Research and Reflect
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NewChap11.docx11 Planning for Health Care Expenses
YOU MUST BE KIDDING, RIGHT?
Amber Parker is a 46-year-old unmarried mother with two children, ages 16 and 17. She lives partly on alimony from her former husband and she works part-time out of her home as a medical transcriptionist for a local hospital. Last year Amber suffered severe head injuries in a hit-and-run accident when jogging. Amber's wounds have healed and she has regained her ability to speak but is not yet able to walk on her own or use her hands and arms very well. At first she required some mental health counseling. Now she still requires a daily paid caregiver to assist with her personal needs. It may be another six months before she can work again. Which one of the following aspects of her injury were covered by Amber's private health care plan?
A. Hospital stay
B. Rehabilitative care
C. Mental health
D. All of the above
The answer is “all of the above.” Amber had purchased an individual health care policy at HealthCare.gov that covers hospital, surgical, mental health, and rehabilitative care, therefore, after deductibles and copays the Affordable Care Act covered all her expenses. Individuals without health insurance can buy a health care policy on a state or federal exchange!
LEARNING OBJECTIVES
After reading this chapter, you should be able to:
Explain how the Affordable Care Act works, and how consumers shop and pay for health insurance coverage.
Distinguish among the types of health care plans.
Describe the typical features and limitations of health care plans.
Explain the fundamentals of planning for long-term custodial care.
Develop a plan to protect your income when you cannot work due to disability.
Summarize the benefits of preparing advance medical directive documents.
WHAT DO YOU RECOMMEND?
Danielle DiMartino is a 36-year-old single mother with two children, ages 10 and 14. Her 10-year-old daughter has a history of ear infections that require doctor's office visits four or five times per year. Danielle's 71-year-old mother lives with the family for financial reasons; she has hereditary high blood pressure and high cholesterol as well as diabetes. Danielle's mother has enrolled in Medicare Parts A and B.
Danielle's employer pays all or a portion of the cost for a health care plan to cover the company's workers, their spouses, and their dependents. Danielle has four options: (1) the basic HMO managed by a local university medical school/hospital with no additional cost for Danielle, but with additional cost of $122 per month to cover her children, (2) a health insurance plan with a PPO at that same medical center for an additional cost of $245 per month, (3) a traditional health insurance plan that provides access to virtually all health care providers in her community for $455 per month, and (4) a health plan with a $5000 deductible at no additional cost. Danielle's employer offers no disability income or long-term care group plan. She does receive ten sick days per year, which can accumulate if not taken. Danielle has accumulated 30 days.
What do you recommend to Danielle DiMartino on the subject of managing health expenses regarding:
1. Choosing among the four alternatives available to her?
2. Danielle's concerns about providing for her mother's health care needs?
3. Danielle's need for disability income insurance?
4. How Danielle can cover her long-term care risk?
Few things in life are more important than your good health. When illness or injuries strike, three issues may affect your finances. First, there is the direct cost of the required health care, such as the cost of hospital stay and surgery. Second, there is the potential for lost income when you cannot work. And third, there are the costs of any rehabilitation. Health care events can quickly wipe out much or all of your assets. More than half of all credit collections are health care related and 60 percent of all personal bankruptcies are caused by health care bills.
Such extreme health care costs now can be avoided because there are programs available to address all of these problems. Now you have no choice! You must learn how to protect your health and personal finances by purchasing the best policy for yourself. That could be mean staying on your parent's health care policy until you are age 26 or by signing up for a policy through your employer. Or, you could buy a price-subsidized policy in the private marketplace. Health illiteracy is no longer acceptable. You have no choice. Today you must know what the insurance vocabulary means as well as all about any exclusions, deductibles, co-pays, and out-of-pocket limits. If you don't, you will lose.
11.1 THE AFFORDABLE CARE ACT AND YOU
When people who are uninsured suffer any insurable loss, such as a vehicle crash, lost ring, or home fire, they typically bear the full cost of the loss themselves. Health care losses, however, are different. Because federal law requires it, when an uninsured person becomes ill or injured they may obtain care by going to a public hospital for treatment. If they are unable to pay, the costs are primarily shifted first to hospitals because the 1986 Emergency Medical Treatment and Active Labor Act requires hospitals participating in Medicare (and nearly all do) to provide emergency care to anyone who needs it.
That pushes hospitals costs up. Those costs are then shifted to people who do have health insurance in the form of higher costs to insurance companies. The insurers then raise health care insurance premiums (the monthly or annual cost for a health care plan) that partially “cover” those without insurance.
premiums The monthly or annual cost of a health care plan.
Before the Affordable Care Act went into effect the United States of America was the only industrialized country in the world that did not provide universal access to health care to all citizens. This continued despite the fact that every U.S. president in the past 70 years pushed their Congresses to pass a universal health care law.
Such legislative failures also meant that about 45 million Americans had no health insurance. Every year among the 45 million uninsured men, women, and children 272,000 cancers were diagnosed and 92,000 died. Ever year another 95,000 died of heart diseases and yet another 22,000 died of respiratory diseases. Strokes killed 20,000. Many lives were devastated because a loved one died by a freak accident or an infectious disease. Or they died from an unexpected diagnosis of a disease like diabetes, nephritis, or influenza. And none had health insurance. These deaths happened every year to those individuals without insurance.
Until 2014 when the ACA went into effect there were two nations in this country: One with the security of health care and one with no security at all. In the eyes of many, including the religious as well as non-believers, their consciences told them that this history was a moral disgrace. Passage of the ACA has made progress in changing the old status quo.
The ACA aims to pool risk and share the costs as broadly as possible so that everyone is protected by affordable health insurance throughout their lives. Thus, everyone benefits if all people are covered by a health plan because each person's costs are lowest when you are sharing risk with others. The insurance idea works because most people are mostly healthy most of the time.
LEARNING OBJECTIVE 1
Explain how the Affordable Care Act works, and how consumers shop and pay for health insurance coverage.
However, no one is guaranteed good health forever. And the reality is most people need to see health providers to stay healthy or at least monitor their health. That is why we buy insurance. Just like auto insurance you have to have health insurance as a “what if “ something happens. We all wish we could avoid buying any kind of insurance until after the vehicle crashes, or the storm hits, or the home catches on fire, or we get very sick, but that is not how insurance works.
The goal of the 2010 Patient Protection and Affordable Care Act (PPACA) , commonly known as the Affordable Care Act (ACA) , is to provide affordable health insurance for all U.S. citizens and reduce the growth in health care spending. The ACA aims to reform U.S. health insurance industry and the American health care system as a whole. In essence, the ACA begins to fix our broken health care system.
Patient Protection and Affordable Care Act (ACA) The law passed by Congress in 2010 to provide affordable health insurance for all US citizens and reduce the growth in health care spending.
The current $2.8 trillion U.S. healthcare system costs almost $9000 a year for every man, woman, and child. A more accurate figure is about $16,300 a year for employed workers in America whose employers pay $11,700 for their insurance and their employees pay about $4600.
These costs amount to 18 percent of gross domestic product spent on health care, which is the highest percentage spent on health care of any country in the world. The people of Britain, Canada, Germany, and Norway, to name a few industrialized countries that provide health care to all citizens, spend only about half as much on health care but their citizens live longer than those in the United States.
The health care system in the USA is not a single-payer health system, like in many nations worldwide, where the government, rather than private insurers, pays for all health care costs. Instead we have a highly fragmented system of private and public payers. Thus the USA system is more inefficient and more costly than others, and despite the ACA it remains so.
YOUR NEXT FIVE YEARS
In the next five years, you can start achieving financial success by doing the following related to managing health expenses:
1. Sign up for an employer-sponsored premium conversion plan and a flexible spending arrangement for medical and dental expenses, whenever they are available, to save money on taxes.
2. Consider using a bronze-level health plan and health savings account if you are unable to afford the high costs of an HMO or traditional health insurance plan.
3. Consider maintaining coverage for health care expenses when changing employers using the COBRA law or a plan offered through the Affordable Care Act.
4. Take advantage of employer-sponsored long-term disability income insurance if available or consider purchasing protection individually.
5. Create your advance medical directive documents so your family will know your wishes.
11.1b The ACA Does Not Impact the 85 Percent of Americans Who Already Have Insurance
The 85 percent of Americans who were already covered by a health care plan prior to the law's implementation were not impacted by the Affordable Care Act because they already had insurance that meets the law's requirements. They already had a group health care plan offered by an employer, already had private insurance, or were enrolled in a government provided insurance plan (e.g., Medicare Part A, Medicaid, CHIP, and TRICARE).
11.1c The ACA Does Impact Individuals without Health Insurance
The 15 percent without health insurance are required to purchase coverage or pay a penalty tax. These 45 million Americans who did not have health insurance at the beginning of 2014 were impacted under new health care law. By 2015, 8 million of those people bought health insurance, 3 million were added to Medicaid, and 3 million more who were under age 26 were added to their parent's health plan. That's 14 million now with health insurance. By 2016 25 million people will have insurance who would not have had it otherwise, predicts the non-partisan Congressional Budget Office. Hospitals, doctors, and health insurance companies like the ACA because it creates more customers and additional income.
