Loss of Health Chapter 17

Chapter Objectives • Describe the similarities and differences among commercial insurers, traditional Blue Cross and Blue Shield associations, and the new for-profit Blues organizations • Explain the major characteristics of health maintenance organizations and explain how point-of-service plans and preferred provider organizations differ from them • Compute the amount of the covered loss that would be reimbursable from an insurer • Given the amount of the loss and applicable deductibles, coinsurance provisions, and limits • Distinguish among forms of basic health insurance policies and describes three forms of major medical insurance

Chapter Objectives • List several characteristics to consider when purchasing long-term care and disability income insurance contracts • Explain the nature and structure of Medicare benefits and the approach used to standardize Medigap policies • Explain the mandatory and allowable provisions in individual health insurance with respect to grace periods, reinstatement, claim procedures, occupational issues, misstatement of age when applying for coverage, and the existence of more than one policy covering the same loss • Describe health care reforms recently enacted or currently under consideration in the United States

Introduction • The high cost of health care, combined with concerns about the lack of availability of health insurance for some persons • Has led to a rapidly changing environment in which health care is delivered in the United States

Health Insurance Providers • Health insurance is provided by several types of organizations • Commercial insurers • Blue Cross and Blue Shield associations • Health maintenance organizations (HMOs) • Point-of-service (POS) plans • Preferred provider organizations (PPOs) • When payment for health expenses is provided as an employee benefit • Many employers set up self-insurance arrangements to either replace or supplement coverage obtained from one or more of these types of providers • Some health insurance is provided by the Medicare and Medicaid systems • Social insurance arrangements set up through the federal and state governments

Insurers and the Blues • Until recently, commercial insurers and Blue Cross and Blue Shield (the Blues) associations were legally very different in terms of structure • Though from the perspective of an individual insured they appeared to be very similar • The Blues were originally designed to be nonprofit organizations • Allowing their subscribers to prepay some types of health care expenses • Blue Cross associations focused on the prepayment of hospital expenses • Blue Shield groups covered physicians’ services • When combined, medical expense coverage offered by the Blues can be virtually identical to that available from commercial insurers

Insurers and the Blues • Beginning in the mid-1990s the structural differences between the Blues and insurers began eroding • In an effort to become more competitive, Blues in several states began forming or acquiring for-profit subsidiaries • A number of the Blues organizations converted to a for-profit status in their entirety • The Blues were independent groups organized by doctors, hospitals, and other medical service providers in a particular geographic region • They agreed to meet certain common standards in exchange for authorization to use the Blues name • Many states granted the Blues preferential tax treatment because of their nonprofit status

Insurers and the Blues • As changes in the health care delivery system evolved • Many Blues found themselves insuring a large percentage of individuals who had difficulty obtaining health insurance elsewhere • Caused the Blues to experience substantial financial losses • Additionally, traditional not-for-profit Blues have more limited access to capital than for-profit stock companies

Health Maintenance Organizations (HMOs) • By the beginning of the 21st century, more than 80 million persons in the U.S. were enrolled in HMOs • All are designed to provide their members comprehensive health services within a well-defined geographical area • The HMO is paid a set fee per month by its members • And it provides all necessary medical services • Coverage is usually broader than that provided by insurers • Both cost control and prevention of health problems tend to be emphasized • By stressing regular health care, early diagnosis and treatment, and disease prevention • HMOs can be effective in helping the members identify and correct small health problems before they become major ones

Health Maintenance Organizations (HMOs) • Persons belonging to an HMO generally must receive all medical care from physicians associated with that HMO • Each person chooses a primary care physician within the HMO • This doctor is responsible for coordinating all medical care for the patient • Including access to medical specialists • Primary care physicians are sometimes referred to as gatekeepers • Most medical specialties are represented within the HMO • But if highly specialized treatment is required, patients can be referred to other doctors at no additional cost to the patient • Arrangements also exist with hospitals in the area for the provision of hospital services when needed

Health Maintenance Organizations (HMOs) • Group practice HMO • A large group of physicians share facilities and support personnel and work out of one or a few main locations • The doctors are not employees of the HMO • Rather, as a group they have a contractual agreement with the HMO to provide the medical services needed • Compensation arrangements vary, but most are paid either on • The amount of services provided (called a fee-per-service basis) or • Capitation basis • Payment of a specified, periodic amount based on number of patients for which a physician is responsible • Regardless of the amount of medical services provided to each one

Health Maintenance Organizations (HMOs) • Staff model HMO • Doctors are employees of the HMO and are paid salaries • Individual practice HMO • Has no centralized location • Physicians work out of their individual offices and usually are paid on a fee-per-service basis • Many people prefer individual practice HMOs • Because of the greater choice of physicians that is usually provided and the number of different locations in which medical treatment can be sought

