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Health insurance is a generic term encompassing several types of insurance contracts that, while related, are designed to protect against different risks. There are two separate types of coverage included within the generic term health insurance. One type, medical expense insurance, provides coverage for expenses related to health care, while the second is designed to provide payments for loss of income. The health insurance policy designed to provide periodic payments when an insured is unable to work because of sickness or injury is referred to as disability income insurance. Terminology used to reference health insurance varies from state to state and from company to company.
There are two major causes of loss (perils) under a health insurance policy. Policies may cover both accident and sickness, or accident only.
Accidental bodily injury is an unforeseen and unintended injury that resulted from an accident rather than a sickness.
Sickness is normally defined as an illness that first manifests itself while the policy is in force. The majority of health insurance claims result from sickness rather than accidental injury. An emergency medical condition is one that is so severe in pain or symptoms that, if not treated quickly and properly, could cause serious bodily harm or possibly death.
The two major perils covered in health insurance policies are accidental bodily injury and sickness.
Like many disability policies, Accidental Death and Dismemberment (AD&D) policies also distinguish between injuries due to accidental means and accidental results.
With policies that base payment on accidental means, both the injury and its cause must be unexpected and unintended — for example, a man loses a leg in a car accident. Both the accident and the loss are unexpected.
With policies that base payment on accidental results, only the injury must be unexpected and unintended — for example, a man is cliff-diving and breaks his neck. He intentionally jumped off the cliff, but not with the intention of breaking his neck.
Most major medical policies include a coinsurance provision that provides for the sharing of expenses between the insured and the insurance company. After the insured satisfies the policy deductible, the insurance company will usually pay the majority of expenses, typically 80%, with the insured paying the remaining 20%. Other coinsurance arrangements exist, such as 90/10, 75/25, or 50/50. The larger the percentage paid by the insured, the lower the required premium will be. The purpose of the coinsurance provision is for the insurance company to control costs and discourage overutilization of the policy.
A deductible is a specified dollar amount that the insured must pay first, before the insurance company will pay the policy benefits. The purpose of a deductible is to have the insured absorb the smaller claims, while the coverage provided under the policy absorbs the larger claims. Consequently, the larger the deductible, the lower the premium required to be paid.
Most major medical policies feature an annual deductible (also called a calendar year deductible) that, as the name implies, is paid once in any year regardless of the amount of claims in that year. The policy may contain an individual deductible, in which each insured is personally responsible for a specified deductible amount each year, or a family deductible (usually 2 to 3 times the individual deductible), whereby the annual deductible is satisfied if two or more family members pay a deductible in a given year, regardless of the amount of claims incurred by additional family members. Some policies contain what is known as a per occurrence deductible or flat deductible, which requires the insured to pay for each claim, possibly resulting in more than one deductible being paid in a given year.
The policy may also contain a provision which applies when more than one family member is injured in a single accident, also called the common accident provision. In this case, only one deductible applies for all family members involved in the same accident.
Some supplemental major medical plans also include an integrated deductible, in which case the amount of the deductible may be satisfied by the amount paid under basic medical expense coverage. For example, if the supplemental coverage included a $1,000 integrated deductible, and the insured incurs $1,000 in basic medical expenses, the deductible will be satisfied. If the basic policy only covered $800 of the basic expenses, the insured would have to satisfy the remaining $200 difference.
Some policies also include a carry-over provision, stating that if the insured did not incur enough expenses during the year to meet the deductible, any expenses incurred during the last 3 months may be carried over to the next policy year to satisfy the new annual deductible. For example, if an insured has a $500 deductible and incurs $100 in the first half of the year, and another $250 during the last quarter — thus not reaching the total deductible for the year — the $250 could be carried forward to the next year, and the insured would become eligible for claim payments once he incurred an additional $250 in the new year.
Disability income and long-term care policies usually have a time deductible in the form of an elimination period.
Copayments are arrangements where the insured pays a specified dollar amount for a claim, typically at the time of receiving the service, and the insurance company pays the remaining amount. Copayments differ from coinsurance because copayments are typically expressed in dollar amounts, while coinsurance is usually expressed as a percentage of the cost.
Initially, the member chooses a primary care physician, or gatekeeper. If the member needs the attention of a specialist, the primary care physician must refer the member. This helps keep the member away from higher-priced specialists unless it is truly necessary.
Any medical expense plan that attempts to contain costs by controlling the behavior of participants is considered a managed care program. A true managed care plan should have 5 basic characteristics:
Extension of benefits means continuation of coverage under a specified benefit after discontinuance of original coverage to an employee or dependent. This provision protects a disabled person from becoming uninsured due to a loss of coverage for any reason. Basic medical expense benefits will usually be extended for 3 months, while major medical expense benefits will usually be extended for a period of 12 months. In order for extension of benefits to be provided, the insured must have been disabled before the policy was discontinued and must continue to be disabled.