11.1d The ACA Is Based on RomneyCare and the Heritage Foundation's Ideas
The ACA, commonly known as ObamaCare, is based on health reform in Massachusetts, signed into law in 2006 by the state's then governor, Mitt Romney, which is informally called RomneyCare. Today the law provides coverage for 98.1 percent of Massachusetts residents with satisfaction rates over 96 percent. The law mandates that nearly every resident obtain a state-government-regulated minimum level of health care insurance coverage and provides free health care insurance for residents earning less than 150 percent of the federal poverty level (FPL). RomneyCare has proved cost effective, sharply reduced health insurance costs, and it provides better quality affordable health care to more people. And the law is creating jobs.
The concept behind both RomneyCare and the ACA was originally purposed by the conservative Heritage Foundation in 1989 as a traditional, market-based reform of health care, suggested in contrast to a single-payer health care system. It was strongly supported for a while by conservative economists and Republican senators as a conservative approach to health care reform, particularly on the basis of individual responsibility.
11.1e The ACA Provides Benefits, Rights, and Protections
The ACA offers a lot of new benefits, rights, and protections to 25 to 30 million uninsured Americans who will buy health insurance policies in the individual market. The benefits include a mandate for health insurance companies to cover everyone regardless of pre-existing conditions (which 1 in 2 Americans have), stops insurers from charging women more than men, prohibits dropping coverage for any reason except for fraud, eliminates annual and lifetime limits on health care, mandates that insurers cover 10 essential health benefits, wellness visits and preventative services with no out-of-pocket costs, and generally increases the quality of American's health care. The only way health insurance providers can afford all of this is if everyone buys insurance.
You Must Have a Health Care Plan If You Are Uninsured The Affordable Care Act regulates health insurance, not health care. The law includes over 2700 pages of reforms to the insurance and health care industries in order to cut health care costs, provide affordable health insurance to all Americans, and reduce wasteful spending. The law focuses on prevention and primary care to help people stay healthy and to manage chronic medical conditions before they become more complex and costly to treat. Provisions of the ACA and answers to many questions may be found at www.irs.gov.aca . Step-by-step help on the law is offered by Consumer Reports at HealthLawHelper.org.
The government wants you to have a health care plan. The ACA law requires that all Americans and legal residents no matter how sick and regardless of any pre-existing health problems, buy health coverage. This is known as the individual mandate.
Almost everyone is required to obtain a quality healthcare plan that meets the government's standard for its required “10 essential benefits” of adequate coverage (see next page) either through a private provider, their employer, through a state or federally assisted program or pay a tax penalty.
If you do not have health care, you will be assessed a tax penalty. The IRS calls the tax penalty an individual shared responsibility fee. It goes toward funding the ACA, subsidizing hospitals (which will still have to cover unpaid emergency room visits for those not covered by Medicaid programs in states that do not offer expanded Medicaid [discussed below] and undocumented immigrants), and as a down payment on other uninsured people's almost inevitable use of the health care system. The tax penalty will be assessed when filing your income tax return. It will offset any refund that would otherwise be due or will add to any balance due.
Health insurance coverage gaps of up to three months are allowed and will not violate the individual mandate. But after that, the tax applies to each month within a calendar year that you did not have coverage for yourself or a member of your household. Health insurance plans will provide documentation to prove you had insurance, which is filed with your income tax return.
Protections and Benefits of the Affordable Care Act
• Ban on Denial for Pre-exisiting Conditions and Cancellation of Policies. You cannot be denied coverage because of pre-exisiting health conditions diagnosed prior to signing up for a plan, and this impacts half of all Americans. Nor can an insurer cancel your policy if you get sick or make an honest mistake on your application. Policies can only be canceled for customer fraud.
• Prohibits Charging Women and Men Different Prices. The law stops discrimination based on gender, income, and health issues.
• Prohibits Rationing Health Care. The law protects consumers from the health care rationing insurance companies have been doing for ages.
• Lousy Health Policies Are Prohibited. Prior to passage of the law, the nation saw a race to the bottom as insurers cut benefits to lower premiums. Any policy today offering less than the federal government's “10 Essential Benefits” are prohibited.
• Required Free Preventive Care and Annual Checkups Without Co-pays. Plans must eliminate cost-sharing (co-payment, coinsurance, or deductible) for proven preventive measures such as immunizations, mammograms, cancer screenings, well-woman visits, screening for gestational diabetes, colonoscopies, domestic violence screening, breast-feeding supplies, and contraception.
• Requires Lower Premiums for Prescriptions via Medicare. The law provides lower prescription drug costs for people on Medicare.
• Payout Maximums Prohibited. Major or long-term illness can rack up serious medical bills and health insurance policies may no longer set annual and lifetime limits on how much they would pay for an individual's medical bills.
• Remain on Parent's Plan Until Age 26. Young adults may remain as dependents on their parent's policy until they turn 26, regardless of whether they live at home, attend school, or are married, unless they can get coverage at work.
• Prohibits Overcharging Older Consumers. Prohibit insurers from charging older people more than three times the amount they charge younger policyholders or vary premiums based on gender; but premiums are allowed to be higher for tobacco users.
• Rapid Appeals. People can appeal insurance company decisions to an independent reviewer and receive a response in 72 hours for urgent medical situations.
• Required Standard Disclosure Forms. All plans must use a standardized form to summarize benefits and coverage, including co-payments, deductibles, and out-of-pocket limits, and they must disclose typical out-of-pocket costs for having a baby and treating type 2 diabetes.
• Requires Justification of Rate Hikes. The law requires health insurance companies to justify any rate increases above 10 percent to a state agency.
• Promotes Choice Without a Referral. Plans must allow people to choose any available participating primary care provider, OB-GYN, or pediatrician in their health plan's network, or emergency care outside of the plan's network, without a referral.
• Required Premium Rebates If Companies Underspend on Care. Insurers must spend at least 80 percent (85 percent for insurers covering large employers) of the premiums on medical care, and if insurers spend too much on salaries, bonuses, or administrative costs, instead of health care, they must issue refunds to policyholders.
• Required Hospital Grading. Doctors and hospitals are being moved to a system where they are rewarded for providing quality care not quantity. The Medicare Value-Based Purchasing Program means hospitals can lose or gain up to 1 percent of Medicare funding based on a number of quality measures related to treatment of patients with heart attacks, heart failures, pneumonia, certain surgical issues, re-admittance rate, as well as patient satisfaction.
11.1f Ten Essential Benefits of All New Health Care Plans
Health coverage available in the exchanges is better than the substandard polices that were typically available to individuals in the health insurance marketplace before because it was dominated by bare-bones, limited-coverage plans. Older policies usually did not cover prescription drugs, mental health, maternity, and rehabilitative care. These lousy policies worked fine for many people as long as they did not discover the limitations of their policies by getting sick, going to the hospital or requiring some other excluded health care services.
The ACA established ten comprehensive essential health benefits for adequate coverage that all health care plans now must include:
essential health benefits A list of ten categories of benefits that all health care plans sold on the health insurance exchanges must Provide.
• Ambulatory patient services, such as doctor's visits and outpatient services
• Emergency services
• Hospitalization
• Maternity and newborn care
• Mental health and substance use disorder services, including behavioral health treatment
• Prescription drugs
• Rehabilitative and rehabilitative services and devices
• Laboratory services
• Preventive and wellness services and chronic disease management
• Pediatric services, including oral and vision care
11.1g Paying for the Cost of Health Insurance
If you do not have health insurance you must pay a penalty tax equal to the greater of 1 percent of your income or $325 (up to a family maximum of $975) in 2015; 2.5 percent or $695 (up to a family maximum of $2085) in 2016. Penalties for children are half the amount for adults. Beginning in 2017 the numbers are indexed to inflation.
Recall from Chapter 4 , Managing Income Taxes, that before you calculate your income tax liability you are allowed to reduce your income using exclusions, deductions, and personal exemptions. This results in your taxable income, which for most of us is the same as your modified adjusted gross income (MAGI). This is the total of adjusted gross income plus any additional tax-exempt interest income you might have. On a MAGI of $50,000 the maximum tax penalty for a single person amounts to $1000 in 2015 or $2500 in 2016.
In contrast, a subsidized health insurance policy for a young person might cost $1200 to $1500 annually. Six in 10 adults who are receiving subsidies now pay less than $100 a month for their ACA policies, and almost half of young, single individuals pay $50 or less a month. For people qualifying for subsidies that amount is less than their cell phone bill or their cable bill.
Depending upon the state in which you live, the premium could be nearly double that charged in a less expensive state. The first-year premium in Colorado was $844 and in New York it was only $255. Price is determined by supply, demand, geographic location, and competition. Predictions are for low premium increases as health care costs are the lowest in more than a decade. These prices are before subsidies, which are provided for three-quarters of the uninsured because of their incomes.
About 1.5 million people do not qualify for subsidies. They will pay much more for health insurance. Rates are lower in states with vigorous competition in their insurance markets and have robust programs to review rates.
Choosing to pay the penalty tax and forego health insurance means that you are responsible for paying all of your health care costs, from visits to the doctor's office for vaccinations, health screenings, and check-ups to ambulance rides and emergency room visits for life-threatening situations. You also will not have any protection against enormous medical bills. A two-hour emergency room visit can cost $10,000. It costs about $30,000 to stay in the hospital for three days or to have a baby, and cancer treatments can run $100,000 or more.
