Chapter 20: types of individual health insurance coverage.
Individual health insurance is a policy purchased by an individual that provides reimbursement for certain medical and hospital expenses in the event of the insured's illness or injury. It is generally issued by an insurance company. Many individuals obtain their health insurance through their employer. This type of coverage is usually provided using a group health insurance contract with the cost split between the employer and the employees.
There are two major types of health insurance plans: prepaid plans and postpaid plans. Prepaid plans pay the health care providers before the care is delivered. The most common type of prepaid plan is a health maintenance organization or HMO. Postpaid plans pay the health care providers or reimburse the insured individual after the care has been received. Traditional forms of health insurance coverage are postpaid plans.
Health insurance coverage was first offered in the 1920's. The first medical expense insurance policy was individual hospital expense insurance that covered only the cost of hospital expenses, not the cost of the doctor's services. This coverage was offered by the hospitals themselves and was the beginning of the Blue Cross plans. (1) The prevalence of employer-provided group health insurance increased significantly during the 1940's when employees were difficult to find but the employers were prohibited by the government from raising wages. Providing fringe benefits such as health insurance was not prohibited. (2) The first major medical coverage was introduced by the Liberty Mutual Insurance Company in 1949. This coverage was designed to supplement the basic medical expense plan coverage. (3)
WHEN IS THE USE OF THIS TOOL INDICATED?
Basic health insurance coverage is an essential part of any individual's financial security. The cost of a serious illness or injury can be, and often is, more than a single individual or family can afford.
In 2005, 15.9% of the United States population did not have health insurance. (4) In 2004, the figure was 15.7%. (5) In 2002, 52.2% of the United States population had health insurance through their employer, but 16.2% were uninsured. (6) In 1997, about 70% of the United States population had coverage provided by some form of private health insurance. (7) The rapidly-increasing cost of health care and health insurance has been a significant concern in the United States.
Premiums paid for personally-owned health insurance are deductible as a medical expense to the extent that the premiums plus the taxpayer's other medical expenses exceed 7.5% of the taxpayer's adjusted gross income for the taxable year. (8) Benefits paid from a personally-owned health insurance policy are not taxable to the covered individual. (9) The taxation of health insurance is treated in greater detail in the following chapter.
There are several different types of health insurance coverage. Although all are designed to provide reimbursement for expenses incurred as a result of sickness or injury, how the coverage and reimbursement is de livered differs. Following is a discussion of the major types of health insurance coverages including hospital-surgical coverage, major medical coverage, traditional indemnity coverage, preferred provider organizations (PPOs), health maintenance organizations (HMOs), and Medicare supplemental insurance.
Generally, medical expense coverage is designed to protect the insured person against financial losses by reimbursing the insured for the costs of surgery and hospitalization. The two major types of medical expense coverage are hospital-surgical insurance, also known as basic medical expense insurance, and major medical insurance. These two coverages are discussed below.
In conjunction with major medical coverage, hospital-surgical coverage provides coverage for hospitalization and surgery. As mentioned above, hospital-surgical coverage and major medical insurance together make up medical expense coverage which is sometimes referred to as basic medical expense insurance. This type of coverage can be offered on both an individual and a group basis.
With hospital-surgical coverage, certain expenses that are covered are defined in the policy. These expenses can differ from one policy to the next, but hospital-surgical coverage will usually cover hospital room and board charges; miscellaneous hospital charges including lab services, x-rays, and medicine; plus services of other hospital employees such as nurses, radiologists, and anesthetists. It also covers surgical charges, physicians' in-hospital charges, charges for outpatient services, and charges for maternity services.
What benefit does this type of coverage pay? Hospital-surgical coverage sets a limit, in one manner or another, on the amount it will pay for each benefit. The limit may be a certain dollar amount, such as $100 per day for hospital room and board charges, or the limit may be set at the usual and customary charge for a particular service. Also, some policies have a total limit on the amount of benefits that will be paid under the policy. For surgical charges this type of coverage sets a fee schedule that imposes an upper limit for various surgical procedures. This limit can be expressed as a cash amount or as portion of the policy's overall coverage amount. These types of policies also set a certain limit, usually a dollar limit, on what types of lab work the policy will reimburse.
