Medical Expense Claims and Managed Care

A medical expense claim is a calculation. The policy’s cost-sharing terms, the provider’s contract with the insurer and the policy’s definition of a covered charge decide who pays each dollar, and a producer who can run that calculation can tell a client what a plan will really cost on the day it is used. The first sections work four claims from the bill to the final split, then compare the four ways medical care is delivered and paid for, follow a request through utilization review, and end with the rule that keeps a health policy in force. Names and figures in the examples are invented and are not statutory figures.

How a Covered Charge Is Decided

Before any deductible or coinsurance is applied, the insurer decides how much of the provider’s bill counts. Three methods are in common use, and the choice changes the answer more than the percentages do.

Scheduled benefits. A schedule lists a fixed dollar amount for each service, such as a surgical schedule that allows a set sum for each operation. The policy pays the scheduled amount, or the actual charge if the policy says it pays the lesser. The schedule does not move when the provider’s bill does.

Usual, reasonable and customary charges. An expense-incurred policy pays a percentage of what the insurer treats as the going rate for the service in the area. This is the usual, reasonable and customary charge, abbreviated UCR. The insurer compares the provider’s bill with its UCR figure and uses the lower of the two as the covered charge.

Contracted rates. A provider in the insurer’s network has agreed to accept a negotiated amount, called the allowed amount, as payment in full. The covered charge is the allowed amount.

When a provider outside a network bills more than the insurer’s covered charge, the difference is balance billing. The insurer does not pay it, and nothing in the policy limits it, so where a patient chooses a non-network provider for planned care, as in the examples here, the patient owes it. Other rules can limit a balance bill in other settings, such as emergencies. Federal law treats balance billing by non-network providers as outside a plan’s cost-sharing, so it does not count toward the plan’s annual cap on cost-sharing (42 USC 18022(c)(3)(B)). Copayments, coinsurance and deductibles do count.

A producer who explains a plan to a client needs to ask which of the three methods applies to the services the client expects to use. The percentages printed on a summary are only part of the answer.

Limits That Sit on Top of Cost-Sharing

Two other terms can change a claim after the deductible and coinsurance have been applied. A benefit limit caps a particular service, such as a stated number of visits or a dollar amount for one kind of care. A maximum benefit caps what the policy pays in total. Michigan bars a health insurance policy from setting lifetime or annual dollar limits on the value of essential health benefit coverage, although a policy may limit benefits that are not essential health benefits where other law allows it, and the bar does not reach grandfathered coverage or a short-term policy of six months or less (MCL 500.3406z(1) to (3)). A service limit that counts visits and not dollars is a different thing from a dollar limit. A producer reads the schedule of benefits for both before telling a client that a service is covered.

For example, suppose a policy covers 30 physical therapy visits a year at 80% after the deductible, and the allowed amount is $90 a visit. A client who needs 36 visits has $2,700 of charges for the first 30 visits, assuming the deductible is already met, so the insurer pays $2,160 and the client pays $540. The six extra visits cost $540 more, and the client pays all of that: the insurer pays nothing for them because the limit has been reached.

Worked Claims

Each claim uses a plan that has a deductible, coinsurance and an annual cap on what the insured pays. Unless the example says otherwise, the cap counts the deductible and the coinsurance together. Plans differ on this point, so a producer reads the policy to see whether the deductible counts toward the cap.

Claim 1: Deductible and Coinsurance

Terry Okafor has a major medical policy with a $1,000 calendar-year deductible, 80% coinsurance and a $4,000 annual cap on what he pays (deductible and coinsurance together). He has had no other claims this year. He is hospitalized for surgery, and the covered charges total $14,000.

1. The deductible comes first. Terry pays the first $1,000, which leaves $13,000.
2. Coinsurance applies to the $13,000. The insurer pays 80%, which is $10,400. Terry pays 20%, which is $2,600.
3. Terry’s total is $1,000 plus $2,600, or $3,600. That is under the $4,000 cap, so the cap does not change the result.

The insurer pays $10,400 and Terry pays $3,600. The two add up to the $14,000 of covered charges.

Claim 2: The Stop-Loss Limit Is Reached

Take the same policy and a larger loss. Terry has a serious fall and the covered charges total $60,000.