Knowing that health care is expensive, the ACA subsidizes middle- and low-income people thus helping them purchase health insurance at a lower cost so that coverage is more affordable. Americans may purchase federally regulated and subsidized insurance in their states through health insurance exchanges (HIX) (also known as the health insurance marketplace), and these are run by the states and/or federal governments. This is where the insurance companies compete to sell you their policies. Find your state's shopping portal at www.healthcare.gov .
health insurance exchange (HIX) Stat-by-state mechanisms established by the ACA through which consumers can purchase a health care plan.
Affordable health insurance is a policy that costs 8 percent of your income for health care premiums or 9.5 percent of family income if insurance is obtained through an employer. Those who cannot afford health insurance will either qualify for Medicare, Medicaid, or enhanced Medicaid government insurance programs or obtain financial help in the form of tax credits.
11.1h How Premium Credits Work under the ACA
Under the Affordable Care Act there are numerous tax credits and other assistance for low- and moderate-income people. The credit is based on household income and the number of people (adults and children) in the household. Premium subsidies in the form of federal tax credits are available for people buying their own insurance in the exchanges who have incomes from 100 percent up to 400 percent of the federal poverty level (about $24,500 annually for an individual to about $95,900 annually for a family of four). Middle-income people under age 65, who are not eligible for coverage through their employer or Medic-aid, may apply for tax credit subsidies available through state-based exchanges. More than half of these Americans qualify for income-based tax credits to help pay the premiums. While premiums are not cheap, they are a lot lower than they used to be.
The exact amount of the credit is based on a benchmark premium, which is the cost of the second-lowest-cost silver plan (described below) in the area where a person lives. The tax credit equals that benchmark premium minus what the individual is expected to pay based on his or her family income. This is calculated on a sliding scale from 2 percent to 9.5 percent of income. The individual can choose to have some, all, or none of the credit applied toward insurance premiums. Any reconciliation may be done on the income tax return when it is filed the following April.
Here is an example from the Kaiser Foundation of how the calculation of the credit might work for a 40-year-old individual making $30,000 a year:
• Estimated benchmark premium for a 40-year-old is $3857 per year (which varies from state to state)
• Person is responsible for paying 8.37 percent of their income, or $2512 per year
• Tax credit equals $1345
The tax credit may be used in any plan offered in the exchanges. Thus, the person would end up paying $2512 ($209 a month) to enroll in the low-cost silver plan or a lower-cost bronze plan, or more to enroll in a higher cost plan. A calculator from the Kaiser Family Foundation ( www.kff.org/interactive/subsidy-calculator/ ) provides subsidy estimates for families of varying characteristics.
The Kaiser Family Foundation figures that more than half the individuals who buy insurance on their own are eligible for subsidies, which are worth an average of $5,550 per household. This would effectively discount the projected price of insurance premiums by two-thirds, on average. Seventy percent of consumers who bought subsidized ACA health policies paid $100 or less in monthly premiums.
The Congressional Budget Office (CBO) projects that the ACA will not increase the national debt. Rather it is expected to cut the deficit by more than a trillion dollars over the next two decades. The cost of subsidies would be paid for by revenues from taxing the most expensive health plans, a small tax on the highest-income earners, tax penalties on people who do not sign up for policies, and lowering payments to hospitals.
11.1i Uninsured Individuals Shopping for Health Coverage
Individuals, families, and small business owners may shop for health plans in online marketplaces, similar to travel websites. These marketplaces make it possible to compare and buy private insurance and to be able to understand the plan you are buying, as well as determine if you qualify for financial help. Health insurance for uninsured people can be purchased using tax credits. You may choose the provider you want for you, your family, or business based on of who offers the most attractive package in terms of affordability and quality of coverage. You may choose among federally regulated and subsidized health plans with high or low premiums using side-by-side benefits and rates.
Practicing a Healthy Lifestyle Can Reduce the Cost of Your Health Care Plan
Health care plans are increasing discounts to people who maintain a healthy lifestyle. Most common are discounts for nonsmokers. Discounts also are offered those who drink alcohol in moderation, exercise regularly, and meet good health-risk assessment targets for weight, blood pressure, and cholesterol levels.
Today only three factors can affect the cost of your health insurance: (1) age, (2) place of residence, and (3) number of people in your family. Your health history and current illnesses may no longer be used to set premiums. Once you input your information on your state exchange the system will automatically calculate your subsidies. Now insurance companies are required to provide essential health benefits that previously were not covered and to take on people who were rejected before because of poor health.
11.1j Health Care Plans on the Government Exchanges
There are a number of different tiers of plans available on the exchanges that meet the government's 10 essential minimum requirements. Plans on the federal and state exchanges are grouped into four categories that cover 60 to 90 percent of out-of-pocket expenses, which is the most you pay during a policy period (usually a year) before your health insurance or plan begins to pay 100 percent of the allowed amount. Plans range from bare bones “bronze” plans which cover 60 percent of out of pocket medical costs leaving the other 40 percent to be paid by you (but the deductibles could be $5000), to “silver,” which is a standard plan familiar to most insured Americans that covers 70 percent (a deductible of about $3000), to “gold” that pays 80 percent, and “platinum” plans that cover 90 percent of the costs. An inexpensive “catastrophic” plan is available only to those under age 30 and it also covers close to 60 percent of initial annual costs. Comparison shop common health care procedures in your area at www.opscost.com .
All plans have exclusions, or a list of services that are not typically covered in the policy, but they do include all ten essential benefits. The types of health care plans available on the exchanges include most of those described in the next section.
The legislatures and governors in states not participating in the ACA are generally opposed to the law and want to see the whole health care program fail, ostensibly because it is a large federal government program. Similar conservative complaints were made about other social welfare programs, including Social Security, Medicare, Medicaid, Medicare Part D (prescription drug coverage for the elderly), CHIP (Children's Health Insurance Program), food stamps (Supplemental Nutrition Assistance Program and Special Supplemental Nutrition Program for Women, Infants and Children), general welfare/public assistance (Temporary Assistance for Needy Families and Supplemental Security Income), and public housing.
While the debate over the ACA continues most people recognize that social welfare is one of the accepted goals of the United States and of the entire industrialized free world. Jim Yong Kim, President of the World Bank, says that proving universal health coverage is vital for economic development as it alleviates poverty.
CONCEPT CHECK 11.1
1. Summarize what the Affordable Care Act is supposed to accomplish.
2. How much is the penalty if you do not purchase health insurance and your income is $40,000?
3. If you choose a “silver” health insurance plan, how much of your out-of-pocket medical costs will be paid by the plan?
11.2 TYPES OF HEALTH CARE PLANS
11.2a Types of Health Care Plans
A health care plan is a generic name for any program that pays or provides reimbursement for health care expenditures. There are several types of health care plans available to Americans, and the major ones are described below.
health care plan Generic name for any program that pays or provides reimbursement for health care expenditures.
Employer-Provided Group Health Care Plan When a group health plan is available as an benefit for active employees, the employer typically pays the cost for the workers (and often subsidizes the costs for other members of the workers' immediate family) typically for the lowest-cost plan the employer offers. Employees can choose a higher-priced plan or add family members to the coverage by paying an additional charge. These plans are provided by employers to 170 million employees.
group health plan Sold collectively to an entire group of people rather than to individuals, such as the group health care policies offered by employers.
LEARNING OBJECTIVE 2
Distinguish among the types of health care plans.
New employees often must choose from among a menu of health care plans soon after being hired.
Private Exchanges for Employee Group Plans
Many employers will no longer offer fully paid health care as an employee benefit, rather they will subsidize it. Some companies have dropped offering their health care plan and are instead offering employees a sum of money—perhaps $500 a month in financial assistance—to purchase insurance on their private exchange. Examples are Darden Restaurants, IBM, Trader Joe's, Sears Holdings, and Walgreens. Within five years it is estimated that more than a quarter of all workers who formerly had an employer-provided group health care plan will get their benefits through private exchanges.
These are employer-based exchanges that provide eligible workers with an employer subsidy to purchase health care policies. The benefits company Aon Hewitt invented the private exchange concept last year. These private exchanges are a new trend away from defined-benefit health coverage offered by employers to defined-contribution coverage. Thus, these exchanges are sometimes called defined contribution health care.
Traditional Health Insurance Plan A traditional health insurance plan provides protection against direct medical expenses resulting from illness and injury based on the concept of payment after an expense occurs. The insurer pays all or most of a portion of the “usual, customary, and reasonable fees” directly with the insured patient being billed for any remainder. These health insurance plans are often referred to as a fee-forservice health plan.
health insurance Provides protection against direct medical expenses resulting from illness and injury based on the concept of payment after an expense occurs.
Basic Indemnity Plan A more limited type of traditional health insurance plan is a basic indemnity plan. Here they compensate the insured for only a part of the cost of care received. The insured receives the benefit amount that is usually fixed without regard to the actual expenses incurred. It might, for example, provide a set cash amount of $150 a day for hospital care. This amount is woefully inadequate.
