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Life and Health Insurance FIN 3660

Chapter 13

Outline

Medical Expense Coverage

Disability Income Coverage

Long-Term Care Coverage

Medical Expense Coverage

Provides benefits to pay for the treatment of an insured’s illnesses and injuries.

Most coverage in the U.S. is provided by private companies, but some government coverage is provided to specific people, such as the elderly and the poor.

In contrast, several other countries, such as Canada and the U.K., virtually every resident has medical expense coverage provided by the government-sponsored programs

Medical expense insurance coverage in the U.S. is available in three basic forms: 1. traditional medical expense insurance policies, 2. managed care plans, 3. government-sponsored healthcare programs.

Traditional Medical Expense Insurance

Provides indemnity benefits, or reimbursement benefits, which are contractual benefits that are provided on the actual amount of the insured’s financial loss.

After the insured received treatment for an illness or injury from a licensed provider of recognized medical services, the medical care provider files a claim. If the insurer determines that the charges are covered under the policy, the insurer will reimburse the insured or the provider for the expenses according to the terms of the policy.

Three types of traditional medical expense coverage: 1. basic medical expense coverage, 2. major medical expense coverage, 3. other medical expense coverage.

Basic Medical Expense Coverage

Provides separate benefits for each of the following types of medical expenses:

Hospital expenses- charges for specific inpatient and outpatient hospital services.

Surgical expenses- charges for inpatient and outpatient surgical procedures.

Physicians’ expenses- charges associated with physicians’ visits both in and out of the hospital

First-dollar coverage- the insurer begins to reimburse the insured for eligible medical expenses without first requiring an out-of-pocket contribution from the insured.

Major Medical Expense Coverage

Provides substantial benefits for: 1. basic hospital, surgical, and physicians’ expenses, 2. additional medical services related to illness or injuries, 3. preventive care.

Two types of major medical coverage are commonly available

Supplemental major medical policy-a policy issued in conjunction with an underlying basic medical expense insurance policy. Provides benefit payments for expenses that exceed the benefit levels of the underlying basic plan and that aren’t covered by the underlying plan.

Comprehensive major medical policy- a single policy that combines the coverages provided by both a supplemental major medical policy and an underlying basic medical expense policy. A comprehensive major medical policy provides substantial medical expense coverage under one policy, and that policy covers most of the medical expenses that the insured may incur.

Major Medical Expense Coverage- Covered Expenses

The benefits provided include payment for many different types of medical treatments, supplies, and services.

The covered services and treatments typically include all or some of the following medical expenses: hospital charges for room and board in a semiprivate room, miscellaneous inpatient hospital charges, such as laboratory fees, X-rays, medications, and the use of an operating room, surgical supplies and services, anesthesia and oxygen, physical, occupational, and speech therapy, surgeons’ and physicians’ services, registered nurses’ services, and specified outpatient expenses, such as lab fees, X-rays, and prescription drugs, preventive services, such as childhood immunizations and periodic screening and diagnostic tests.

Major Medical Expense Coverage- benefit amounts

Pay benefits, like all health insurance policies, for allowable expenses- those expenses the insured incurs that are covered under the policy.

The usual, customary, and reasonable fee is the amount that medical care providers within a particular geographic region commonly charge for a particular medical service.

If an insured files a claim for an amount that is equal to or less than the maximum benefit for the treatment received, then the insurer will allow the entire amount of the claim.

If the amount of the claim is greater than the maximum benefit, then the insurer will allow expenses up to the maximum, and the insured is responsible for paying expenses that exceed the maximum benefit amount.

Major Medical Expense Coverage- Expense Participation Requirements

Two of the most common forms of expense participation (or cost sharing) are deductibles and coinsurance, most policies include both.

Deductible- usually a flat dollar amount of eligible medical expenses, such as $200 or $500, that the insured must pay before the insurer begins making benefit payments under a medical expense insurance policy.

Most policies contain a calendar-year deductible, which is a deductible that applies to the total of all allowable expenses an insured incurs during a given calendar year.

Coinsurance- an expense participation requirement imposed by many medical expense plans; the requirement generally is a specified percentage of all allowable expenses that remain after the insured has paid the deductible and that must be paid by the insured.