Most policies also limit the amount of out-of-pocket expenses the insured can incur during a policy year. A stop-loss limit is a specified dollar amount beyond which the insured no longer participates in the sharing of expenses. The insurance company pays 100% of the expenses above the specified stop-loss limit.
The waiting period, or elimination period, stipulates how long a person must wait to receive benefits for a period of disability. The elimination period begins on the effective date of the policy and lasts for 5 months. Benefits can be received at the beginning of the 6th month. Benefits cannot be offered retroactively for a period of disability that began during the elimination period.
The waiver of premium provision or rider is usually included with guaranteed renewable and noncancellable disability income policies. It provides that, in the event of permanent and total disability, premiums will be waived for the duration of the disability. To qualify, the insured must be totally disabled for a specified period of time, usually 3 to 6 months. During this waiting period, the insured must continue to pay the policy premium, but usually the waiver is retroactive to the date the disability began, and any premiums paid during the waiting period will be refunded. This rider generally expires when the insured attains age 65; however, as long as the insured becomes disabled prior to age 65, premiums will continue to be waived for the duration of the disability.
In group insurance, the policy is called the master policy and is issued to the policyowner, which could be the employer, an association, a union, or a trust.
Pre-existing conditions are conditions for which the insured has received diagnosis, advice, care, or treatment during a specific time period prior to the application for health coverage. Up to January 2014, an individual health insurance policy could have these conditions excluded from coverage; however, the health care reform enacted since then eliminated pre-existing condition restrictions in health insurance plans.
In some cases, an individual may need health insurance for a specified period of time. Coverage is then considered a term health policy, which is not renewable. When the term expires, the insured must purchase another policy. These policies are also called period of time policies, as they are only effective for a specific period of time and will be cancelled by the company at the end of the term.
Examples of term health policies are travel accident policies, short-term health plans, or accident-only policies. Policies that cover specific events, such as school functions, summer camp, or athletic events, are other examples. Once the event is over, coverage is no longer in place.
The insurance company cannot cancel a noncancellable policy, nor can the premium be increased beyond what is stated in the policy (note that the policy may call for an increase in a certain year, such as "age 65," but that must be stated in the original contract). The insured has the right to renew the policy for the life of the contract; the insurer cannot increase the premium above the amount for which the policy was originally issued. However, the guarantee to renew coverage usually only applies until the insured reaches age 65, at which time the insured is usually eligible for Medicare. For disability income insurance, the policy will be renewed beyond the insured's age 65 only if the insured can provide evidence of continuing to work in a full-time job.
The insured may cancel an insurance policy at any time.
The guaranteed renewable provision is similar to the noncancellable provision, with the exception that the insurer can increase the policy premium on the policy anniversary date. The insured, however, has the unilateral right to renew the policy for the life of the contract. The insurer may increase premiums on a class basis only and not on an individual policy. As with the noncancellable policy, coverage generally is not renewable beyond the insured's age 65. Medicare Supplements and long-term care policies must be written as guaranteed renewable contracts, and cannot be cancelled by the company at the insured's age 65.
A guaranteed renewable policy requires the insurer to continue coverage as long as premiums are paid.
With a conditionally renewable policy, the insurer may terminate the contract only at renewal, for certain conditions that are stipulated in the contract. For example, one condition may be that the insured must be employed to collect disability payments. In addition, the policy premiums may be increased. The company may not deny renewal due to claims experience.
Optional renewability is similar to conditional renewability, except that the insurer may cancel the policy for any reason, on certain homogeneous classes (not individuals within a class). Renewability is at the option of the insurer. The insurer can only decide not to renew a policy on the policy anniversary or premium due date (renewal date). If the insurer elects to renew coverage, it may also increase the policy premium.
Blue Cross and Blue Shield organizations have a contractual agreement with physicians and hospitals. The physicians and hospitals are the producers in the cooperative. Blue Plans are voluntary not-for-profit health care organizations (although recently in some states they have been amending their structure to become for-profit organizations); they are not insurance companies.
Blue Plans started out as separate associations, with Blue Cross providing payments to hospitals and Blue Shield covering physician charges. Although today hospital charges are still paid by Blue Cross, and Blue Shield pays physician charges, the two associations are merged as one.
Blue Cross and Blue Shield are operated as local facilities throughout each state and are managed by a governing board in each locality. They are considered prepaid plans because each subscriber pays a set fee (usually monthly) in order to receive the services provided under the plan. It is also considered a service plan because benefits are paid to the hospitals and physicians (health care providers) instead of to the subscriber (insured).