1. He pays the $1,000 deductible. That leaves $59,000.
2. At 20% coinsurance, the uncapped bill would be $11,800, so his total would be $12,800. That is far above the cap, so the cap controls.
3. Terry stops paying when his total reaches $4,000. After the $1,000 deductible he has $3,000 of room under the cap. Coinsurance of $3,000 is 20% of $15,000, so the cap is reached when covered charges total $16,000 ($1,000 plus $15,000).
4. The insurer pays 80% of the $15,000, which is $12,000, and then 100% of the remaining $44,000 ($60,000 minus $16,000). Its total is $56,000.

Terry pays $4,000 and the insurer pays $56,000. A second claim of $2,500 in the same calendar year would be paid in full, because Terry has already reached the cap. The deductible and the cap start again at zero when the next benefit year begins, so the first claim of the new year is shared as in Claim 1.

A family deductible works on the same principle. Suppose a policy has a $500 deductible for each person and a $1,000 maximum for the family, with 80% coinsurance. In one year, one family member has $800 of covered charges, a second has $650 and a third has $300.

Family member	Covered charges	Deductible paid	Coinsurance paid	Insurer pays
First	$800	$500	$60 (20% of $300)	$240
Second	$650	$500	$30 (20% of $150)	$120
Third	$300	$0 (family maximum met)	$60 (20% of $300)	$240

The first two members satisfy $1,000 of deductible between them, so the family deductible is met and the third member pays only coinsurance. The family’s total cost-sharing is $560, plus $530, plus $60, or $1,150.

Claim 3: A Network Provider Compared With a Non-Network Provider

Marta Lindqvist has a preferred provider plan. In network she has a $750 deductible (not yet met this year) and 80% coinsurance. Out of network she has a $1,500 deductible (also unmet) and 60% coinsurance, and the insurer pays out-of-network claims on its UCR figure. Her surgery is billed at $9,000. Two surgeons could have performed it.

In network. The surgeon has a contract with the insurer, and the allowed amount is $5,200.

1. The covered charge is $5,200. The contract bars the surgeon from billing Marta for the remaining $3,800, so that amount is written off.
2. Marta pays the $750 deductible, which leaves $4,450.
3. Coinsurance on $4,450 is 20%, or $890 for Marta and $3,560 for the insurer.
4. Marta’s total is $750 plus $890, or $1,640.

Out of network. The surgeon has no contract and bills $9,000. The insurer’s UCR figure for the procedure is $6,000.

1. The covered charge is the lower of the bill and the UCR figure, which is $6,000.
2. Marta pays the $1,500 deductible, which leaves $4,500.
3. Coinsurance on $4,500 is 40% for Marta ($1,800) and 60% for the insurer ($2,700).
4. The surgeon bills Marta the $3,000 difference between $9,000 and $6,000. That is balance billing.
5. Marta’s total is $1,500 plus $1,800 plus $3,000, or $6,300.

The insurer pays $2,700 and the $6,300 that remains is Marta’s, which together make up the $9,000 bill. The same operation costs Marta $1,640 in network and $6,300 out of network, a difference of $4,660. The balance bill of $3,000 would not count toward a federal cap on cost-sharing, as described earlier.

Claim 4: Copayments, a Referral and an Authorization

An HMO charges fixed copayments, not a deductible and coinsurance. Dev Raman’s HMO charges $25 for a primary care visit, $45 for a specialist visit with a referral, $100 for an MRI and $500 for each hospital admission. After the copayment the HMO pays the contracted rate in full.

Service	Contracted rate	Dev pays	HMO pays
Primary care visit for knee pain	$120	$25	$95
Orthopedist, on his primary care physician’s referral	$210	$45	$165
MRI, authorized in advance	$1,400	$100	$1,300
Surgery with one hospital admission	$22,000	$500	$21,500
Total	$23,730	$670	$23,060

Every step in the table was authorized. Dev’s primary care physician, who acts as the gatekeeper, referred him to the orthopedist, and the HMO approved the MRI before it was done. Suppose Dev had skipped the first two steps and booked a non-network orthopedist who billed $350. An HMO covers no non-network care except emergencies, so the HMO pays nothing and Dev pays all $350. The plan’s rules, not the size of the bill, decided the result: a visit outside the referral path is not covered at all.