Point-of-Service Plans • Sometimes referred to as an open-ended HMO • Can be organized in all of the same ways as an HMO • The philosophies of comprehensive care, prevention, and cost control are present in both types of plans • The primary difference between a POS plan and an HMO • Individuals in POS plans have more freedom of choice in selecting doctors and other medical care providers • POS members have the option of using either the POS providers or doctors unaffiliated with POS plan

Point-of-Service Plans • Because of the emphasis on prevention and cost control • Care can usually be provided in a more cost-effective manner if members use POS doctors than if they go outside the plan for care • To encourage patients to select POS providers • Patients must pay a significantly larger share of the medical bills when they use non-POS doctors • The flexibility of POS plans has made them quite popular • Between 1997 and 2001 the market share of POS plans grew from 17 to 22 percent • While the market share of HMOs dropped from 31 to 23 percent

Preferred Provider Organizations (PPOs) • Currently hold a significantly larger share of the health care market than either HMOs or POS plans • About half of people receiving their health insurance through their employers are members of PPOs • Most PPOs offer a reduction in the price of health care service in return for certain concessions by the sponsoring organization • For example, doctors in a particular PPO might agree to lower their fees by 15% for PPO participants • In exchange for the lower fees, the employers agree to • Provide the PPO with a minimum number of patients each month • Pay their premiums promptly • Encourage their employees to take advantage of health education programs that are designed to lessen health problems and lower costs

Preferred Provider Organizations (PPOs) • Health services provided through PPO arrangements may be extensive • In other instances, services provided by PPOs are extremely narrow and may be focused only on a particular treatment • Such as vision care or prescription drugs • A major difference between PPOs and POS plans • PPOs generally do not use primary care physicians to coordinate individuals’ medical care

Medicaid and Medicare • Medicaid • Generic name for the variety of state-administered programs that provide medical care to low-income persons • Who can show sufficient financial need to qualify them for assistance • Financed by both federal and state tax revenues • Benefits vary somewhat among the states • Care provided through Medicaid has been growing at double-digit rates for several years

Medicaid and Medicare • Medicare • Designed to meet the growing need for health insurance for persons age 65 or older • As well as those under age 65 who have been receiving Social Security disability benefits for at least two years • Has two basic parts • A compulsory hospital plan • A voluntary medical plan • Called supplemental medical insurance • Beginning in 2006, a third part will be added • Offering optional prescription drug benefits to Medicare beneficiaries

Mechanics of Cost Sharing • Many health plans contain cost-sharing provisions that apply at the time of the loss • Can be effective way to help control the use of medical services • Because insureds are more aware of the cost of treatment

Deductibles • Deductibles are used in health insurance to combine the risk management tools of risk retention and transfer • The most common deductible arrangement in health insurance is the calendar-year deductible • Covered losses are generated throughout the calendar year until they exceed the stated deductible • Only after that point does the insured receive any reimbursement from the policy • Per-cause deductible • Each new sickness or accidental injury results in the assessment of a deductible • Sometimes deductibles are applied on a family basis rather than on an individual basis • Another variation is to waive individual deductibles after two or three members of the same family have had claims exceeding their applicable calendar-year deductibles

Copays • HMOs and POS plans sometimes charge patients a small dollar amount for some types of treatment • This amount is a deductible applied on a per-service basis • Generally referred to as a copay

Coinsurance • The policy specifies that the insurer will pay a percentage (often 80%) of the covered loss after the applicable deductible has been satisfied • Coinsurance is a particularly important element of POS and PPO plans • It often provides the primary financial incentive for encouraging insurers to seek medical care from a particular network of doctors • For example, one arrangement is to pay 90% of expenses after a small deductible • If the patient receives care from a provider within the network • However, if the patient receives care from a doctor who is outside the network • The reimbursement rate may be only 60%

Caps • If the policy has both a deductible and coinsurance premium • The cost sharing with a major health problem can be substantial • Policies of coinsurance provisions may include an upper limit on the amount of cost sharing required • Sometimes coinsurance caps are implied rather than stated explicitly • Out-of-pocket cap • Applies the limit to amounts that the insured pays for both coinsurance and applicable deductibles

Maximum Limits • A few health insurance plans have no limit on the amount of benefits that can be paid for covered expenses • Whereas others have a lifetime maximum that applies to the sum of all benefits payable under the plan • However, lifetime maximums may be able to be restored • Allowing an individual to collect more than the overall lifetime maximum stated in the policy • Automatic restoration of the maximum may occur gradually over time

Maximum Limits • As an alternative to a gradual restoration process • Some health policies allow insureds to provide evidence of insurability that is then used to justify restoration of the entire lifetime maximum all at once • Such evidence usually consists of a medical examination showing that the individual meets the same health standards required for new applicants for health insurance • A health insurance policy may have various internal maximums that apply to particular health problems • Treatment for alcohol and drug abuse, for example, is often insured for much less than the coverage provided for other types of health problems • Internal maximums serve to protect the insurer from potentially excessive claims

