In Major Medical Expense policies what is the objective of a Stop Loss provision

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FIN334 Health Insurance Basics
Chapter 15 & 16

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FIN334 Health Insurance Basics
Chapter 15 & 16

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1. 1. 1 FIN334 Chapter 15 & 16 Health Insurance Basic
2. 2. Copyright © 2011 Pearson Prentice Hall. All rights reserved. Chapter 15 Individual Health Insurance Coverages
3. 3. 3 Agenda • Health Care Problems in the US • Individual Health Insurance Coverages • Major Medical Insurance • Major Medical Insurance and Managed Care • Health Savings Accounts • Long-term Care Insurance • Disability-Income Insurance • Individual Medical Expense Contractual Provisions • Shopping for Individual Health Insurance
4. 4. 4 Affordable Care Act • health insurers can no longer refuse or drop coverage based on patients’ medical histories or because of a pre-existing condition • health insurers cannot charge different rates based on patients’ medical histories or gender • establishing minimum standards for qualified health benefit plans • young adults can remain covered under parents until age 26 • most employers must provide coverage for their workers or pay a surtax on the workers wage up to 8% • an expansion of Medicaid • a subsidy to low- and middle-income Americans to help buy insurance • a central health insurance exchange where the public can compare policies and rates • requiring most Americans to carry or obtain qualifying health insurance coverage or possibly face a surtax for non-compliance (fine)
5. 5. 5 Premiums- payments to have health insurance co-pay is a common feature of many health insurance pl Co-insurance= The percentage of costs of a covered hea Deductible-The amount you pay for covered health care Out of Pocket Maximum- you maximum out of pocket c
6. 6. 6 Health Care Problems in the US • The US Health care delivery system has four major problems: – Rising health care expenditures – Large number of uninsured in the population – Uneven quality of medical care – Considerable waste and inefficiency
7. 7. 7 Health Care Problems in the US • Problem 1: Rising Health Care Expenditures – Health care expenditures in the US have increased substantially over time and are growing faster than the national economy • Estimated national health expenditures totaled just over $2.5 trillion in 2009, or 16.9 percent of the nation’s GDP. One in six dollars of the nation’s income is spent on health care.
8. 8. 8 Exhibit 15.1 The United States Ranks First in the World on Health- Care Spending—International Health-Care Spending as a Percentage of Gross Domestic Product (GDP)
9. 9. 9 Health Care Problems in the US – Reasons for the increase in health care expenditures include: • Increase in consumer demand • Advances in technology • Cost insulation because of third-party payers • Employment-based health insurance • State mandated benefits • Increased spending on prescription drugs • Cost shifting by Medicare and Medicaid • Higher administrative costs • Rising prices in the health care sector – Aging of the population is not a major contributing factor
10. 10. 10 Health Care Problems in the US • Problem 2: Many people do not have health insurance coverage – 45.7 million people, or 15.3% of the US population had no health insurance coverage in 2007 – Groups with large number of uninsured include: • Foreign born • Hispanics, Blacks, and Asians • Young adults • Low income households – Many people are uninsured because the coverage is not affordable – Many low income people who are eligible for Medicaid are not aware they are eligible
11. 11. 11 Exhibit 15.2 More Than Half of Americans Say Family Skimped on Medical Care Because of Cost in the Past Year; Worries About Affordability and Availability of Care Rise
12. 12. 12 Exhibit 15.3 Reasons for Not Having Health Insurance
13. 13. 13 Health Care Problems in the US • Problem 3: Uneven Quality of Medical Care – The quality of medical care varies widely depending on geographic location – Many patients do not receive the most effective care • Problem 4: Waste and Inefficiency – Critics believe the administrative costs of delivering health insurance benefits are excessively high • Paperwork is excessive • There is a duplication of expensive technology in hospitals in large cities • Insurance fraud and abuse are widespread
14. 14. 14 Health Care Problems in the US • Many health care reform proposals have been suggested in the past 35 years – Obama’s plan has three major objectives: • To make health insurance available and affordable to all Americans, building on the present system • To lower health care costs by investing in health information technology • To promote public health by requiring coverage of preventive services
15. 15. 15 Individual Health Insurance Coverages • Individual medical expense plans are purchased by: – People who are not employed – Retired workers – College students • Common forms of individual coverage include: – Major medical insurance – Health savings accounts – Long-term care insurance – Disability-income insurance