Maximum out-of-pocket provision, AKA stop-loss provision, specifies that the policy will cover 100% of allowable medical expenses after the insured has paid a specified amount out-of-pocket to satisfy deductible and coinsurance requirements.

Major Medical Expense Coverage- Exclusions

These policies commonly exclude from coverage of any medical expenses that result from the following treatments:

Cosmetic surgery other than corrective surgery required as a result of an accidental injury or other medical reasons.

Treatment of an illness or injury that occurs while the insured is in military service or that results from an act of war.

Treatment of intentionally self-inflicted injuries.

Routine dental treatments, routine eye examinations, and corrective lenses.

Other Medical Expense Coverage

Dental Expense Coverage- provides benefits for routine dental examinations, preventive dental work, and dental procedures needed to treat tooth decay and diseases of the teeth and jaw.

Prescription Drug Coverage- provides benefits for the purchase of drugs and medicines that are prescribed by a physician and are not available over-the-counter. This coverage usually varies according to the type of drugs.

Vision Care Coverage- provides the insured with benefits for expenses incurred in obtaining eye examinations and corrective lenses.

Managed Care Plans

Managed Care- a method of integrating the financing and delivery of health care services within a system that manages the access to health care services and the cost of those services.

Managed Care Plan- an arrangement that integrates the financing and management of health care with delivery of health care services to a group of individuals who have enrolled in the plan.

Managing Access to Health Care Services

Managed Care Plans use a provider network to manager access to health care services.

Network- a group of physicians, hospitals, and ancillary services providers that a specific managed care plan has contracted with to deliver health care services to plan members.

Typically require plan members to choose providers from within the network or offer financial incentives to members who choose network providers.

Primary Care Provider- a network member who coordinates members’ medical care and treatment.

Refer to figure 13.1 in your textbook to read about the types of managed care plans.

Managing the Cost of Health Care Services

In most managed care plans, plan members receive comprehensive health care in exchange for payment of a fixed, periodic- usually monthly- premium.

When the plan member receives services from a network provider, the plan member generally pays a specified, fixed amount, known as a copayment.

Managed care plans achieve risk sharing with medical care providers by negotiating fee arrangements with them and making other contractual arrangements that encourage cost-effective care.

Managed care plans typically offer the following: extensive preventive care programs, access to wellness programs, and patient education programs.

Government-Sponsored Medical Expense Coverage

Many countries provide comprehensive medical expense coverage of core health services.

The extent of this coverage varies by country.

The U.S. government provides medical expense insurance benefits through several programs, including Medicare and Medicaid.

Medicare- a federal government program that provides medical expense benefits to persons age 65 and older and persons with certain disabilities.

Medicaid- a joint U.S. federal and state program that provides basic medical expense and nursing home coverage to low-income individuals and to certain aged and disabled individuals.

Disability Income Coverage

Provides income replacement benefits to an insured who is unable to work because of sickness or injury.

To help relieve the financial stress created by disability, insurance companies offer income replacement benefits in the form of disability income coverage.

Certain countries, including the U.S. and Canada, have government programs that provide certain benefits to individuals who become disabled.

Types of Disability Income Insurance

Benefit period- the time during which the insurer agrees to pay income benefits to the insured.

Short-Term Individual Disability Income Coverage- provides a maximum benefit period ranging from one to five years.

Long-Term Individual Disability Income Coverage- a maximum benefit period of five years or more. Commonly extends until the insured reaches age 65.

Short-Term Group Disability Income Coverage- one year or less.

period of one year or more. CLong-Term Group Disability Income Coverage- ommonly extends until the insured’s normal retirement age or to age 70.

Definition

Each disability income policy specifies the definition of total disability that the insurer uses to determine whether a covered person is entitled to receive disability income benefits.

Disability income policies used to define total disability as a disability that prevented the insured from performing the duties of any occupation. Now total disability is defined more liberally.

An insured is considered totally disabled if at the start of disability, the disability prevents him/her from performing the essential duties of his/her regular occupation.

Own Previous Occupation/ Presumptive Disabilities

Some insurers have further liberalized the definition of total disability as the inability to perform the essential duties of the insured’s own previous occupation.

A presumptive disability is a stated condition that, if present, automatically causes the insured to be considered totally disabled.