Health Expense Insurance • Figure 17-1 shows a diagram of the groupings used to classify health insurance policies • No sharp distinction among policies exists as to the type of medical expense for which indemnity is provided • Insureds should familiarize themselves with their specific coverages • Because there is much less standardization among health expense coverage than for many other types of insurance

Figure 17-1: Health Insurance Classifications

Hospital Insurance • A hospital insurance contract is one of the basic health insurance policies • Basic health insurance policies have fewer cost-sharing provisions than policies that are not considered to be basic health contracts • Hospital insurance policies provide indemnification of necessary hospitalization expenses such as • Room and board when hospitalized • Laboratory fees • Nursing care • Use of the operating room • Certain medicines and supplies • Specific dollar limits for hospital room and board may be stated in the contract

Hospital Insurance • Some contracts limit coverage by specifying a maximum time period for which costs will be reimbursed for any one illness or injury • Covered expenses other than room and board are often referred to ancillary charges • Certain exclusions are contained in hospital insurance policies • Many policies exclude convalescence, custodial, or rest care; voluntary hospital stays for some types of cosmetic surgeries; private-duty nursing; and physical examinations unrelated to the treatment of an injury or a sickness

Surgical Insurance • Covers physicians’ fees associated with covered surgeries • Both inpatient and outpatient surgical procedures are usually covered in order to prevent unnecessary hospitalizations when a procedure can be performed without an overnight stay in a hospital • Some surgical policies pay only the fees charged by the doctor who actually performs the surgery • Whereas other policies also provide coverage for charges associated with assistant surgeons and anesthesiologists

Surgical Insurance • Many surgical policies were written on a scheduled basis in the past • Several surgical procedures were listed in the policy together with the specified maximums payable for each one • However, it is better for the insured if the policy is written on an nonscheduled basis • Covered procedures are insured up to the full amount of what is reasonable and customary • In judging whether a particular expense exceeds what is reasonable and customary • Insurers analyze the range of fees prevailing in the relevant geographical area at the time the surgery is performed • If the fee is more than what would be charged by most other surgeons then some of the charges will be disallowed and will not be eligible for reimbursement

Regular Medical Expense Insurance • Usually written in conjunction with other basic coverages rather than as a standalone contract • Most policies primarily cover physicians’ services other than for surgical procedures • Some policies require that the individual be hospitalized • Whereas others do not have this restriction • Coverage may be written to pay reasonable and customary fees • Or there may be specific limits associated with each covered service • Typical exclusions usually relate to routine physical examinations, dental care, and vision care

Major Medical Insurance • Usually have higher limits and fewer exclusions then do hospital, surgical, and regular medical expense contracts • Some major medical policies are designed to be coordinated with underlying basic health insurance • Others are designed to replace basic health coverage and insure all medical expenses within one policy • Called a comprehensive form • Usually have substantial deductibles and coinsurance provisions • Nearly always written on a reasonable-and-customary-fee basis

Major Medical Insurance • Covers all of the same types of expenses insured by hospital, surgical, and regular medical expense contracts • Additionally, after satisfaction of applicable cost-sharing provisions • Major medical policies may cover expenses not addressed by basic health contracts • Such as prescription drugs, ambulance services, physical therapy, crutches, and wheelchairs • Excess major medical • Usually pays only after another major medical policy has exhausted its limits

Dental Insurance • A newer form of health expense coverage • Coverage services typically include fillings, crowns, extractions, bridgework, dentures, root canal therapy, X rays, treatment of gums, and orthodontics • Preventive care such as oral examinations, X rays, and semiannual cleanings are nearly always covered • Most policies have relatively low annual limits and some limit coverage by applying fee schedules for various dental procedures • Deductibles and coinsurance provisions normally are used for nonpreventive types of care • Cost sharing is usually waived for routine examinations, cleanings, and X rays

Long-Term Care Insurance • With increased life expectancies and an aging population • There is an increase in risk of loss associated with the eventual need of many persons for nursing home care or other assistance with daily living • The market for long-term care (LTC) insurance is growing rapidly • All states have adopted legislation regulating LTC insurance • Some standardization is achieved for a product that is still evolving

Long-Term Care Insurance • It is important to consider the following points when comparing different LTC policies • Some policies cover only the named insured • Whereas others cover the insured’s spouse as well • Policies must specify the conditions that trigger benefit payments • To qualify for favorable tax treatment the LTC policy must make benefits available when insureds cannot perform two or more of the following activities of daily living • Eating, bathing, toileting, transferring, dressing, and continence • Most policies specify a maximum daily benefit and an overall minimum limit on the number of days for which the benefit will be paid