16. 16. 16 Major Medical Insurance • Major medical insurance is designed to pay a high proportion of the covered expenses of a catastrophic illness or injury • Plans are characterized by: – High lifetime limits – Broad range of benefits, including • Inpatient hospital services • Outpatient services • Physician services – Surgeons and physicians reimbursed on the basis of reasonable and customary charges • Outpatient prescription drugs – Under an integrated approach, charges for prescription drugs are subject to the same deductible and coinsurance charges that apply to other expenses – Under a separate drug card program, prescriptions are subject to separate deductible and copayment charges
17. 17. 17 Major Medical Insurance – A benefit period, or length of time for which benefits are paid after a deductible is satisfied – A deductible is used to eliminate small claims and the high administrative cost of processing small claims • A calendar-year deductible is an aggregate deductible that has to be satisfied only once during the calendar year • A family deductible specifies that medical expenses for all family members are accumulated to satisfy the deductible • Under a common-accident provision, only one deductible has to be satisfied if two or more family members are injured in one accident – A coinsurance provision requires the insured to pay a certain percentage (typically 20-25 %) of eligible medical expenses in excess of the deductible • Purpose is to reduce premiums and prevent overutilization of policy benefits • A copayment is a flat amount the insured must pay for benefits
18. 18. 18 Major Medical Insurance – The insured’s total out-of-pocket spending is limited by an out- of-pocket limit (also called a stop-loss limit), after which the insurer pays 100% of eligible expenses • The out-of-pocket limit reduces the crushing financial burden of a catastrophic loss – Common exclusions to a major medical policy include cosmetic surgery and expenses covered by workers compensation – Plans may have internal limits for some types of expenses, such as hospice care and treatment for alcoholism
19. 19. 19 Major Medical Insurance and Managed Care • Many individual major medical policies sold today are part of a managed care plan. – A managed care plan provides benefits to insureds in a cost-effective manner, with heavy emphasis on cost control – Major medical plans now incorporate many elements of managed care, such as requiring approval for some hospital admissions
20. 20. 20 Health Savings Accounts • A health savings account (HSA) is a tax exempt account established exclusively for the purpose of paying qualified medical expenses – The beneficiary must be covered under a high- deductible health plan to cover catastrophic medical bills – The account holder can withdraw money from the HSA tax-free for medical costs – Contributions and annual out-of-pocket expenses are subject to maximum limits
21. 21. 21 Health Savings Accounts – An HSA investment account in a qualified plan received favorable tax treatment • Participants pay premiums with before-tax dollars • Investment earnings accumulate tax-free – Proponents argue that HSAs can help keep health care costs down because consumers will be more sensitive to costs, will avoid unnecessary services, and will shop around – Critics argue that HSAs will encourage insureds to forego preventative care
22. 22. 22 Long-Term Care Insurance • Long-term care insurance pays a daily or monthly benefit for medical or custodial care received in a nursing facility, in a hospital, or at home – People who reach age 65 will likely have a 40% chance of entering a nursing home, and about 10% of them will stay there five years or more – Plans come in three main forms: • A facility-only policy • A home health care policy • A comprehensive policy
23. 23. 23 Long-Term Care Insurance – Daily benefits range from $50 - $300 or more – Most policies are reimbursement policies, which reimburse for actual charges up to a daily limit – Some policies reimburse on a per diem basis – Many insurers offer policies with pooled benefits, which provide a total dollar amount that can be used to pay for the deferent types of long-term care services – An elimination period is a waiting period during which time benefits are not paid
24. 24. 24 Long Term Care Insurance – In a qualified plan, a benefit trigger must be met to receive benefits. Either, • The insured is unable to perform a certain number of activities of daily living (ADLs), or • The insured needs substantial supervision to be protected against threats to health and safety because of a severe cognitive impairment – Since inflation can erode the real purchasing power of the daily benefit, some plans offer automatic benefit increases – Policies are guaranteed renewable – Coverage is expensive
25. 25. 25 Long Term Care Insurance – Most insurers offer optional nonforfeiture benefits, which provide benefits if the insured lapses the policy • Under a return of premium benefit, the policyholder receives a cash payment • Under a shortened benefit period option, coverage continues but the benefit period or maximum dollar amount is reduced – Long-term insurance that meets certain requirements receives favorable income tax treatment • Premiums are deductible under certain conditions • Per diem benefits are subject to daily limits
26. 26. 26 Disability-Income Insurance • The financial impact of total disability on present savings, assets, and ability to earn an income can be devastating • Disability-income insurance provides income payments when the insured is unable to work because of sickness or injury – Income payments are typically limited to 60- 80% of gross earnings
