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Frequently Asked Questions | Health Insurance
Medical Expense (Health) Insurance
What are the principal types of medical expense insurance
coverage?
Medical expense insurance is broadly classified into two principal
types of coverage: base (or basic) plans and major medical plans.
Base plans generally consist of either hospital expense coverage,
surgical expense coverage, or both. Basic hospital and surgical
expense plans generally provide coverage on a first-dollar basis
(i.e., no deductible) and provide 100 percent reimbursement of covered
expenses, up to a relatively low maximum of $10,000, $25,000, $50,000
or $100,000. Major medical plans, in contrast, apply a deductible
to initial expenses, generally ranging from $100 to $500 per calendar
year. After the deductible is satisfied, major medical plans typically
reimburse 80 percent of eligible expenses up to a relatively high
maximum, e.g., $500,000 or $1,000,000. Some major medical plans
reimburse eligible expenses at 70 percent; some plans also provide
unlimited lifetime benefits. Major medical plans typically cover
a broad list of medical expenditures, including hospital expense,
surgical expense, physician (non-surgical) expense, private duty
nursing, diagnostic X-ray and laboratory services, prescription
drug expense, artificial limbs and organs, ambulance services, and
many other types of medical expenses when prescribed by a duly licensed
physician. Thus, in comparison with basic plans, major medical plans
provide much broader coverage, with higher limits, but these plans
require the insured to share in the cost of medical care through
deductibles and coinsurance (i.e., 20 or 30 percent of eligible
expenses above a deductible amount).
Is medical expense coverage available for
substance abuse and mental illness?
Major medical expense plans also generally provide coverage for
treatment of substance abuse (e.g., alcoholism and drug usage) and
mental illness. A higher coinsurance percentage (e.g., 50 percent)
and a lower lifetime benefit limit (e.g., $25,000 or $50,000) generally
applies, however. In addition, the extent of coverage may depend
on whether treatment is provided on an in-patient or out-patient
basis.
What types of expenditures are commonly excluded
under major medical expense plans?
Although providing very broad coverage, major medical plans typically
contain a number of exclusions. Common exclusions include medical
expenditures arising from: (1) convalescent or custodial care; (2)
physical examinations, unless required for the treatment of an injury
or illness (it should be noted that some plans now cover this expenditure);
(3) cosmetic surgery unless required to correct a condition resulting
from an injury or a birth defect; (4) occupational injuries and
illnesses that are otherwise covered under a Workers' Compensation
law; and (5) routine dental and vision care (care required for treatment
of an injury and dental and eye surgery are frequently covered,
however). Other common exclusions relate to benefits provided by
government agencies (e.g., VA hospitals) and expenses paid under
other insurance programs, including Medicare.
Even though major medical plans provide broad
coverage, insureds still incur certain "out-of-pocket"
costs. What are these costs?
An insured's "out-of-pocket" costs under major medical
expense plans include the deductible, cost-sharing amounts arising
from the operation of the coinsurance clause, and medical expenditures
that are deemed by the plan to be in excess of "reasonable
and customary" charges. Only charges that are "reasonable
and customary" for a specific type of service, in a particular
location or geographic area, are eligible for reimbursement under
medical expense plans. The definition of "reasonable and customary"
may vary somewhat from one medical expense plan to another.
What is the coinsurance clause in medical
expense plans and how does it work?
Coinsurance, sometimes called "percentage participation,"
requires the insured to share in the cost of medical care. Under
an 80/20 coinsurance provision, the medical expense plan pays 80
percent of eligible medical charges above any deductible. The insured
is required to pay the remaining 20 percent. Other coinsurance arrangements,
e.g., 70/30 or 90/10, are sometimes used. In the event of large
or catastrophic medical expenses, an insured might suffer severe
financial hardship due to the operation of the coinsurance clause.
To compensate for this possibility, many major medical expense plans
contain a coinsurance cap, or stop-loss limit. This provision places
a limit on the insured's out-of-pocket costs in a given year arising
from the operation of the coinsurance clause. The size of the coinsurance
cap generally ranges from $2,000 to $3,000, depending on the plan,
although limits as low as $1,000 are sometimes used. Once the coinsurance
cap has been reached, all eligible expenses above this amount are
paid in full, up to the plan's overall limit of coverage.
What is the difference between coinsurance
and copayment?
On occasion, these terms have been used interchangeably. However,
it is preferable to define the two terms differently, despite their
similarity of purpose. Under a copayment or copay provision, the
insured usually is required to pay a set or fixed dollar amount
(e.g., $3, $5, or $10) each time a particular medical service is
used. Copay provisions are frequently found in medical plans offered
by health maintenance organizations (HMOs) where a nominal copayment
is applied to each office visit and to each prescription that is
filled.
What is a preexisting conditions clause and
what is the effect of its inclusion in major medical expense plans?
A preexisting condition is often defined as a medical condition
(i.e., an injury or illness) that required treatment during a prescribed
period of time, e.g., 3 or 6 months, prior to the insured's effective
date of coverage under the major medical expense plan. Sometimes,
a preexisting condition is defined to include medical conditions
that were known to the insured, even though no treatment was provided
during the prescribed period. A preexisting conditions clause excludes
coverage for preexisting conditions for possibly as long as 12 months
after the effective date of coverage. Because the definition of
a preexisting condition, and the provisions of the clause itself,
may differ considerably from one plan to another, it is recommended
that newly insured individuals (and prospective insureds) completely
familiarize themselves with this policy provision.
How does the medical expense coverage offered
by Health Maintenance Organizations (HMOs) differ from the coverage
provided under basic and major medical expense plans?
Basic and major medical expense plans are generally classified as
indemnity contracts. These plans indemnify, or reimburse, the insured
for medical expenses incurred and typically require the completion
and filing of claim forms. In addition, these plans usually contain
deductible and coinsurance cost sharing provisions and may restrict
coverage for certain types of medical care expenditures. Indemnity
plans, however, provide the insured with substantial freedom relative
to the choice of physician, including whether a primary care physician
or a specialist will be seen. In contrast, HMO coverage emphasizes
comprehensive (including preventive) care and typically contains
very few exclusions, no (or small) deductibles, and nominal copayments.
However, there is much less freedom of choice of physician under
traditional HMO coverage since the patient is typically required
to be under the care of a primary care physician who serves as a
"gatekeeper." In this role the primary care physician
determines whether the services of a specialist are needed, in addition
to determining what other medical services are required for treatment.
Some HMOs today offer a point-of-service option, whereby patients
may opt for indemnity type coverage (with a deductible and coinsurance)
when they desire medical treatment outside the HMO network.
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