High-Deductible Health Insurance Plan A deductible is a clause in health care plan contracts that require you to pay an initial portion of medical expenses annually before receiving reimbursement. A high-deductible plan has a high deductible that you must meet before the insurance will start paying for your office visits, lab tests, and prescriptions. In order to qualify as a high-deductible plan the deductible must be at least $1000. The average deductible is $5000. Often once you have reached the deductible the insurance will kick in with coverage.
deductibles Clauses in health care plans that require the participant to pay an additional portion of health expenses annually before receiving reimbursement.
High-deductible plans typically have a lower premium than traditional health plans. If you are healthy, and are looking for a way to reduce costs this may be an option to consider.
Health Maintenance Organizations Health maintenance organizations (HMOs) provide a wide array of health care services, including hospital, surgical, and preventive health care. A goal of HMOs is to catch any medical problem early, which helps keep overall costs low by reducing the probability of subsequent high-cost medical treatment.
health maintenance organizations (HMOs) Health insurance plans that provide a broad range of health care services for a set monthly fee on a prepaid basis.
Such plans control the conditions under which health care can be obtained. Examples include preapproval of hospital admissions and restrictions on which hospitals or doctors may be used. If the HMO itself does not provide a particular type of care, the primary care physician may refer the patient to a local hospital or clinic for those services. Most participants are assigned a primary-care physician by the HMO or choose one from a list of physicians employed by the HMO. The primary-care physician usually must order all procedures and approve referrals to specialized health care providers (for example, a cardiologist) within the HMO.
Such plans typically have co-pays, which are when the insured pays a specified amount of out-of-pocket expenses for health care services such as doctor visits and prescriptions drugs at the time the service is rendered, with the insurer paying the remaining costs. These differ from coinsurance, where the insured is required to pay a certain percentage of the covered costs.
Preferred Provider Health Care Organization A preferred provider organization (PPO) is a managed care organization of medical doctors, hospitals, and other health care providers who have contracted with an insurer or a third-party administrator to provide health care at reduced rates to the insurer clients. A PPO is similar to a HMO, but you pay for care when it is received rather than in advance. This discount is then passed along to the policyholders in the form of reductions or elimination of deductibles and coinsurance requirements. These are sometimes referred to as a participating provider organization or preferred provider option.
preferred provider organization (PPO) Group of health care providers (doctors, hospitals, and other health care providers) who contract with a health insurance company to provide services at a discount.
Provider-Sponsored Network A provider-sponsored network (PSN) health care plan identifies a group of cooperating physicians and hospitals who have banded together to offer a health insurance contract. Such networks operate primarily in rural areas, where access to HMOs may be limited. As a group, the members of the PSN coordinate and deliver health care services and manage the insurance plan financially. They also contract with outside providers for health services that are not available through members of the group.
Maintain Your Health Care Plan between Jobs
What happens when you no longer work for an employer that offers a group health care plan and you want to continue the coverage? You can assert your COBRA rights (Consolidated Omnibus Budget Reconciliation Act of 1985). These rules allow you to remain a member of a group health plan for as long as 18 months if you worked for an employer with more than 20 workers. COBRA applies to you and to any of your dependents who had been covered under the employer's plan. COBRA rights apply to your dependents for 36 months. These rights must be exercised within 60 days after the termination of employment, and you must pay the full premiums (including both the employee's and the employer's portions) plus a 2 percent administrative fee.
COBRA rights The Consolidated Omnibus Budget Reconciliation Act of 1985 allows a former employee to remain a member of a group health plan for as long as 18 months if the employee worked for an employer with more than 20 workers.
You might be tempted to go without coverage for a time because of the high cost of converting your previous plan, you expect to have a job soon that will provide coverage, or simply because you are willing to pay the penalty. This latter reason is shortsighted because young people do get sick and are injured.
So what should you do? Buy a health plan using the government health exchange in your state. Coverage for a premium of perhaps $150 to $250 per month is available. About half of COBRA users are expected to move to the government exchanges.
William Dean
Southern University, Baton Rouge, Louisiana
Medicare is a Government Health Care Plan for the Elderly Over fifty million people are enrolled in the Medicare program, which is the federal government's single-payer health care program for the elderly. It costs only 6 cents on the dollar for the government to run this single-payer system, which is less than one-third that of commercially available health plans. Medicare's primary beneficiaries are people age 65 and older who are eligible for Social Security retirement benefits. Medicare is funded by means of the Medicare payroll tax. This tax for most American workers is 1.45 percent of earned income. Both employees and employers pay the 1.45 percent. The nation's top 3 percent of income earners pay an additional 2.35 percent Medicare surtax on incomes over $200,000. In addition, their unearned income (e.g., interest, dividends, capital gains, annuities, rental income) is taxed at a 3.8 percent rate [1.45 + 2.35].
Medicare The federal government's health care program for the elderly.
Medicare is divided into two parts. Medicare Part A is the hospitalization portion of the program; it requires no premium. Most people do not pay a monthly Part A premium because they or a spouse has 40 or more quarters of Medicare-covered employment.
Medicare Part B is the supplementary health expense insurance portion for outpatient care, doctor office visits, or certain other services of the Medicare program; it requires payment of a monthly premium of about $105 (but more for higher income older people). Both components require patients to pay a portion of their costs, recently $147 a year. The federal government pays 75 percent of Part B costs and beneficiaries pay 25 percent.
Medicare also includes an optional prescription coverage plan under Medicare Part D. Participants pay an initial portion of prescription costs annually depending on their level of income and a portion of the cost for each prescription.
Medicare's Competitors Some programs compete with Medicare to serve the elderly and their programs are approved by the government. Medicare Advantage Plans are health care plans that offer Medicare benefits through private health plans, such as HMOs and PPOs. Medicare pays Medicare Advantage plans a lump sum annually to provide Plan A and B coverages. The also offer annual financial incentives for the better plans. Medicare Advantage plans replace Medicare for ¼ of the nation's elderly population. Medicare Advantage plans provide broader coverage than Medicare and some plans also provide prescription drug benefits.
Workers' Comp Pays if You Are Hurt on the Job
If you are injured on the job or become ill as a direct result of your employment, state law requires your employer to pay any resulting medical costs. Workers' compensation insurance covers employers for liability losses for injury or disease suffered by employees that result from employment-related causes. The benefits to the employee include health care, recuperative care, replacement of lost income, and, if necessary, rehabilitation. Thus, workers' compensation insurance covers the full range of health-related losses.
Making Changes in Your Health Care Plan
In almost all health care plans, you must wait until the next open-enrollment period to make changes in coverage or switch among alternative plans. Open-enrollment periods are one to two months long. Open-enrollment period for the Affordable Care Act is October 15 to December 7. Plan rules allow changes at other times during the open year if the participant experiences certain family events such as births, adoptions, divorce, and marriage.
Choosing a Medicare Advantage Plan typically results in lower out-of-pocket costs. The features of Medicare Advantage and prescription drug plans, including premiums as well as other costs and benefits may be compared using HealthPocket's free Medicare comparison tool at www.healthpocket.com/medicare .
Medicaid and Expanded Medicaid are Government Programs for Lower-Income Americans Medicaid is a joint federal and state funded program that provides health care for over 60 million low-income Americans, mostly children, pregnant women, people with disabilities and elderly people who need help or live in nursing homes. Medicaid programs must follow federal guidelines, but they vary somewhat from state to state. Eligibility for Medicaid is based on both household income and family size, and it is either free or costs very little.
Medicaid A government health care program for low-income people funded jointly by the federal and state governments.
More than half the states have adopted a voluntary expanded Medicaid program, which expands Medicaid eligibility to all individuals (who were not previously eligible) and households with incomes below 138 percent of the Federal Poverty Level. Five million poor families living in states that decided not to offer expanded Medicaid will have no affordable health care option, even though the federal government paid 100 percent of the costs for 3 years and 90 percent after that. Thus that 7 percent of the population remains uninsured. Instead they will use emergency services and drive up costs for all taxpayers.
CONCEPT CHECK 11.2
1. Distinguish between health maintenance organizations (HMOs) and traditional health insurance.
2. Identify two benefits of selecting a preferred provider organization (PPO) when seeking health care.
3. List three ways you can save on taxes when paying for health care or insurance.
The Tax Consequences of Managing Health Expenses
The Internal Revenue Code allows several avenues for reducing income taxes when you spend your own money on health care plan premiums and health care expenses, and all plans must be integrated with employer's plans and the Affordable Care Act:
1. Many employees may save on taxes when they use premium conversion plans to pay their health care insurance premiums (discussed in Chapter 1 ). With premium conversion, the employee's share of the premiums is paid with pretax dollars, and those amounts are not included when the employer reports the employee's taxable income to the IRS.
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2. A flexible spending arrangement (FSA) is a plan that allows an employee to fund qualified expenses on a pretax basis through salary reduction to pay for out-of-pocket unreimbursed medical and dental expenses for health care expenditures. Employees can contribute $2,500 to a FSA. (This was discussed in Chapter 1 .)
3. A health savings account (HSA) is a tax-deductible savings account into which individuals and/or their employers can deposit tax-sheltered funds to use later to pay medical bills including the deductibles and other out-of-pocket costs for health plans. The maximum annual savings deposit is $3300 for an individual or $6550 for a family plan.
health savings account (HSA) Tax-deductible savings accounts into which individuals or employers can deposit tax-sheltered funds to pay medical bills.