27. 27. 27 Disability-Income Insurance • The four most common definitions of total disability are: 1. Inability to perform all duties of the insured’s occupation 2. Inability to perform the duties of any occupation for which the insured is reasonably fitted by education, training, and experience 3. Inability to perform the duties of any gainful occupation 4. Loss-of-income test, i.e., your income is reduced as a result of sickness or accident – Most insurers use a combination of 1 & 2
28. 28. 28 Disability-Income Insurance – Partial disability is defined as the inability of the insured to perform one or more important duties of his or her occupation – Some policies offer partial disability benefits • Usually, partial disability benefits must follow total disability • The partial disability benefits are paid at a reduced rate for a shorter period – Residual disability means a pro rata disability benefit is paid to an insured whose earned income is reduced because of an accident or sickness • The typical provision has a time and duties test that considers both income and occupation
29. 29. 29 Disability-Income Insurance – The benefit period is the length of time that disability payments are payable after the elimination period is met • Most disabilities have durations of less than two years – Individual policies normally contain an elimination period, during which time benefits are not paid • The typical elimination period is 30 days – A waiver-of-premium provision allows for future premiums to be waived as long as the insured remains disabled – Policies typically include a rehabilitation provision and some pay accidental death, dismemberment and loss-of-sight benefits – A cost-of-living rider can be added to adjust benefits for increases in the cost of living
30. 30. 30 Individual Medical Expense Contractual Provisions • Some common contractual provisions address the renewability of the policy – Under an optionally renewable policy, the insurer has the right to terminate a policy on any anniversary date – A “nonrenewable for stated reasons only” provision allows the insurer to terminate coverage only for certain reasons – A guaranteed renewable policy is one in which the insurer guarantees to renew the policy to some stated age • Premiums can be increased for the underwriting class – Under a noncancellable policy, the insurer guarantees renewal of the policy to some stated age • Premiums cannot be increased during that period
31. 31. 31 Individual Medical Expense Contractual Provisions • To control adverse selection, individual policies usually contain some type of preexisting-conditions clause – The clause limits coverage for a physical or mental condition for which the insured received treatment prior to the effective date of the policy – Some states limit these exclusion periods, e.g., for 12 months • Some contractual provisions address claims: – Under a notice of claim provision, the insured must give written notice to the insurer within 20 days after a covered loss occurs – Under a claim forms provision, the insurer is required to send the insured a claim form within 15 days – Under the proof-of-loss provision, the insured must send written proof of loss to the insurer within 90 days
32. 32. 32 Individual Medical Expense Contractual Provisions • The grace period is a 31-day period after the premium due date to pay an overdue premium • The reinstatement provision permits the insured to reinstate a lapsed policy, subject to payment of premiums and a 10-day waiting period for sickness • The time limit on certain defenses states that after the policy has been in force for two years, the insurer cannot void the policy or deny a claim on the basis of misstatements in the application, except for fraudulent misstatements
33. 33. Copyright © 2011 Pearson Prentice Hall. All rights reserved. Chapter 16 Employee Benefits: Group Life and Health Insurance
34. 34. 34 Agenda • Meaning of Employee Benefits • Fundamentals of Group Insurance • Group Life Insurance Plans • Group Medical Expense Insurance • Traditional Indemnity Plans • Managed Care Plans • Consumer-directed Health Plans • Recent Developments in Employer-Sponsored Health Plans • Group Medical Expense Contractual Provisions • Group Dental Insurance • Group Disability-Income Insurance • Cafeteria Plans
35. 35. 35 Meaning of Employee Benefits • Employee benefits are employer-sponsored benefits, other than wages, that are partly or fully paid by employers, which enhance the financial security of individuals and families • These benefits include: – Group life, medical and dental insurance – Paid holidays, vacations, medical leave – Educational assistance, employee discounts – Employer contributions to Social Security and Medicare
36. 36. 36 Fundamentals of Group Insurance • Group insurance differs from individual insurance in several ways: – Many people are covered under one contract • A master contract is formed between the group and insurer – Coverage costs less to the individual than comparable insurance purchased individually – Individual evidence of insurability is usually not required – Experience rating is used