Major Medical Coverage
As mentioned earlier, together with hospital-surgical coverage, major medical coverage makes up medical expense coverage. The two types of major medical coverage, which can be offered on both an individual basis and a group basis, are supplemental and comprehensive.
Supplemental major medical coverage is designed to supplement the basic hospital-surgical plan by covering expenses that the basic plan does not cover. In contrast, comprehensive major medical wraps up into a single plan all the coverages provided by the basic hospital surgical plan and a supplemental major medical plan. As you might expect, the comprehensive major medical plan is streamlined, easier to use, and does not have any overlapping of coverage from several different policies. For these reasons, the comprehensive major medical plan is more common than the other types of coverages.
Major medical policies cover specific services and supplies in much the same manner as the basic hospital-surgical policies. However, the major medical coverage tends to cover more services and to pay greater benefits. Similar to the basic hospital-surgical plan, the major medical coverage also has exclusions and limitation for various services.
With major medical coverage, there are two concepts that it is important to understand in relation to which and how much of certain services will be covered under the policy. These two concepts are the policy deductible and coinsurance.
A deductible is a certain amount of a covered expense that the policyholder must pay out of pocket. The deductible amount is not the same with each policy. One policy may have a deductible of $500 while another policy's deductible amount may be only $200. Often the policyholder can choose the deductible amount for the policy, and electing a higher deductible generally will lower the cost of the policy.
If a policyholder has major medical coverage with a deductible of $500 and he incurs a covered medical expense of $1,200, the policyholder must pay the first $500 dollars of the expense and the insurance policy will pay the remaining $700. Usually, deductible amounts are cumulative, so if the policyholder mentioned above incurs another covered expense of $400 later in the year, the policy will pay the entire $400 expense since the policyholder has already meet the $500 deductible for the year.
Coinsurance is a concept that typically applies to health insurance policies. It requires that both the policyholder and the insurance company pay a portion of each covered expense after the policy's deductible has been met. For example, if a covered expense is $2,000, after the policy deductible has been paid by the policyholder, the policyholder will pay a portion of the $2,000 out of pocket and the insurance company will cover the remainder. Often, coinsurance is a 20/80 split, with the policyholder paying 20% of the covered amount ($400 in the example) and the insurance company paying 80% ($1,600 in the example). Usually, there is an overall coinsurance maximum for the policyholder for the year. After the policyholder has paid this maximum amount, such as $1,000, in coinsurance for the year, the insurance company will pay 100% of subsequent covered expenses.
Most major medical expense policies set a maximum limit on the amount that the policy will pay out in benefits during the insured person's lifetime. This limit is generally quite high, perhaps as much as $5,000,000.
To receive benefits under a health insurance plan, the insured must submit a claim to the insurance company. A claim is, generally, an itemized statement of services and costs for which payment is being requested. The claim form is completed by the doctors' office, the hospital, or other health care provided. It is submitted to the insurer by either the insured or directly from the health care provider's office.
The ways in which the insured individual submits claims under major medical coverage can vary. The requirement that the policyholder submit a claim form and other paperwork for each expense and each doctor, lab, and medical facility can become burdensome, particularly where the policyholder is dealing with a major illness. In fact, there are now companies that an individual can hire just to submit the claims to their health insurer. Such companies will also deal with the medical establishment to try and make sure that the policyholder receives the maximum reimbursement to which he or she is entitled.
Many states have a mandated review process that insurance companies must follow when a policyholder's claim has been denied. Typically, these review processes deal with such items as who can appeal, when the appeal can be made, what information must be included in the appeal, and a time frame in which the policyholder must receive a response. Usually, the policyholder must work through all levels of the health plans internal review process before moving into the state's review process.