4. A health reimbursement arrangement (HRA) consists of funds set aside solely by employers to reimburse employees for qualified medical expenses. Thus, the employer helps employees pay their medical bills. There is no limit on the employer's contributions, which are excluded from an employee's taxable income.
5. Employee contributions to private exchanges are covered under IRS Section 125. The employee contributions are pretax, just like today.
6. Health care expenditures can be used as itemized deductions on one's income tax return to the extent that they exceed 10 percent of adjusted gross income. Self-employed people may deduct (as a business expense, not an itemized deduction) the cost of health care plan premiums for themselves and their dependents.
11.3 YOUR HEALTH PLAN BENEFITS AND LIMITS
You can save yourself considerable confusion, delay, and money if you understand your health plan benefits before illness or injury strikes. If you have a group insurance plan, you will receive a certificate of insurance that outlines your benefits. HMO participants can obtain a copy of the plan contract. You should become familiar with the details of your health insurance plan. Below are some questions to ask yourself and background information to understand what you find in these documents.
certificate of insurance Document or booklet that outlines group health insurance benefits.
LEARNING OBJECTIVE 3
Describe the typical features and limitations of health care plans.
11.3a What Types of Care Are Covered?
The typical health care plan covers hospital room and board expenses, surgical procedures both as an inpatient and outpatient, prescription drugs, diagnostic tests, visits to the doctor's office, and many other aspects of health care. Dental and vision care are now covered as they are part of the required 10 essential benefits.
A family generally consists of a parent or parents and dependent children. Are the children of a divorced parent who does not have custody covered under that parent's group plan? What about stepchildren? These questions must be answered to ensure that all family members are covered under some plan.
11.3c How Much Must You Pay out of Your Own Pocket?
Health care plans contain provisions that specify the level of coverage for your expenses and the portion that you must pay yourself.
How Much Is Your Deductible? An annual deductible is a clause in health care plans that require you to pay an initial portion of medical expenses annually before receiving reimbursement. A deductible of $200 per year, for example, would mean that the patient must pay the first $200 of the medical costs for the year. Family plans generally include a deductible for each family member (again, perhaps $200 per year) with a maximum family deductible (perhaps $500 per year). Once the deductible payments for individual family members reach the maximum family deductible ($500 in this example), further individual deductibles will be waived.
How Much Is the Co-payment? A co-payment requires you to pay a specific dollar amount each time you have a specific covered expense item. A co-payment is often required for visits to the doctor's office and prescription drugs. For example, you might have to pay $25 for each prescription, with the insurer paying the remainder. A co-payment differs from a deductible in that it might require that you pay $35 for each office visit even after the annual deductible is met.
co-payment A variation of a deductible that requires you to pay a specific dollar amount each time you use your benefits for a specific covered expense item.
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How Much Is the Coinsurance Payment? A coinsurance clause requires you to pay a proportion of any loss suffered. The typical share is 80/20, with the insurer paying the larger percentage. Usually, a coinsurance cap limits the annual out-of-pocket payments required of the patient when meeting the coinsurance.
coinsurance clause A clause in a health care plan that requires the participant to pay a proportion of any loss suffered.
The following example illustrates how a deductible of $250 and an 80/20 coinsurance provision with a $1000 coinsurance cap work together to determine the coverage for an $8760 health care bill. Because the deductible is the responsibility of the insured party, the patient pays the first $250. The coinsurance ratio is applied to the remaining $8510 ($8760 − $250) until the portion paid by the patient reaches the coinsurance cap. Thus, $1000 is covered by the insured and $4000 by the insurer. The additional expenses of $3510 ($8510 − $1000 − $4000) are covered 100 percent by the insurance company. In this example, the insured party will pay $1250 ($250 deductible 1 $1000 coinsurance) and the insurer will pay $7510 ($4000 coinsurance 1 $3510 remaining charges).
Dual-Income Couples Should Coordinate Their Employee Health Care Benefits
Dual-income households often have overlapping health care benefits. For example, both Harry and Belinda Johnson's employers provide partially subsidized family health insurance plans as employee benefits. The Johnsons chose to be covered under Belinda's policy because it provides more protection and is less expensive. Belinda's coverage is fully paid for, and she can add Harry to the plan for only $125 per month. Harry can then drop his health plan through his employer and sign up instead for another benefit such as disability income insurance or education reimbursement for additional training.
CONCEPT CHECK 11.3
1. Distinguish among a deductible, a co-payment, and coinsurance.
2. Explain COBRA rights and portability rights that apply when you leave a job that has a group health care plan.
3. Explain the linkages among premium conversion plans, flexible savings arrangements and health savings accounts (HSAs) and health reimbursement accounts (HRAs).
11.4 PLANNING FOR LONG-TERM CUSTODIAL CARE
Many health care episodes include a period of time when the patient no longer needs skilled medical care but does need assistance to a degree that requires confinement in a nursing home or special help at home. This impacts about 4 percent of the population. This need is especially prevalent with the extremely elderly and patients with certain conditions such as Alzheimer's disease. The cost for such nonmedical assistance is typically not covered by HMOs, health insurance, or Medicare. The elderly who have spent down their assets then may be eligible to receive Medicaid reimbursement for a portion of their custodial nursing home care and custodial assistance at home. But for others, a long-term care policy may be an important part of one's health care planning. Long-term care insurance provides reimbursement for costs associated with custodial care in a nursing facility or at home.
long-term care insurance Provides reimbursement for costs associated with custodial care in a nursing facility Or at home.
Factors to assess when considering a long-term care policy include the following:
1. The degree of impairment required for benefits to begin. Insurance companies use the inability to perform a certain number of activities of daily living (ADLs) as a criterion for deciding when the insured becomes eligible for long-term care benefits. Typically, a policy pays benefits when a person cannot perform two or three ADLs without assistance. The ADLs commonly used in this type of decision making are bathing, bladder control, dressing oneself, eating without assistance, toileting (moving on and off the toilet), and transferring (getting in and out of bed). Because bathing is often one of the first ADLs that is lost, a policy that does not list bathing as a criterion makes it more difficult to reach the threshold at which benefits become available.
activities of daily living (ADLs) Insurance companies use the inability to perform a certain number of such activities as a criterion for deciding when the insured becomes eligible for long-term care benefits.
2. The level of care covered. The levels of nursing home care are usually categorized three ways. Skilled nursing care is intended for people who need intensive care, meaning 24-hour-a-day supervision and treatment by a registered nurse, under the direction of a doctor. Intermediate care is appropriate for people who do not require around-the-clock nursing but who are not able to live alone. Custodial care is suitable for many people who do not need skilled nursing care but who nevertheless require supervision (for example, help with eating or personal hygiene). Insurance companies' definitions of these levels of care may differ and must be considered when policies are evaluated. Although the largest expenses related to long-term care result from a stay in a nursing home, many people are able to remain in their homes with the assistance of visiting nurses, therapists, and even housekeepers. Long-term care policies can be written to cover such in-home care.
custodial care Suitable for people who do not need skilled nursing care but who nevertheless require supervision (for example, help with eating or personal hygiene).
3. The person's age. The younger the person is when the policy is purchased, the lower the premium as the odds of needing care increase with age. The trade-off lies between buying young and paying premiums for many years versus waiting to purchase a policy, at which time it may be difficult to afford coverage because of pre-existing conditions and consequently high policy costs.
LEARNING OBJECTIVE 4
Explain the basics of planning for long-term custodial care.
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Who Most Needs Long-Term Care Insurance
Low-wealth, low-income individuals can be covered for long-term care expenses under the Medicaid program. Those who have built-up accumulated retirement nest eggs of $500,000 or more generally can afford the cost of long-term care. Thus middle-income people most need long-term care insurance.
4. The benefit amount. Long-term care plans are generally written to provide a specific dollar benefit per day of care. If the cost per day for nursing homes in your geographic area is typically $200, you can pay lower premiums by choosing to buy a policy for $160 per day, thereby coinsuring for a portion of the expenses.
5. The benefit period. The benefit period in a long-term care policy is the maximum period of time for which benefits will be paid; typically stated in years. Although it is possible to buy a policy with lifetime benefits, this option can be very expensive. The average nursing home stay is about two-and-one-half years. A policy with a three-year limit might cost one-third less than a policy with a lifetime benefit period.
benefit period The maximum period of time for which benefits will be paid under a disability income or other insurance policy.
6. The waiting period. The waiting period (elimination period) in a long-term care policy is the time period between the onset of the need for care and the date that benefits begin. Policies can pay benefits from the first day of nursing home care or they can include a waiting period. Selecting a 30-day or 90-day waiting period can significantly reduce premiums.
waiting period (elimination period) The time period between the onset of a disability and the date that disability benefits begin.
7. Inflation protection. If a policy is purchased prior to age 60, the buyer faces a significant risk in that inflation may render the daily benefit woefully inadequate when care is ultimately needed. Some policies increase the daily benefit by 4 or 5 percent per year to adjust for inflation, but this protection adds considerably to the premium. The younger your age when a policy is purchased, the more you need inflation protection.