Presumptive disabilities include total and permanent blindness, loss of the use of any two limbs, and loss of speech or hearing.

Elimination Period

Elimination Period- the specific amount of time that the insured must be disabled before become eligible to receive policy benefits.

By specifying the elimination period, the insurer can substantially reduce the expenses involved in processing and paying claims for disabilities that last for only a very short time.

Usually 30 days to 6 months.

Group Short-Term Disability Income Policies- typically specify no elimination period for disabilities caused by accidents and an elimination period of one week for disabilities caused by sickness.

Group Long-Term Disability Income Policies- typically specify an elimination period of 30 days to 6 months.

Benefit Amounts

As a general rule, the benefit amount provided by disability income coverage is not intended to fully replace an individual’s pre-disability earnings.

Without restrictions on the income amounts available through disability income coverage, a disabled insured could receive as much income as he/she received when working.

Disability income insurance providers use two methods to establish the amount of disability income benefits that will be paid to a disabled person: 1) an income benefit formula and 2) a flat benefit amount.

Income Benefit Formula/Flat Amount

An income benefit formula usually expresses the disability income benefit amount as a stated percentage of the insured’s pre-disability earnings and considers all sources of disability income that the disabled insured receives.

The percentage typically included in group long-term disability income policies ranges from 60%-75%.

Group short-term policies often specify a higher percentage than do group long-term policies, and it is not uncommon for group short-term policies to provide 90%-100%.

A flat amount is paid periodically to an insured who becomes disabled.

The specified benefit amount is based on the amount of the insured’s income when the policy was purchased.

Supplemental Disability Benefits/ Partial Disability Benefits

A variety of supplemental benefits are available in connection with disability income policies. These include partial disability benefits, future purchase option benefits, and cost-of-living adjustment benefits.

Partial Disability- a disability that prevents the insured either from performing some of the duties of his/her usual occupation or from engaging in that occupation on a full-time basis.

The amount paid in a partial disability policy is either a flat amount or determined from the formula.

Future Purchase Option Benefit/Cost-of-Living Adjustment Benefit

Future purchase option benefit- grants the insured the right to increase the benefit amount in accordance with increases in the insured’s earnings.

Cost-of-living adjustment benefit- provides for periodic increases in the disability income benefit amount that the insurer will pay to a disabled insured; these increases usually correspond to increases in the cost of living.

Exclusions

The causes of disability that typically are excluded from coverage include the following:

Injuries or sicknesses that result from war, declared or undeclared, or any act of war.

Intentionally self-inflicted injuries.

Injuries received as a result of active participation in a riot or the commission of a crime.

Occupation-related disabilities or illnesses for which the insured is entitled to receive disability income benefits under a government program.

Specialized Types of Disability Coverage

Specialized coverage is designed to provide benefits for specific expenses-other than loss of income- that may result from an insured’s disability.

Key person disability coverage- provides benefit payments to the business if an insured key person becomes disabled.

Disability buyout coverage- provides benefits designed to fund the buyout of a partner’s or owner’s interest in a business should he become disabled.

Long-Term Care Coverage/Benefit Triggers

Provides benefits for medical and other services to insureds who need care for an extended period in their own homes or in a qualified facility.

Benefit triggers- requirements specifying the conditions that establish an insured’s eligibility to receive long-term care benefits.

Long-term care benefits are available is the insured can no long do daily living activities or has a cognitive impairment.

Activities of daily living- activities of eating, bathing, dressing, toileting, and transferring into or out of a bed, chair, or wheelchair.

Cognitive impairment- a reduction in a person’s ability to think, reason, or remember.

Long-Term Care Benefits

LTC Policies provide coverage for medical or other health-related services in a qualified facility, or, for most policies, in an insured’s home.

LTC insurance policies generally state a daily benefit amount, which is a maximum amount of benefits payable for each day of an insured’s long-term care at a care facility or in the patient’s home.

Indemnity method-the insurer pays the insured the daily benefit amount regardless of the actual expenses for long-term care of the insured.

Reimbursement method- the insurer pays the insured the amount of covered LTC expenses per day up to the stated maximum daily benefit amount.

Some LTC policies contain an inflation protection provision-which automatically adjust the benefits each year to match inflation.