Health Insurance Basics

Health insurance is offered through private commercial insurers, service organizations, or the government as outlined below:

• Commercial Insurance Companies
• Service Organizations—HMOs and PPOs
• Government (Federal)—Social Security Disability Income, Medicare, TRI-CARE and CHAMPUS
• Government (State)—Medicaid

Commercial Insurers

While an insurance company may specialize in only one or two types of insurance, most insurance companies offer life insurance as well as health insurance. Health insurance may be offered through either an individual or a group policy with certain provisions common to both. The unique characteristics of group health insurance will be discussed later in the text.

Service Providers

Some organizations resemble private insurance companies by offering protection against the financial loss caused by illness and accidents. However, in key respects these organizations are quite different from private insurers. Examples of service providers are health maintenance organizations (HMOs) and preferred provider organizations (PPOs).

Government Insurers

Federal, state, and local governments provide social insurance to a segment of the population who would otherwise be without coverage. The federal government offers a variety of military life and health insurance plans as well as Medicare, which is the health insurance part of Social Security. State governments provide unemployment insurance, workers’ compensation programs, and state-run medical expense insurance plans for the financially needy (Medicaid).

Health insurance is a broad term that includes:

• Medical Expense Insurance
• Accidental Death and Dismemberment Insurance
• Dental Insurance
• Long Term Care (LTC) Insurance
• Disability Income Insurance

In all forms, health insurance offers protection against financial loss resulting from illness or accidental injury.

Underwriting

Like life insurance underwriters, health insurance underwriters are in the business of analyzing insurance applicants to determine if they represent an insurable risk. Underwriters determine if an applicant is insurable and, if so, at what rate.

Many of the same applicant characteristics and hazards are of concern to health underwriters as they are to life underwriters, but for different reasons.

Age

It is an easily recognized fact that a person’s age can have a direct bearing on the expected health of that person. Not only are very young or very old people more apt to become ill more often than people in the middle, but the length and severity of the illness may be greater.

Gender

Although insurers are increasingly using unisex rate tables, it is a statistical fact that a female is more likely to get pregnant than a male. Therefore, if a policy covers childbirth, a female will most likely pay a higher premium than a male during the childbearing years. In the same vein, a male is more like to suffer from a heart attack than a female and premiums will reflect this at more advanced ages.

Financial Status

Especially with disability income insurance, the applicant’s current income in relation to the amount of insurance being applied for is important in underwriting.

Occupation

One’s occupation is of concern to the health underwriter, for obvious reasons. This is true whether the applicant is seeking medical expense reimbursement insurance or disability income insurance. If an applicant for disability insurance has 2 jobs, the policy will usually be underwritten on the more hazardous occupation.

Medical Condition

The most significant factor used in evaluating a health insurance application is the applicant’s current physical condition and past medical history.

Other Factors

The health underwriter is as concerned about moral and morale hazards as is the life underwriter. What are the applicant’s hobbies and avocations? Does the applicant drink alcohol excessively or abuse drugs? Answers to many of these questions are obtained from the application. Health underwriters also have access to the same resources as life underwriters, namely, the Medical Information Bureau and consumer investigation reports.

Underwriting the Substandard Risk

Health underwriters have several options available to them in setting rates for applicants who represent a substandard risk. Techniques for handling substandard risks include:

Exclusions

If an applicant seems at particularly high risk for a certain illness or injury, the underwriter may propose excluding that illness or injury from coverage. For example, a person with a history of back problems might be offered a health policy that excludes coverage for spine related medical expenses.

Modification of Coverage

Insurers may offer a policy that is modified to reflect the greater risk posed by the applicant. Unlike the exclusion approach, a modified policy would not exclude protection of a certain illness, but may reduce benefits paid for certain medical care if the applicant seems predisposed to having a claim for a specific medical problem.

Extra Premiums

If at all possible, most insurers prefer to deal with substandard risks by charging an extra premium (rating) and providing full coverage.

Health Insurance Claims

The challenges facing the health claim examiner are different from those of the life claim examiner. With life insurance, if the insured has died within the terms of the policy, the death benefit is paid.

Health insurance claims are subject to several variables. The cost of medical care depends on the type and degree of one’s illness or injury. Some medical claims can become very complicated, with medical bills coming from different sources. The claim examiner must review each bill to see if it represents a covered expense and if it falls within the coverage offered by the policy.

The principal of indemnity states that no one should profit from an insurance claim. Some insureds may have coverage through two or more policies. If so, the claim examiners must know this and must communicate with each other to make sure that the combined amount of money paid on the claim does not exceed 100% of the medical expense. Through “Other Insurance” clauses, one policy is designated the primary insurance, and will pay its full policy obligations. Any other insurance will then pay whatever amount is necessary to bring the total benefit paid to no more than 100% of total costs.

There are other considerations that are predicated on the particular type of health insurance in question. Disability claims present challenges that are different from medical expense reimbursement claims. As we review each type of health insurance in detail, some of these unique considerations will become evident.

Lesson Summary

Health insurance is offered through various avenues including commercial insurance companies, service organizations, and government programs. Here is a breakdown of how health insurance is provided:

• Commercial Insurance Companies
• Service Organizations (HMOs and PPOs)
• Government (Federal)–Social Security Disability Income, Medicare, TRICARE, and CHAMPUS
• Government (State)–Medicaid

Health insurance encompasses various types of coverage such as medical expense insurance, dental insurance, disability income insurance, and more to protect against financial losses due to illness or injury. Underwriting for health insurance involves evaluating factors like age, gender, financial status, occupation, and medical condition to determine insurability and rates.

For applicants deemed as substandard risks, health underwriters have options such as exclusions, modifications of coverage, and charging extra premiums. Health insurance claims are subject to a different set of challenges compared to life insurance claims due to the complexities of medical care and potential overlapping coverage from multiple policies.

An important principle is indemnity, ensuring that no one profits from an insurance claim. Coordination between different insurers is necessary to prevent overpayment, designating primary insurance and coordinating payouts to avoid exceeding total costs.

Each type of health insurance, whether medical expense insurance, accidental death and dismemberment insurance, dental insurance, long term care insurance, or disability income insurance, presents unique challenges regarding claims processing.

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