37. 37. 37 Group Insurance • Group insurers observe certain underwriting principles: – The group should not be formed for the sole purpose of obtaining insurance – There should be a flow of persons through the group – Benefits should be automatically determined by a formula • This is to reduce adverse selection against the insurer – A minimum percentage of employees must participate – Individual members should not pay the entire cost – The plan should be easy to administer
38. 38. 38 Group Insurance • Eligibility for group status depends on company policy and state law – Usually a minimum size is required • Employees must meet certain participation requirements: – Be a full time employee – Satisfy a probationary period – Apply for coverage during the eligibility period • During the eligibility period, the employee can sign up for coverage without furnishing evidence of insurability – Be actively at work when the coverage begins
39. 39. 39 Group Life Insurance Plans • The most important form of group insurance is group term life insurance – Provides low-cost protection to employees – Coverage is yearly renewable term – The amount of coverage can be based on the workers’ earnings, position, or it can be a flat amount for all • It is typically 1-5 times the annual salary or earnings – Coverage usually ends when the employee leaves the company • Can convert to an individual cash value policy
40. 40. 40 Group Life Insurance Plans • Many group life insurance plans also provide group accidental death and dismemberment (AD&D) insurance – Pays additional benefits if the employee dies in an accident or incurs certain types of bodily injuries – Some plans offer voluntary accidental death and dismemberment insurance • Employees pay the full cost
41. 41. 41 Group Life Insurance Plans • Some employers make available group universal life insurance for their employees – The employer may offer a one or two plan design • In the single plan approach, the employee who wants only term insurance pays only the mortality and expense charges • In the two plan approach, the employee who wants only term insurance pays into the term insurance plan; the employee who wants universal life insurance must pay higher premiums to accumulate cash value – Employees select the amount of guaranteed coverage – Employees pay the full cost of universal life insurance – Premiums are flexible; loans and withdrawals are possible – Retired employees can continue the coverage – Dependents can be added with a rider
42. 42. 42 Group Medical Expense Insurance • Group medical expense insurance pays the cost of hospital care, physicians’ and surgeons’ fees, and related medical expenses – Insurance is available through: • Commercial insurers • Blue Cross and Blue Shield Plans • Managed Care organizations • Self-insured plans by employers • Commercial life & health insurers sell medical expense coverage and also sponsor managed care plans
43. 43. 43 Group Medical Expense Insurance • Blue Cross and Blue Shield plans sell individual, family and group coverages – Blue Cross plans cover hospital expenses – Blue Shield plans cover physicians’ and surgeons’ fees – Major medical is also available – In most states, plans operate as non-profit organizations • Some have converted to a for-profit status to raise capital – Managed care plans offer medical expense benefits in a cost effective manner – Plans emphasize cost control and services are monitored – Most organizations are for-profit – A managed care organization typically sponsors a health maintenance organization (HMO) • Comprehensive services are provided for a fixed, prepaid fee
44. 44. 44 Group Medical Expense Insurance • A large percentage of employers self-insure the health insurance benefits provided to their employees – Self insurance means the employer pays part or all of the cost of providing health insurance to the employees – Plans are usually established with stop-loss insurance • A commercial insurer will pay claims that exceed a certain limit – Some employers have an administrative services only (ASO) contract with a commercial insurer • The commercial insurer only provides administrative services, such as claim processing and record keeping – Self-insured plans are exempt from state laws that require insured plans to offer certain state-mandated benefits
45. 45. 45 Traditional Indemnity Plans • Under a traditional indemnity plan: – Physicians are paid a fee for each covered service – Insureds have freedom in selecting their own physician – Plans pay indemnity benefits for covered services up to certain limits – Cost-containment has not been heavily stressed • These plans have declined in importance over time • Some plans have implemented cost-containment provisions • Common types include basic medical expense insurance and major medical insurance
46. 46. 46 Traditional Indemnity Plans • Basic medical expense insurance is a generic name for group plans that provide only basic benefits – Covers routine medical expenses – Not designed to cover a catastrophic loss – Coverage includes: • Hospital expense insurance – Plans pay room and board or service benefits • Surgical expense insurance – Newer plans typically pay reasonable and customary charges • Physicians’ visits other than for surgery • Miscellaneous benefits, such as diagnostic x-rays
47. 47. 47 Traditional Indemnity Plans • Major medical insurance is designed to pay a high proportion of the covered expenses of a catastrophic illness or injury – Can be written as a supplement to a basic medical expense plan, or combined with a basic plan to form comprehensive coverage – Supplemental major medical insurance is designed to supplement the benefits provided by a basic plan and typically has: • High lifetime limits • A coinsurance provision, with a stop-loss limit • A corridor deductible, which applies only to eligible medical expenses not covered by the basic plan
