Medical Insurance Basics
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 inpatient
or outpatient 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.