When dealing with group plans, both the Blues and insurance companies use experience rating to determine rates to be charged. The rates are thus based on the overall experience of the group. The Blues, however, still use community rating in pricing products for smaller employers and individuals. Community rating involves a pooling of the experience of all groups in all areas, and then the setting of an average rate that will be sufficient to support this experience. This rate then applies to all groups insured under a particular plan. Most Blue Shield plans now offer surgical benefits on a reasonable and customary basis.
Increasing health care costs during the 1970s and 1980s helped stimulate the rapid growth of Health Maintenance Organizations (HMOs). HMOs were established to manage health care and the associated costs by providing prepaid care that emphasizes preventive care. This is quite a departure from traditional health insurance policies that typically did not cover preventive care, covering illness only after it had manifested.
An HMO is regarded as an organized system of health care that provides a comprehensive array of medical services on a prepaid basis to voluntarily enrolled persons living within a specified geographic area (called the service area). Insureds (called subscribers) pay a premium to the HMO and are provided with a broad range of health care services, including routine doctor visits and emergency room care. The service is provided by physicians and hospitals that have an agreement with the HMO to provide care.
An indemnity plan pays health insurance benefits to the insured based on a predetermined rate set for medical services. The amount of actual expense for those services does not matter — the policy will pay the fixed amount stated in the contract. Usually an indemnity plan will pay a stated amount for each day the insured is hospitalized as an inpatient; it does not usually pay the cost of medical expenses, specific hospital bills, or specific doctor bills.
Commercial insurers, such as stock, mutual, and life insurers, also write health and disability insurance on an indemnity basis. These policies can be written as either individual or group policies and include benefits for hospital, medical, surgical, and major medical expenses.
A Multiple-Employer Trust (MET) is made up of two or more employers in similar or related businesses who do not qualify for group insurance on their own. Before HIPAA defined small employers, many small companies were unable to get health insurance at a reasonable cost due to the fact that there weren't enough people in the company to insure. In situations like this, several small companies banded together to create a large pool of people so that the insurance company will provide coverage. This group of employers jointly purchases a single benefits plan to cover employees of each separate employer.
A noninsured plan may operate without the services and funds of an insurance company. Once the trust fund is established, it can pay for employees' health care expenses directly (self-funding). The trustee has charge of the funds, and all financial activities occur through it. As with any self-funded program, the employer assumes legal responsibility for providing coverage, and the employee has no conversion right upon leaving the group coverage.
The Preferred Provider Organizations (PPOs) could be seen as the traditional medical system's answer to HMOs. In the PPO system, the physicians are paid fees for their services rather than a salary, but the member is encouraged to visit approved member physicians who have previously agreed upon the fees to be charged. This encouragement comes in the form of benefits. While members can utilize any physician they choose, the PPO may provide 90% of the cost of a physician on their approved list, while possibly only providing 70% of the cost if the member chooses to utilize a physician not included on the PPO's approved list.
An Exclusive Provider Organization (EPO) is a type of PPO. The members of an EPO, however, do not choose health care providers from a list of preferred providers. Instead, insureds under an EPO plan use specific providers who are paid on a fee-for-service basis.
Self-funded plans are funded by the insured (usually the employer) and administered by a third party. A successful self-funded program will have the following characteristics:
There are a variety of health insurance policies providing limited coverage for specific accidents or sickness. These contracts must specify the type of accident or sickness covered, limited perils, and amounts of coverage. Benefits may be paid on an expense-paid (reimbursement) basis or indemnity basis.
Limited policies cover a specific sickness or accident only.
A travel accident policy provides coverage for death or injury resulting from accidents occurring while a fare-paying passenger is on a common carrier. The benefits are only paid if the loss occurs during the time of travel.
A dread disease, or limited risk, policy provides a variety of benefits for a specific disease, such as a cancer policy or heart disease policy. Benefits are usually paid as a scheduled, fixed-dollar amount of indemnity for specified events or medical procedures, such as hospital confinement or chemotherapy.
A critical illness policy covers multiple illnesses, such as heart attack, stroke, and renal failure, and pays a lump-sum benefit to the insured upon the diagnosis (and survival) of any of the illnesses covered by the policy. The policy usually specifies a minimum number of days the insured must survive after the illness was first diagnosed.
A hospital indemnity policy provides a specific amount on a daily, weekly, or monthly basis while the insured is confined to a hospital. Payment under this type of policy is unrelated to the medical expense incurred, but based only on the number of days confined in a hospital. This can also be called a hospital fixed-rate policy.
Accident-only policies are limited policies that provide coverage for death, dismemberment, disability, or hospital and medical care resulting from an accident. Because it is a limited medical expense policy, it will only pay for losses resulting from accidents, and not sickness.
A credit disability policy is issued only to those in debt to a specific creditor. In case of the borrower's disability, payments to the creditor will be made on the loan until the disabled borrower is able to return to work.