48. 48. 48 Traditional Indemnity Plans – Comprehensive major medical insurance is a combination of basic benefits and major medical insurance in one policy, and typically has: • High lifetime limits • A coinsurance provision • A calendar-year deductible • A plan may contain a family deductible provision
49. 49. 49 Managed Care Plans • Managed care is a generic name for medical expense plans that provide covered services to the members in a cost-effective manner – An employee’s choice of physicians and hospitals may be limited – Cost control and cost reduction are heavily emphasized – Utilization review is done at all levels – The quality of care provided by physicians is monitored – Health care providers share in the financial results through risk-sharing techniques – Preventive care and healthy lifestyles are emphasized
50. 50. 50 Managed Care Plans • A health maintenance organization (HMO) is an organized system of health care that provides comprehensive services to its members for a fixed, prepaid fee – Basic characteristics include: • The HMO enters into agreements with hospitals and physicians to provide medical services • The HMO has general managerial control over the various services provided • Most services are covered in full, with few maximum limits • Choice of providers is limited • A gatekeeper physician controls access to specialty care • Providers may receive a capitation fee, which is a fixed annual payment for each plan member regardless of the frequency or type of service provided
51. 51. 51 Managed Care Plans • There are several types of HMOs: – Under a staff model, physicians are employees of the HMO and are paid a salary or a salary and an incentive bonus to hold down costs – Under a group model, physicians are employees of another group that has a contract with the HMO • Group receives a capitation fee for each member – Under a network model, the HMO contracts with two or more independent group practices • The group practices receive a capitation fee for each member – Under an individual practice association (IPA) model, an open panel of physicians agree to treat HMO members at reduced fees, on a fee-for-service basis • Most IPAs have risk-sharing agreements with the HMO
52. 52. 52 Managed Care Plans • A preferred provider organization (PPO) is a plan that contracts with health care providers to provide medical services to members at reduced fees – PPO providers typically do not provide care on a prepaid basis, but are paid on a fee-for-service basis – Patients are not required to use a preferred provider, but the deductible and co-payments are lower if they do – Most PPOs do not use a gatekeeper physician, and employees do not have to get permission from a primary care physician to see a specialist
53. 53. 53 Managed Care Plans • A point-of-service plan (POS) is typically structured as an HMO, but members are allowed to go outside the network for medical care – If patients see providers who are in the network, they pay little or nothing out of pocket – Deductibles and co-payments are higher if patients see providers outside the network • Managed care plans generally have lower hospital and surgical utilization rates than traditional indemnity plans – Emphasis on cost control has reduced the rate of increase in health benefit costs for employers
54. 54. 54 Managed Care • Managed care plans are criticized for: – Reducing the quality of care, because there is heavy emphasis on cost control – Delaying care, because gatekeepers do not promptly refer patients to specialists – Restricting physicians’ freedom to treat patients, thus compromising the doctor-patient relationship • Studies show the quality of care is improving, but variations in evidence-based care cause many people to receive substandard care – Quality varies widely depending on geographic location
55. 55. 55 Consumer-Directed Health Plans • A consumer-directed health plan is a generic term for an arrangement that gives employees a choice of health-care plans designed to: – Make employees more sensitive to health-care costs – To provide a financial incentive to avoid unnecessary care – To seek out low-cost providers • In a defined contribution health plan, the employer contributes a fixed amount, and the employee has a choice of plans, such as an HMO, PPO, or POS • In a high-deductible health plan (HDHP), the employee is covered under a major medical plan with a high deductible and a health savings account (HAS)
56. 56. 56 Recent Developments in Employer- Sponsored Health Plans • Health care costs continue to rise, and employers continue to emphasize cost control. – Employers are shifting more cost to employees through higher deductibles – Consumer-directed health plans are now offered by 20% of large employers – Large employers are giving employees financial incentives to participate in health management programs – Large employers are using health risk assessments to learn about their employees’ health habits – Employers are shedding medical coverage for retirees
57. 57. 57 Exhibit 16.1 Examples of Exorbitant Charge by Some Out-of- Network Physicians in New York and North Carolina, 2008 (cont.)