After the insurance company has processed the claim, the policyholder should receive an Explanation of Benefits or EOB statement for each claim processed. This statement tells the policyholder what claims were allowed and what amounts were paid. This statement is the starting point to appeal a claims decision with which the policyholder disagrees. With a Health Maintenance Organization (HMO) Plan, discussed below, the claims are handled between the medical providers and the HMO and payment is often decided upon before treatment is authorized rather than afterwards.
This type of coverage, known as traditional or hospital indemnity insurance, pays a specified dollar amount for each day the insured is in the hospital. With some policies, the applicable time period may be a week or a month rather than per day. The benefits paid by hospital indemnity coverage are not based upon the insured person's actual medical expenses. They are paid in addition to other types of insurance payments. These payments are intended to provide the hospitalized person with funds to pay expenses not covered by other types of insurance as well as other incidental expenses, childcare costs, housekeeping services, etc. A typical benefit amount under this type of coverage ranges from $100 to $400 per day. (10)
Health Maintenance Organization (HMO)
An HMO is a type of managed care organization. Created in the 1920's, it is an organization of physicians and other health care providers that provide health care including doctor's visits, lab tests, hospital stays, surgery, preventative care, check-ups, and emergency care on a prepaid basis. It is generally considered to be an alternative to traditional health insurance coverage. With an HMO, the insured must select a primary care physician who coordinates all care and controls referrals made to specialists. In addition, the insured must go to the doctors, hospitals, etc. that participate in that particular HMO plan. Often, if an insured obtains non-emergency care from a provider outside the network, the plan will not cover the cost of such care.
One advantage of the HMO is that it often covers more types of health care services than the traditional policy and often has lower co-payments and deductibles. HMOs provide access to services ranging from primary care office visits to highly sophisticated medical inter ventions for life-threatening conditions. They cover the full range of health care services, including physician, hospital and outpatient services, laboratory tests, x-rays, home care, rehabilitation therapy, mental health care, and other services. HMOs also offer supplemental benefits, such as prescription drugs.
On the other hand, HMOs impose limits as to which doctors and which hospitals an insured individual may use. Some HMOs emphasize preventative care to a greater extent than does traditional health insurance coverage. Typically, HMO members do not receive bills from the physicians and hospitals as they would with a more traditional type of health insurance coverage such as major medical insurance. Neither do the HMO members have to complete claims forms.
Over time different types of and different methods for organization have developed in relation to HMOs. Following is a discussion of several of the more common types of HMOs.
First, let's take a look at the staff model of an HMO. Here, the doctors are salaried employees of the HMO. In other words, the physicians are on the staff of the HMO rather than operating their practices as separate business entities. Generally, this means that the HMO patients are permitted to see only the doctors that are on the staff of the HMO. The HMO locations may also provide laboratory and x-ray services, prescription drugs, and other medical services. Inpatient treatment is provided through affiliated hospitals.
A second method of organizing an HMO is referred to as the group model. Here, the HMO does not contract with the physicians directly as employees but makes payments to a physicians' group. In turn, the group decides how to split the funds received among the various doctors. With this type of HMO, as with the staff model, the patients are only permitted to see the physicians in the group. Both the staff model and the group model are referred to as "closed panel" HMOs. This term refers to the fact that the patients are not allowed to be seen by physicians outside the organization.
In contrast to the closed-panel is the "open-panel" model. In this type of organization physicians may contract with an independent practice association (IPA). The IPA then enters into a contract with the HMO. Physicians participating in this model of an HMO maintain their own offices and may see patients who are not members of the HMO as well as those who are members.
The last type of HMO organization is the network model. Here, the HMO contracts with any number of groups as well as with individual physicians. This model has tended to be the one most commonly used in recent years.