Money Websites
Informative websites for those planning health care expenses, including those that explain the Affordable Care Act are:
ACA provisions ( www.irs.gov/uac/Affordable-Care-Act-Tax-Provisions )
AARP ( www.healthlawanswers.aarp.org/ )
Centers for Medicare & Medicaid Services ( www.cms.gov )
Department of Health and Human Services ( www.longtermcare.gov/ )
Department of Labor ( www.dol.gov/ebsa/ )
EHealth ( www.ehealthinsurance.com ) to compare individual policies
Healthcare portal for states ( www.healthcare.gov )
Kaiser Family Foundation subsidy calculator ( www.kff.org/interactive/subsidy-calculator/ )
National Association of Insurance Commissioners ( www.insureuonline.org/health_page.htm )
NOLO ( www.nolo.com/legal-encyclopedia/medicare-long-term-care )
Social Security Administration ( www.ssa.gov/disability/ and www.ssa.gov/pgm/medicare.htm )
CONCEPT CHECK 11.4
1. Describe the protections provided by long-term care insurance.
2. Distinguish between the benefit period and the waiting period for a long-term care policy.
3. List three aspects of long-term care insurance that affect the cost of a policy.
11.5 PROTECT YOUR INCOME DURING DISABILITY
Anyone with a job can lose income when he or she becomes sick or is injured. Many employers offer sick days and other time off that can be used as necessary. Some employers may offer disability income insurance that replaces a portion of the income lost when you cannot work because of illness or injury. These plans come in two forms. A short-term disability income insurance plan replaces a portion of one's income for a short period of time, usually from two weeks up to two years. Short-term plans are sometimes partially paid for by the employer. Employers may also offer a group long-term disability income insurance plan for coverage periods of five or more years. The employee is usually required to pay the full premium for such coverage. If your employer does not offer either of these plans, you may buy them on your own.
disability income insurance Insurance that covers a portion of the income lost when you cannot work because of illness or injury.
Workers who are eligible can collect Social Security Disability Income Insurance benefits from the federal government if their disability is total (meaning they cannot work at any job) and is expected to last one year (or until death if that is anticipated within one year). The amount of these benefits is based on the worker's average lifetime earnings subject to Social Security tax and, thus, might not be sufficient to adequately support young workers and their families.
Social Security Disability Income Insurance Under this government program, eligible workers can receive some income if their disabilities are total, meaning that they cannot work at any job.
Long-term disability income loss is often overlooked, though it is vitally important for all workers including young single adults. A male worker has a 21percent chance of becoming disabled for three months or longer at some point during his working career. Older workers who become disabled may have retirement money available because certain types pension plans (not 401(k) plans or IRAs for workers under age 55) provide benefits to workers who become disabled while still employed. However, such benefit plans fall far short of fully meeting the needs of most workers.
LEARNING OBJECTIVE 5
Develop a plan to protect your income when you cannot work due to disability.
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A young person needs disability income insurance even with no dependents.
11.5a What Is Your Level of Need?
The first question to ask when contemplating disability income insurance is, “How much protection do I need?” The dollar limits on disability income policies are written either in increments of $100 per month or as a percentage of monthly income. Policy coverage is limited to 60 to 80 percent of the insured's after-tax earnings. The government's Social Security disability income program pays an average of $13,560 annually in tax-free income to the family of a fully insured disabled worker. See Appendix B at the end of the book or the Garman/Forgue companion website for an illustration of how to estimate these benefits.
Determining the amount of additional protection needed is challenging because some sources of help may not actually be available for all disabilities. It is smart to complete the calculations in the Run the Numbers feature, “Determining Disability Income Insurance Needs.” You can use the figure obtain from the worksheet as a starting point when shopping for disability income insurance protection.
11.5b What Disability Income Insurance Policy Provisions Best Meet Your Needs?
Once you have estimated your level of need, you can begin your search for a disability income insurance policy. Look first for the major policy provisions discussed in the following paragraphs that meet your needs. Disability income insurance policies are complicated so avoid relying on the verbal assurances of the agent selling the policy, do your own analysis, and also seek the advice of a financial planner before making a decision.
Waiting Period Disability income policies will have a waiting period between the onset of the disability and the date that disability benefits begin. Because disability income benefits are paid monthly, the first check will not arrive until 30 days after the end of the waiting period.
Determining Disability Income Insurance Needs
The determination of disability insurance needs begins with your current monthly after-tax income. From this figure, subtract the amounts you would receive from Social Security disability and other sources of disability income. The resulting figure will provide an estimate of extra coverage needed.
|
Decision Factor |
Example |
Your Figures |
|
1. Current monthly after-tax income |
$3,200 |
__________ |
|
2. Minus previous established disability income protections |
|
__________ |
|
(a) Monthly Social Security disability benefits |
− $1,250 |
__________ |
|
(b) Monthly benefit from employer-provided disability insurance |
− $ 600 |
__________ |
|
(c) Monthly benefit from private disability insurance |
______ |
__________ |
|
(d) Monthly benefit from other government disability insurance |
______ |
__________ |
|
Total Subtractions |
− $1,850 |
__________ |
|
3. Estimated monthly disability income insurance needs |
$1 350 |
__________ |
Bias toward Minimizing Losses
People engaged in managing for health care events have a bias toward certain behaviors that can be harmful, such as a tendency towards minimizing even small, initial losses. An example is wanting a short waiting period on disability and long-term care insurance. Many people fail to understand that having a short waiting period usually means that you are at greater risk of catastrophic losses. This is because the high cost of the short waiting period makes it difficult to afford a long benefit period. What to do? Purchase policies with six-month or one-year waiting period and apply the premium savings to getting a five-year or longer benefit period.
Benefit Period The benefit period in a disability income policy is the maximum period of time for which benefits will be paid. It begins when the elimination period ends. The benefit period is usually stated in years but may instead state a specific age when benefits will cease. Most disability income policies will not pay past age 65.
Degree of Disability Policies can be written on an “own-occupation” or “any-occupation” basis. An own-occupation policy will provide benefits if you can no longer perform the occupation you had at the time you became disabled. An any-occupation policy will provide full benefits only if you cannot perform any occupation. In effect, an any-occupation policy is an income replacement policy, as it makes up a portion of the difference between what you were earning prior to becoming disabled and what you can earn while disabled. Own-occupation policies are more generous and, therefore, cost more. Some policies provide own-occupation coverage during the first two years of a disability, and then switch to an any-occupation basis with income replacement for the remaining years of the benefits. Such split-definition policies are likely to provide benefits for rehabilitation and retraining at insurance company expense.
any-occupation policy Provides full benefits only if the insured cannot perform any Occupation.
A residual clause is a feature of own-occupation policies that allows for some reduced level of disability income benefits when a partial—rather than full—disability occurs. Consider the case of Françoise LaDeux, a criminal lawyer in Athens, Alabama, who purchased a disability policy offering a benefit of $3000 per month. Françoise later developed multiple sclerosis and was forced to cut back her workload by 50 percent, thereby taking a 50 percent pay cut. Her disability policy had a residual clause, so she received $1500 (0.50 × $3000) per month during her disability.
residual clause Feature of own-occupation policies that allows for some reduced level of disability income benefits when a partial—rather than full—disability strikes.
Sean's Success Story
Early in his working life, Sean recognized that financial success is not simply a matter of making more money and building assets. He also focused on protecting his assets and income through the purchase of insurance. Sean has always been healthy but knew that illness and accidents happen all the time. His first step was to sign up for the health care plan offered by his employer. He selected an expensive health plan to keep his costs under control and signed up for a health savings account to accumulate funds for his out-of-pocket health care expenses. In addition, Sean used a premium conversion option to pay his portion of the plan's cost on a pretax basis, and he set up a flexible spending arrangement with his employer. Sean also considered the risk of being unable to work due to illness or injury. Fortunately his employer offered a group disability income insurance plan, and Sean signed up for the plan and selected a 120-day waiting period and a ten-year benefit that would pay 60 percent of his salary should he not be able to work.
Your Worst Financial Blunders in Managing Health Expenses
Based on others' financial woes, you will make mistakes in personal finance when you:
1. Pay the tax-penalty assessed under the Affordable Care Act because you fail to enroll in a health care plan.
2. Duplicate employer-provided health care protection with your employed spouse.
3. Ignore your need for disability income insurance.
A Social Security Rider Provides Additional Protection If you have figured your disability income insurance needs assuming that you would receive Social Security benefits, you will find yourself with inadequate protection if your Social Security application is denied (65 percent of all applicants are rejected). To provide an extra dollar amount of protection if you fail to qualify for Social Security disability benefits, a Social Security rider may be added to your policy.
Social Security rider Provides an extra dollar amount of protection if a person fails to qualify for Social Security disability benefits (70 percent of all applicants are rejected).
Consider the case of Heather Gifford, a florist from Springfield, Missouri. Heather determined that her disability insurance needs would be $1400 per month after assuming that she would receive $1000 from Social Security if she were to become disabled. She could have purchased a $2400-per-month policy and removed all uncertainty, but the premium would have been more than she could afford. Instead, she bought a $1400 policy with a $1000 Social Security rider for a premium savings of 30 percent.
Cost-of-Living Adjustments You are wise to seek out a policy with a cost-of-living clause, which will increase your benefit amount to keep up with inflation. You might also consider buying a policy that limits benefits to a percentage of income rather than a specific dollar amount per month. With such a policy, your potential monthly benefit would increase automatically as your income increases.