58. 58. 58 Exhibit 16.1 Examples of Exorbitant Charge by Some Out-of- Network Physicians in New York and North Carolina, 2008
59. 59. 59 Exhibit 16.2 Average Annual Premiums for Single and Family Coverage,1999–2009
60. 60. 60 Exhibit 16.3 Enrollment in Consumer-Directed Health Plans Grows in 2008 (percentage of all covered employees enrolled in each plan type)
61. 61. 61 Exhibit 16.4 Medical Plan Cost Per Employee, 2007–2008
62. 62. 62 Exhibit 16.5 Offerings of Retiree Medical Plans Have Fallen Sharply Over the Past Decade (percentage of large employers)*
63. 63. 63 Group Medical Expense Contractual Provisions • Important provisions in group medical expense insurance plans include: – A preexisting condition provision that excludes coverage for a preexisting medical condition for a limited period after the worker enters the plan • Period is restricted to 12 months by the Health Insurance Portability and Accountability Act of 1996 (HIPAA) • The act also establishes the portability of insurance coverage, whereby insurers must give an employee credit for previous coverage
64. 64. 64 Group Medical Expense Contractual Provisions – A coordination-of-benefits provision specifies the order of payment when an insured is covered under two or more group health insurance plans • Coverage as an employee is usually primary to coverage as a dependent • With respect to dependent children, the plan of the parent whose birthday occurs first during the year is primary • The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) gives employees the right to stay in the employer’s plan for a limited period after leaving employment
65. 65. 65 Group Dental Insurance • Group dental insurance helps pay the cost of normal dental care – Also covers damage to teeth from an accident – Covers x-rays, cleaning, fillings, extractions, etc. – Some plans cover orthodontia – Encourages insureds to see their dentists on a regular basis – Coinsurance requirements vary depending on the type of service provided – Maximum limits on benefits and waiting periods for certain types of services are used to control costs – A predetermination-of-benefits provision informs the employee of the amount that the insurer will pay for a service before the service is performed
66. 66. 66 Group Disability-Income Insurance • Group disability-income insurance pays weekly or monthly cash payments to employees who are disabled from accidents or illness • Under a short-term plan, benefit payments range from 13 weeks to two years – Most cover only nonoccupational disability, which means that an accident or illness must occur off the job – Employee must be totally disabled to qualify – You are considered totally disabled if you are unable to perform each and every duty of your regular occupation • Under a long-term plan, the benefit period ranges from 2 - 65 years – For the first two years, you are considered disabled if you are unable to perform all of the material duties of your own occupation. After two years, you are still considered disabled if you are unable to work in any occupation for which you are reasonably fitted by education, training, and experience – Plans typically cover occupational and nonoccupational disability – If the disabled worker is receiving Social Security or other disability benefits, the payments are reduced to discourage malingering
67. 67. 67 Cafeteria Plans • A cafeteria plan allows employees to select those benefits that best meet their specific needs – In many plans, the employer gives each employee a certain number of dollars or credits to spend on benefits, or take as cash – Many plans allow employees to make their premium contributions with before-tax dollars – Many plans include a flexible spending account which is an arrangement that permits employees to pay for certain unreimbursed medical expenses with before-tax dollars

What is the stop

What is a major medical expense plan?

What is the difference between stop

Which of the following is least likely to be covered by a major medical expense?