan that already helps fill Medicare coverage gaps, it doesn’t make sense to pay for a fixed-indemnity plan as well.

What Are the Disadvantages of Indemnity Health Insurance?

There are several disadvantages of indemnity health plans when compared to ACA-compliant plans, including:

Predetermined payouts for healthcare services may fall short of actual costs, leaving you with unpredictable out-of-pocket expenses, as you’ll cover the difference.
Indemnity plans may limit the number of times you can access a particular service and the total amount of benefits you can receive in a year. So, an indemnity plan might not provide enough coverage for a serious health condition.
You may not be allowed to enroll in an indemnity plan if you have a pre-existing condition, or the plan may not pay for related treatment.

What’s the Difference Between Indemnity and PPO Health Insurance?

Like a PPO plan, indemnity health plans allow you to see any doctor without a referral. But with PPO health insurance, you pay a fixed copay or coinsurance for each service after meeting your deductible. Your insurer covers the rest. Your out-of-pocket expenses are capped at a certain dollar amount.

Indemnity health plans can work in a reverse fashion. The insurer pays you or your provider a fixed amount for services up to an annual limit, and you pay the rest. While plans may differ, in a worst-case scenario, there’s no limit to how much you might spend on healthcare with an indemnity plan. A serious illness could lead to medical debt.

The Bottom Line

The best fixed-indemnity insurance policies come with no deductible, high annual and lifetime coverage limits, high fixed coverage amounts for a wide range of benefits, and a short waiting period before coverage begins. Also ensure you compare how much coverage you’re buying to the actual costs of care.