Preferred Provider Organization (PPO)
Like an HMO, a preferred provider organization or PPO is a type of managed care organization. A PPO contracts between the sponsor and health care providers to treat plan members. A PPO can also be a group of health care providers who contract with an insurer to treat policyholders according to a set fee schedule. A PPO might consist of a single hospital and its practicing physicians that contract with a large employer while another PPO might consist of a national network of physicians, hospitals, and labs that contract with insurers or employer groups. A PPO often provides discounts from standard fees and incentives for plan enrollees to use the contracting providers. While a PPO typically provides incentives for its members to use designated health care providers who contract with the PPO at a discount, this type of plan also provides coverage for services rendered by health care providers who are outside of the PPO network. However, members of a PPO may be required to pay a larger percentage of the out-of-network provider's bill.
Point-of-Service Organization (PSO)
Yet another variation of health insurance plans is the point-of-service organization or PSO. The PSO is a type of health care plan that permits its members to elect, at the time medical care or services are needed, whether they will go to a provider within the PSO's network or whether they will obtain the health care from outside the plan's network. .
Some might characterize the PSO as a hybrid plan falling between the HMO and the PPO. The PSO is typically more expensive than the HMO but less costly than a PPO. The costs of the PSO consist of a monthly premium, a co-payment for care received from the plan network, and a deductible for care received outside the plan network.
The plan may impose restrictions on the types of services that can be obtained from outside the plan's network. For example, a PSO plan might not allow members to obtain prescription drugs or infertility treatments from outside its network. Furthermore, if a member elects to go outside the network, the member will likely be responsible for filing the necessary paperwork to get reimbursed from the plan. If services are obtained within the plan network, the paperwork is usually handled without involving the member.
The advantages of the PSO type of plan include the fact that members are free to use non-network providers and the fact that for network care, co-payments are typically low. Further, PSO members usually do not pay a deductible when care is received inside the network. Disadvantages include the fact that the co-payments for care received outside the network can be relatively high and come with a deductible that the member must meet. Also, some would argue that with the PSO plan referrals for specialized care may be difficult to receive.
Medicare Supplemental Insurance
This type of supplemental coverage pays for expenses not covered by Medicare. Other names for this type of coverage are MedSupp policies and Medigap polices. Medicare is a program of the federal government that pays for health care for individuals age 65 and older. Medicare has two primary parts: Part A and Part B.
Part A of Medicare pays benefits for hospitalization, skilled nursing facilities, home health services, and hospice care. It is provided, without cost, to everyone age 65 and older who is eligible for Social Security benefits. If an individual with Medicare Part A coverage is hospitalized, the individual must pay the deductible and all of the charges for the first 60 days. For days 61 through 90, the individual must pay a co-payment for each day in the hospital. After the 90th day, the individual is again responsible for the hospital expenses. In addition, each person has a lifetime reserve benefit available of up to 60 additional days of hospitalization coverage where the individual pays only a co-payment.
Medicare Part A also pays benefits for skilled nursing care for the first 100 days if the individual spent at least three days in the hospital prior to the skilled care. The costs of the first 20 days are paid in full while the costs of the next 80 days require the individual to make a co-payment. Home health services and hospice care are also covered by Medicare Part A.
In contrast to Part A of Medicare, Part B is a voluntary program that requires participants to pay a premium. It provides coverage for doctor's bills, surgical procedures, hospital outpatient services, and medical supplies. The amount of payment for the various expenses paid by Medicare Part B is determined based on what is considered reasonable for the area in which the services are provided.
In 1990, the federal government required that all Medicare supplement policies, which provide coverage for certain expenses not covered by Medicare, must be standardized. There are twelve standard types of policies that may be sold. These twelve polices are designated with the letters A through L. Plan A offers the least amount of benefits and is generally referred to as the "core" plan. It is available in all states. Plans B through J provide a mix of additional benefit options, but all include the "core" benefits. Some of these plans may not be available in Massachusetts, Wisconsin, and Minnesota. These states are allowed to have different Medigap plans as they already required standardized Medigap policies prior to 1992. Plan J provides the most coverage available for this type of policy. (11) The "core" plan must contain these benefits (12):
* Hospital Insurance (Part A) coinsurance for the 61st day through the 90th day of hospitalization;
* Hospital Insurance coinsurance for the 91st day through the 150th day of hospitalization;
* Hospital Insurance expenses for an extra 365 days in the hospital;
* Hospital Insurance (Part A) and Medical Insurance (Part B) deductible for the cost of the first three pints of blood; and
* Medical Insurance (Part B) coinsurance (20% of allowable charges).