Turn Bad Habits into Good Ones
Do You Do This?
Simply assume your health care plan provides the coverage you want
Pay all of your medical expenses with after-tax dollars
Ignore the potential for lost income if you became sick or injured
Ignore your employer's open-enrollment period
Have no advance medical directive documents
Do This Instead!
Read the plan documents and make any changes desired
Sign up for a premium conversion plan for your health insurance payments, a flexible savings arrangement, and a health savings account to save on taxes
Explore the purchases of disability income insurance through your employer or on your own.
Use open enrollment to reassess all of your employee benefits including those related to health care
Go online and fill out online forms
CONCEPT CHECK 11.5
1. Explain how you determine your level of need for disability income insurance.
2. Identify the major policy provisions to consider when purchasing disability income insurance.
3. Distinguish between any-occupation and own-occupation disability income insurance plans.
4. Describe how you might adjust the waiting period on a disability income insurance policy in order to affordably obtain a longer benefit period.
11.6 CREATE ADVANCE DIRECTIVE DOCUMENTS IN CASE YOU BECOME INCAPACITATED
Advance medical directives refers to treatment preferences and the designation of a surrogate decision maker in the event that a person should become unable to make decisions on her or his own behalf as a result of coma, dementia, brain tumor, or other serious medical condition. These documents may be used to retain your dignity and save your loved ones the burden of making some very challenging and difficult decisions. In essence, you sign legal documents stating exactly what you want to happen if you become incapacitated. Four out of five adults have no advance directive documents.
advance medical directives Treatment preferences and the designation of a surrogate decision maker in the event that a person should become unable to make decisions on her or his own behalf.
There are three types of advance directives: (1) health care proxy, (2) living will, and (3) durable power of attorney for legal and financial matters. Once you have created advance directive documents, give copies to members of your family and other responsible people in your life, and your wishes in these matters may then be controlled as you desire.
LEARNING OBJECTIVE 6
Summarize the benefits of preparing advance medical directive documents.
11.6a A Health Care Proxy Designates One to Make Health Care Decisions
A health care proxy is a legal document in which individuals designate another person to make health care decisions on their behalf if they are rendered incapable of making their wishes known. The authorized person executes such decisions or tries to make sure that health care professionals follow the maker's intentions. The person who is authorized is called a proxy or agent. Filling out a health care proxy form does not deprive the creator of the right to make decisions about medical treatment as long as he or she is able to do so.
health care proxy A legal document in which individuals designate another person to make health care decisions on their behalf if they are rendered incapable of making their wishes known.
11.6b A Living Will Specifies End-of-Life Medical Treatments
A living will allows you to document in advance your specific wishes concerning medical treatments in an emergency or during end-of-life health care. The document sets forth one's wishes in case of terminal illness or persistent unconsciousness where the individual is no longer capable of participating in his or her health care decisions.
living will Allows you to document in advance your specific wishes concerning medical treatments in an emergency or during end-of-life health care.
Advanced Directives for Unmarried Couples
While state laws are evolving on the rights of unmarried couples, a loved one can be protected and have some legal power. To do so, name each other as your durable power of attorney for finances and health care proxy.
11.6c A Durable Power of Attorney Appoints Someone to Handle Legal and Personal Finances
Everyone should create a durable power of attorney in advance of the onset of any incapacitating medical condition. A durable power of attorney gives the designated person virtually absolute power to manage your financial affairs, so choose a trusted individual who knows your wishes. It allows the named individual to make bank transactions, collect Social Security payments, apply for disability, and pay bills while an individual is medically incapacitated. Understand, too, that you may revoke your power of attorney and/or give it to another person as long as you are mentally capable to do so. A limited (or special) power of attorney is narrower in scope and could be restricted to one specified act or a certain time period, such as signing the maker's name at the closing of the sale of a home or managing the maker's investment accounts.
DO IT NOW!
You know more about personal finance after reading this chapter, so get started right now by:
1. Learning exactly what group health care coverage you actually do have through your job, your school, and/or your family.
2. Investigating the possibility of saving on income taxes via a premium conversion plan, flexible spending arrangement, or health savings account (HSA).
3. Create living will and health care proxy documents.
CONCEPT CHECK 11.6
1. Offer three reasons why people should create advance medical directive documents.
2. What does a health care proxy achieve, and how does it differ from a living will?
3. What does a durable power of attorney provide?
WHAT DO YOU RECOMMEND NOW?
Now that you have read the chapter on health care planning, what do you recommend to Danielle DiMartino in the case at the beginning of the chapter regarding:
1. Choosing among the four alternatives available to her?
2. Danielle's concerns about providing for her mother's health care needs?
3. Danielle's need for her own disability income insurance?
4. How Danielle can cover her long-term care risk?
BIG PICTURE SUMMARY OF LEARNING OBJECTIYES
LO1 Explain how the Affordable Care Act works and how consumers shop and pay for health insurance coverage.
The Patient Protection and Affordable Care Act of 2010 was designed to provide affordable health insurance for all US citizens and reduce the growth in health care spending. Americans already covered by a plan prior to 2014 saw little change as a result of the law. The uninsured had to have a health care plan or pay a tax penalty. The law provides for health insurance exchanges to allow consumers to find and select a quality health care plan. It also provides subsidies for families whose incomes are up to 400 percent of the poverty level to assist them in buying a health care plan.
LO2 Distinguish among the types of health care plans.
Traditional health insurance and HMOs address the need for health care. Health insurance will reimburse you or pay your medical bills directly. HMOs provide health care on a prepaid basis.
LO3 Describe the benefits and limitations of health care plans.
Health care policies contain language that outlines coverage in general and, more important, describes the limitations and conditions that determine the level of protection afforded under the plan. Some of the more important plan provisions include what types of care are covered and who is covered under the plan. Important limitations on coverage include deductibles and co-payments, and coinsurance requirements.
LO4 Explain the fundamentals of planning for long-term custodial care.
Long-term care insurance provides a per-day dollar reimbursement when the insured person must stay in a nursing home or other long-term care facility. It is not designed to provide health care protection, as that coverage is available through other plans such as an HMO, private insurance, or Medicaid.
LO5 Develop a plan to protect your income when you cannot work due to disability.
Disability income insurance replaces a portion of the income lost when you cannot work as a result of illness or injury. The amount you need is equal to your monthly after-tax income less any benefits to which you are entitled (for example, Social Security). By selecting among various policy provisions, you can tailor a policy that fills any gaps in your existing disability protection.
LO6 Summarize the benefits of preparing advance medical directive documents.
Making advance medical directives can save your loved ones the burden of making some challenging decisions in case you become incapacitated. These documents include health care proxy, living will, and durable power of attorney.
LET'S TALK ABOUT IT
1. The Affordable Care Act and You. Were you affected directly by the Affordable Care Act? If so, in what ways.
2. Your Health Care Plan. Are you covered by a health care plan? If so, what do you see as the largest potential for losses if you become ill or injured? How well do you understand the plan?
3. HMOs Versus Health Insurance. HMO plans and health insurance plans take different approaches to health care. What are the major differences between the two types of plans? Which plan would you prefer for your own health care protection?
4. Long-Term Care Insurance. Are you covered by a long-term care insurance plan? What would happen if you became so incapacitated that such care was necessary? What could you do?
5. Disability Income Insurance. Are you covered by disability income insurance? What would happen if you were unable to work for two or three years because of illness or injury?
6. Advance Medical Directive Documents. Give some thought to naming a health care proxy, signing a living will and a durable power of attorney. What are some specific provisions that you might put into the documents, and who might you name as your proxy and power of attorney?
DO THE MATH
1. Health Care Coverage Amounts. Michael Howitt of Berkley, Michigan, recently had his gallbladder removed. His total bill for this surgery, which was his only health care expense for the year, came to $13,890. His health insurance plan has a $500 annual deductible and an 80/20 coinsurance provision. The cap on Michael's coinsurance share is $2000.
(a) How much of the bill will Michael pay?
(b) How much of the bill will be paid by Michael's insurance?
DO IT IN CLASS PAGE 334
2. Health Care Event Protection. Christina Haley of San Marcos, Texas, age 57, recently suffered a stroke. She was in intensive care for 3 days and was hospitalized for 10 more days. Her total bill for this care was $125,500. After being discharged from the hospital, she spent 25 days in a nursing home at a cost of $170 per day. Christina, who earns $4,500 per month, missed two months of work. Christina had a health insurance plan through her employer. The policy had a $1000 deductible and an 80/20 coinsurance clause with a $2000 coinsurance cap. She had also accumulated 21 sick days (equivalent to one month) at work. Otherwise she had no long-term care or disability income insurance.
(a) How much of Christina's direct medical expenses was paid by her insurance policy?
(b) What did Christina have to pay for her nursing home care?
(c) How much income did Christina lose?