Long-Term Care Insurance • When selecting a policy, insureds usually must select an elimination period • A form of a deductible • For example, a policy with a twenty-day elimination period would not pay benefits during the first twenty days of a covered stay in a nursing home or other eligible facility • The longer the elimination period, the lower will be the premium • Some early LTC policies excluded losses related to Alzheimer’s disease • Or paid only for skilled and intermediate nursing home care and not custodial care • Many policies have options that make benefits available for adult day care, home health care, and other miscellaneous forms of assistance that might be needed by people at an advanced age

Medicare • Currently includes both a compulsory hospital insurance plan and a voluntary and medical insurance plan • The hospital insurance, often referred to as Part A, provides coverage in the following main areas • Inpatient hospital care • Skilled nursing home care • Home health services • Hospice care

Medicare • Medicare’s supplementary medical insurance (Part B) covers doctor bills and related expenses that are medically necessary • Persons covered under Part A are automatically covered under Part B • Unless they reject the coverage • A monthly premium is also charged for Part B • Which has its own set of deductibles and coinsurance provisions

Medicare • Currently all Part B beneficiaries pay the same flat monthly premium • However, in 2007 the Medicare reform law passed in 2003, beneficiaries with incomes exceeding a certain amount will pay higher premiums • Expenses covered under Part B • Bills for physicians’ services, physical and occupational therapy, speech pathology, diagnostic X ray and laboratory tests, blood transfusions, radioactive isotope therapy, medical equipment and supplies, ambulance services, organ replacements, and artificial limbs and eyes

Medicare • In general, neither Part A nor Part B will pay for the following • Services that are not medically necessary • Payments covered by workers’ compensation benefits • Services performed by a relative • Services rendered outside the United States • Routine physicals, eye exams, hearing aids, dental care, foot care, and cosmetic surgery • Prescription drugs taken at home • Most immunizations • Private nurses

Medicare • One of the largest gaps left by Medicare is the lack of coverage for prescription drugs • Beginning in 2006 optional prescription drug coverage will be available • The monthly premium will initially be about $35 • With a $250 deductible • After that, the beneficiary will pay 25% of the cost for drug costs up to $2,250

Medicare • Because of the existence of deductibles, coinsurance, and coverage limitations in the Medicare program • Many persons purchased private insurance to “fill in the gaps” • Sometimes referred to as Medigap insurance • These policies are the subject of past controversies alleging deceptive sales practices and coverages • Standardization of Medigap policies is achieved through a system devised by the NAIC

Other Health Expense Insurance • Many other specialized forms of health insurance are available including • Prescription drug coverage that is separate from both major medical and basic health insurance coverages • Vision care insurance • Covers the cost and eyeglasses, contact lenses, and periodic routine eye exams • Dread disease coverage • Designed to pay expenses associated only with particular diseases such as cancer • Accident insurance

Disability Income Insurance • Provides periodic income payments to the insured while he or she is unable to work as a result of sickness or injury • Benefit duration • Benefits terminate at the earlier of • As soon as the disability ends • When benefits have been paid for the maximum benefit duration period • Short-term disability (STD) insurance usually pays benefits for up to six months • Longer-term disability (LTD) insurance arrangements pay for a longer period of time, such as 5 or 10 years

Definition of Disability • Contracts with very strict definitions tend to be less expensive and less useful to insureds • For example, if an insured is not considered disabled unless confined to his or her home except for trips to see a doctor • Few people would qualify for benefits even though their health conditions may prevent them from earning a living • Most policies link their definitions to one’s ability to work • Some policies require the insured to be unable to engage in any type of paid work in order to collect benefits • Other types provide the insured is disabled if they are unable to perform the major duties of any occupation for which he or she is reasonably suited through education, training, or experience

Definition of Disability • The most liberal definition is the own occupation definition • The insured is considered disabled if unable to perform the major duties of his or her own occupation • Results in the highest premiums • Most LTD policies that use this definition do so for an initial period time • After which the definition changes to the less liberal “any occupation for which reasonably suited”

Definition of Disability • Many LTD policies also provide some coverage for partial disability • But this may be restricted only to those periods that follow a period of total disability • The definition of partial disability often is similar to the definition of total disability • As an alternative, partial disability may be defined solely in terms of a person’s earnings • Contracts that use this type of income-related definition usually specify that an insured is considered to have some residual disability that qualifies him or her for partial disability payments • As long as earnings are less than some percentage of the former level

Elimination Period • Both STD and LTD policies use elimination periods • When a disability occurs, no benefits are payable during the elimination period • Thus, they are really deductibles that reduce premiums by eliminating coverage for small losses • The longer the elimination period the lower the premium • The premium savings tends to decrease at a diminishing rate as the elimination period becomes longer • Sometimes STD policies have different elimination periods that depend on the cause of the disability • Disabilities due to sickness are subject to longer elimination periods than those resulting from an accident

Loss of Health Chapter 17