Two plans (F and J) are available with a high-deductible ($1,860 in 2007) option. Plans K and L, new in 2006, do not include the entire core benefit package. They instead offer catastrophic coverage for a lower premium.
An individual has six months after turning age 65 to open-enroll in a Medigap policy. During this time period, the insurance company cannot deny Medigap coverage to an individual or charge a greater premium if the individual has had health problems. Further, Medigap policies are guaranteed renewable which means that the insurance company must continue the policy provided the premiums are paid in a timely manner. This is true even if the insured individual is in poor health. (13)
1. One alternative to the purchase of health insurance is self-funding. In other words, an individual saves sufficient funds to pay any medical expenses out of pocket and completely forgoes the purchase of any commercial health insurance policy. This is typically difficult for the average person to do since a major illness or accident can happen at any time and conceivably result in medical and doctors' bills that run into the hundreds of thousands of dollars. Most individuals cannot realistically save this amount and set it aside for possible medical bills.
2. A second alternative to individually-purchased health insurance is group health insurance coverage. A common type of coverage, this is usually provided by an employer or perhaps through an association. Typically, there is an open-enrollment period where all eligible employees can accept coverage without showing evidence of insurability. The cost of the insurance is usually paid for by both the employer and the individual employee.
WHERE CAN I FIND OUT MORE ABOUT IT?
1. The Health Insurance Primer (Washington, D.C.: The Health Insurance Association of America, 2000).
2. Social Security Manual (Cincinnati, OH: The National Underwriter Company, published annually).
3. All About Medicare (Cincinnati, OH: The National Underwriter Company, published annually).
QUESTIONS AND ANSWERS
Question--What are the various types of deductibles used with major medical health insurance policies?
Answer--Generally, there are two basic types of deductibles used with major medical coverage: the all cause deductible and the per cause deductible. With an all cause deductible, all expenses incurred for all illnesses or accidents apply to a single deductible amount. Once this deductible amount has been met for the year, all covered expenses will be paid by the insurance company.
With the per cause deductible, the policyholder must meet the deductible amount for each illness or accident. Any expenses attributable to an illnesses or accident will be paid in full after the deductible is met, typically, for a two-year period. Because of its simplicity, the all cause deductible is more commonly used than the per cause deductible.
Question--What is the difference between a corridor deductible and an integrated deductible? Answer--Both of these deductible types are used to coordinate medical benefits paid by a major medical plan with benefits paid by the basic hospital-surgical plan that the major plan supplements. When the medical expenses incurred by the policyholder are greater than the benefits that will be paid by the basic plan, a corridor deductible must be met before the supplemental major medical plan will pay any benefits. For example, if the total medical expense incurred is $3,000 and the basic plan will pay only $1,500, the corridor deductible must be met by the policyholder before the supplement plan will pay any benefits. If the corridor deductible is equal to $500, the first $1,500 of the expenses is paid by the basic plan, the next $500 is paid by the policyholder as a deductible, and the remaining $1,000 is paid by the supplement plan.
In contrast, the integrated deductible is easier to understand. This type of deductible can be met by either payments made by the policyholder or by benefit payments made by the basic coverage policy.
Question--What is critical illness insurance?
Answer--Critical illness insurance pays a lump sum to the insured person if he suffers one of the serious illnesses or injuries set forth in the policy. Typical conditions covered by critical illness insurance are heart attack, heart bypass, major organ transplant, stroke, kidney failure, paralysis, cancer, Alzheimer's disease, multiple sclerosis and the loss of sight, hearing, or speech. (14)
Critical illness policies pay the lump sum benefit without regard to the insured person's actual medical expenses or any other medical insurance benefits he may be entitled to. The lump sum may be different for different illnesses or injuries within one policy.