DO IT IN CLASS PAGE 334, 335, 337
FINANCIAL PLANNING CASES
CASE 1
The Johnsons Consider Buying Disability Insurance
Although Belinda's employer offers a generous employee benefit program, it does not provide disability income protection other than 8 sick days per year, which may accumulate to 20 days if Belinda does not use them. Harry also has no disability income insurance. Although both have worked long enough to qualify for Social Security disability benefits, Belinda has estimated that Harry would receive about $640, and she would receive about $800 per month from Social Security. Harry and Belinda realize that they could not maintain their current living standards on only one salary. Thus, the need for disability income insurance has become evident even though they probably cannot afford such protection at this time. In fact, they chose not to purchase the disability waiver of premium option when they purchased their life insurance. Advise them on the following points:
DO IT IN CLASS PAGE 337
(a) Use the Run the Numbers worksheet on page 338 to determine how much disability insurance Harry and Belinda each need. Use the December salary figures from Table 3-6 on page 87. To determine the amount of taxes and Social Security paid by each, assume that Harry, whose salary represents approximately 40 percent of their total income, paid a comparable percentage of the taxes.
(b) Use the information on pages 336-344 to advise the Johnsons about their selections related to the following major policy provisions:
1. Elimination period
2. Benefit period
3. Residual clause
4. Social Security rider
5. Cost-of-living adjustments
CASE 2
The Hernandezes Face the Possibility of Long-Term Care
Victor Hernandez recently learned that his uncle has Alzheimer's Disease. While discussing this tragedy with Maria, he realized that both of his grandparents probably had the disease, although no formal diagnosis was ever made. As a result, Victor and Maria have become interested in how they might protect themselves from the financial effects of long-term health care.
(a) What factors should the Hernandezes consider as they shop for long-term care protection?
(b) Victor is still in his 40s. How does his age affect their decisions related to long-term care protection?
CASE 3
Julia Price Assesses Her Health Care Plan
Julia is about to change jobs. Her new employer offers several different health care plans including a traditional fee-forservice plan with a PPO, and an HMO. Her employer will pay the first $300 per month for any plan she chooses. This means that Julia will have to pay the remainder of the premium for the plan plus the deductible and coinsurance and co-payments. These costs are higher than they were at her previous employer's, and she is concerned about the added expenses. After talking with the employee benefits office at the new firm, she is considering saving money by opting for the medium cost plan and signing up for a health savings account, a premium conversion plan, and a flexible spending arrangement. Offer your opinions about her thinking.
DO IT IN CLASS PAGE 333
CASE 4
A New Employee Ponders Disability Insurance
Charles Napier of Indiana, Pennsylvania, recently took a new job as a manufacturer's representative for an aluminum castings company. While looking over his employee benefits materials, he discovered that his employer would provide 10 sick days per year, and he can accumulate these to a maximum of 60 sick days if any go unused in a given year. In addition, Charles's employer provides a $1000-per-month, short-term, one-year total disability policy. When he called the employee benefits office, Charles found that he might qualify for $500 per month in Social Security disability benefits if he became unable to work. Charles earns a base salary of $2000 per month and expects to earn about that same amount in commissions, for an average after-tax income of $3100 per month. After considering this information, Charles became understandably concerned that a disability might destroy his financial future.
DO IT IN CLASS PAGE 337
(a) What is the level of Jim's short-term, one-year disability insurance needs?
(b) What is the level of Jim's long-term disability insurance needs?
(c) Help Jim select from among the important disability insurance policy provisions to design a disability insurance program tailored to his needs.
CASE 5
A CPA Selects a Health Care Plan
Your friend Taliesha Jackson of Stillwater, Oklahoma, recently changed to a new job as a CPA in a moderate-size accounting firm. Knowing that you were taking a personal finance course, she asked your advice about selecting the best health insurance plan. Her employer offered five options. In addition, she could open a flexible spending arrangement and pay any premiums she must pay through a premium conversion plan:
• Option A: A standard health insurance plan with a $500 annual deductible and an 80 percent/20 percent coinsurance clause with a $2000 out-of-pocket limit. Taliesha must pay $80 per month toward this plan.
• Option B: Same as option A except that a PPO is associated with the plan. If Taliesha agrees to have services provided by the PPO, her annual deductible drops to $200 and the coinsurance clause is waived. As an incentive to get employees to select option B, Taliesha's employer will provide dental expense insurance worth about $40 per month.
• Option C: Another health insurance plan with a $200 annual deductible and a 90 percent/10 percent coinsurance clause with a $1000 out-of-pocket limit. Taliesha must pay $170 per month toward the cost of this plan.
• Option D: Membership in an HMO. Taliesha will have to contribute $40 extra each month if she chooses this option.
(a) To help her make a decision, Taliesha has asked you to list two positive points and two negative points about each plan. Prepare such a list.
(b) Why might Taliesha's employer provide an incentive of dental insurance if she chooses option B?
(c) Which plan would you recommend to Taliesha? Why?
BE YOUR OWN PERSONAL FINANCIAL MANAGER
1. How Do You Pay for Your Health Care? Make a list of the health care services that you used last year and estimate the cost of each of those services. Then indicate how these costs were paid, whether by yourself, by a health plan, or shared. Write a summary of what you have learned about how your health care expenses are paid.
2.Analyze Your Health Care Plan! Obtain a copy of your health insurance policy or the explanation of benefits brochure if you are covered by a group plan. Analyze the plan by focusing on the types of care covered, persons covered, its deductibles, coinsurance, and co-pay amounts, and any restrictions on providers of your health care.
3. What Level of Social Security Disability Benefits Is Available to You? Visit the website for the Social Security Administration and use its online calculator at www.ssa.gov/planners/benefitcalculators.htm to determine whether you are currently eligible to receive Social Security disability insurance benefits if you become disabled and the projected level of those benefits.
4. Calculate Your Need for Disability Income Insurance. Use the Run the Numbers worksheet and material on page 338 or Worksheet 46: Determining My Disability Income Insurance Needs from “My Personal Financial Planner” to estimate the amount you would need to replace should you become disabled.
5. Explore Your Options for Saving on Taxes via Your Health Care Plan. Are you currently employed and eligible to participate in an employer-sponsored health care plan? Use the material on page 333 to assess the opportunities you have to make use of premium conversion, a flexible spending account, high-deductible health care plan, and a health savings account to lower your after-tax cost of health care.
6. Develop Advance Medical Directive Documents. Complete Worksheet 47: My Advance Directive Documents in “My Personal Financial Planner” by recording which of the three advance medical directives documents the date you prepared and the names of those who know about their location or have a copy.
ON THE NET
Go to the Web pages indicated to complete these exercises.
1. Understanding Health Care Reform. Visit the website for U.S. Department of Health and Human Services at www.healthcare.gov/law/introduction/index.xhtml and the Kaiser Family Foundation at www.kff.org for information on the health care reform law. What provisions in the law will be most beneficial to you in your current life situation? How might the law affect you once you graduate?
2. Benefiting from Long-term Care Insurance. Visit the website for U.S. Department of Health and Human Services at www.longtermcare.gov and read its information on long-term care insurance. How might such protection fit into your risk-management program or that of your family?
3. Selecting a Disability Income Insurance Policy. Visit the website for the U.S. Department of Agriculture at www.publications.usa.gov/USAPubs.php?PubID=6042 and read its information on disability income insurance. How might such protection fit into your plans for protecting your income should you become sick or be injured and unable to work?
ACTION INVOLVEMENT PROJECTS
1. Assessment of Your State's Health Insurance Exchange. Visit your state's health insurance exchange ( www.kff.org/state-health-exchange-profiles ). How easy was it to navigate through the information provided? Would you feel comfortable using the state or the federal health exchange to obtain coverage?
2. Views Concerning Having Health Care Protection. Talk to five fellow students who are not taking your personal finance class. Ask them to explain their feelings about their health care plan. Then ask them how they plan to meet their health care needs once they graduate. Make a table that summarizes your findings.
3. What Is It Like to Choose Among an Employer's Health Care Options? Survey three individuals or couples who are covered by a group health care plan at work. Ask them how they went about making the choice among the plans the employer offered. Include a discussion of how they approach the same decisions when the open-enrollment period occurs with the plan each October. Write a summary of their responses and how their experiences affected your thinking about an employer-provided plan.
4. Applying the Large-Loss Principle to Health Care Planning. The large-loss principle says that one is better off paying a higher initial portion of any loss and expanding the coverage for the largest and most catastrophic losses. In health care planning, this would mean selecting a health care plan with a high deductible for your health care expenses and a longer waiting period and longer benefit period for your disability income and long-term care insurance plans. Talk to three students in your personal finance class on their views of this approach. Also talk to three people outside of your class who are covered by a health care plan for their views. Write a summary of the responses of these two groups and how their views affect your own thinking about the large-loss principle.
5. Addressing the Need for Disability Income Insurance. Talk to a family member who has gone through the process of deciding about disability income insurance. Ask what motivated him or her to decide to buy or not buy such insurance. Also ask about which aspects were the most difficult part of the process. Write a summary of the responses and how your family member's efforts, or lack thereof, affect your thinking about disability income insurance.
6. Planning for Long-Term Care. Talk to a family member who has had to decide how to meet the long-term care needs of a loved one. Ask what aspects were the most difficult part of the process. Also ask your family member how going through the process affected his or her thinking about planning for their own long-term care needs. Write a summary of your family member's responses and how his or her efforts, or lack thereof, affect your thinking about long-term care.
Visit the Garman/Forgue companion website at www.cengagebrain.com ..