Question--What are the additional benefits that can be offered by Medigap policies above the "core" plan?
Answer--Beyond the "core" benefits offered in the Plan A Medigap policy, the following additional benefits can be offered in the other plans (15):
* the entire hospital insurance deductible;
* the per day coinsurance for days 21 through 100 of skilled nursing home care under hospital insurance;
* the medical insurance deductible;
* 80% of the "balance billing" paid by Medical Insurance beneficiaries whose doctors do not accept assignments;
* 100% of the lawful balance billing;
* 50% of outpatient prescription drug costs;
* 80% of the Medicare-eligible costs of medically necessary emergency care when the insured is traveling outside the United States;
* up to $120 per year for certain screening and preventative measures; and
* some short-term at-home assistance benefits.
Question--What is a Health Savings Account (HSA)?
Answer--A Health Savings Account or HSA is a trust created exclusively for the purpose of paying the qualified medical expenses of the account holder. (16) Contributions to the HSA cannot exceed a certain limit for each calendar year. (17) Generally, any employer or individual who has high deductible health insurance coverage can have an HSA. Contributions to an HSA may be made by either the individual or by his employer or by both. If the contributions are made by the individual, they are deductible. (18) If the contributions are made by the employer, they are excluded from the employee's income. (19) HSA distributions are not includable in income if they are used exclusively to pay for qualified medical expenses. Distributions not used for this purposes are includable in income and may be subject to a penalty. (20)
(1.) The Health Insurance Primer (Washington, D.C.: The Health Insurance Association of America, 2000), p. 163.
(2.) Ibid, p. 164.
(3.) Ibid, p. 165.
(4.) Julie Appleby, "Ranks of Uninsured Americans Grow," USA Today, accessed at www.usatoday.com on 8-27-07.
(5.) Report from Center on Budget and Policy Priorities, accessed at www.cbpp.org on 8-27-07.
(6.) Ibid, p. 170.
(7.) Ibid, p. 9.
(8.) IRC Sec. 213(a).
(9.) IRC Sec. 104(a)(3).
(10.) The Health Insurance Primer (Washington, D.C.: The Health Insurance Association of America, 2000), p.34.
(11.) Ibid, p. 40.
(12.) All About Medicare (Cincinnati, OH: The National Underwriter Company, 2007), p. 99.
(13.) Ibid, pp. 97-98.
(14.) The Health Insurance Primer (Washington, D.C.: The Health Insurance Association of America, 2000), p. 35.
(15.) All About Medicare (Cincinnati, OH: The National Underwriter Company, 2007), p. 97.
(16.) IRC Sec. 223(d).
(17.) IRC Sec. 223(d)(1).
(18.) IRC Sec. 223(a).
(19.) See IRC Sec. 106(d)(1).
(20.) IRC Sec. 223(f).
END OF CHAPTER REVIEW
1. Many individuals obtain their health insurance through an employer-sponsored group health plan.
2. Individuals may not purchase individual health insurance policies that reimburse for medical and hospital expenses.
3. The first health insurance offered was individual hospital expense insurance that covered the cost of hospital expenses, but not the cost of the doctor's services.
4. Premiums paid for personally-owned health insurance are never deductible as a medical expense. True False
5. Major medical coverage tends to cover more services and to pay greater benefits than hospital-surgical insurance.
6. A policy deductible is the amount of a covered expense that the policyholder must pay out of pocket.
7. Coinsurance never applies once a policy deductible is met.
8. HMOs and PPOs are types of managed care organizations.
9. Medicare Part A provides coverage for doctor's bills, surgical procedures, outpatient services, and medical supplies.
10. Medigap policies vary widely from state to state.
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|Publication:||Tools & Techniques of Risk Management for Financial Planners, 2nd ed.|
|Date:||Jan 1, 2007|
|Previous Article:||Chapter 19: overview of health-related insurance.|
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