Reading an Explanation of Benefits

After a claim is processed the insurer sends an explanation of benefits, which shows each step of the calculation. Marta’s out-of-network surgery from Claim 3 would appear like this.

Line	Amount	What it means
Amount billed	$9,000	The surgeon’s charge
Over the usual, reasonable and customary figure	$3,000	Not a covered charge, and not paid by the plan
Covered charge	$6,000	The lower of the bill and the UCR figure
Applied to deductible	$1,500	Marta’s first dollars of covered charges
Coinsurance	$1,800	40% of the $4,500 left after the deductible
Plan paid	$2,700	60% of $4,500
Patient responsibility on the covered charge	$3,300	Deductible plus coinsurance

The statement does not show the $3,000 as owed to the plan, because the plan never owed it. It is the surgeon’s balance bill, and it arrives separately. A client who reads only the “patient responsibility” line will think the surgery cost $3,300, when it cost $6,300. A producer who has walked a client through one of these statements has already answered most of the questions that arrive after the first claim.

Comparing Two Plans for One Client

A plan’s premium is part of its cost, so the total cost of a plan in a year is the premium plus what the insured pays on claims. Two plans for the same 40-year-old client, both with 80% coinsurance and a cap that counts the deductible:

• Plan A has a premium of $380 a month ($4,560 a year), a $500 deductible and a $3,000 annual cap.
• Plan B has a premium of $250 a month ($3,000 a year), a $3,000 deductible and a $6,000 annual cap.

The total cost of each plan depends on how much care the client uses in a year.

Covered charges for the year	Plan A: client pays	Plan A: total with premium	Plan B: client pays	Plan B: total with premium
$1,500	$700	$5,260	$1,500	$4,500
$12,000	$2,800	$7,360	$4,800	$7,800
$80,000	$3,000 (cap)	$7,560	$6,000 (cap)	$9,000

Plan A’s figures come from the $500 deductible plus 20% of the rest, so $500 plus $200 is $700 on $1,500 of charges, and $500 plus $2,300 is $2,800 on $12,000. Plan B pays nothing until $3,000, so it costs the client the whole $1,500 in the first row, and $3,000 plus $1,800 is $4,800 on $12,000.

Plan B is cheaper in a light year and Plan A is cheaper in a heavy one. The break-even point is where the extra premium of Plan A, $1,560, equals Plan A’s saving in cost-sharing. At $2,450 of covered charges each plan costs $5,450 in total. Below that Plan B wins. Above it Plan A wins. The calculation lets a producer say to a client, “If you expect a routine year, Plan B saves you $760 at $1,500 of charges; if there is surgery in your family’s future, Plan A is the safer choice,” and show the figures behind it.

HMOs, PPOs, POS Plans and EPOs Compared

The four arrangements differ in who sets the network, whether the patient needs a referral, and whether care outside the network is covered at all.

Feature	HMO	PPO	POS	EPO
Network	Required	Preferred, with out-of-network allowed	Required for the lower cost level	Required
Primary care physician	Selected by the member, who coordinates care	Not required	Selected by the member	Usually not required
Referral to a specialist	Required	Not required	Required to use the network level	Usually not required
Care outside the network	Not covered, except emergencies	Covered at a lower percentage	Covered at a lower percentage	Not covered, except emergencies
Typical cost-sharing	Copayments	Deductible and coinsurance, lower in network	Copayments in network, deductible and coinsurance outside	Copayments or coinsurance in network
How providers are paid	Capitation or negotiated rates	Negotiated rates	Either, depending on the network	Negotiated rates

An exclusive provider organization, or EPO, is the plan the table calls a network without a gatekeeper: the member must use network providers, but need not name a primary care physician or get a referral to see a specialist in the network. The details vary by insurer, so a producer describes an EPO by what its summary of benefits says.

What an HMO Provides

An HMO covers a defined list of basic services for a prepaid charge. These include preventive care such as immunizations, screenings and annual examinations, primary care, care from specialist physicians when the primary care physician refers the member, hospital and outpatient care, laboratory and imaging services, and emergency care. A member needs the primary care physician’s referral to see a specialist, and some services also need the HMO’s authorization before they are provided. The HMO’s own rules say which services need which step.

Emergency care is a situation in which a member does not wait for a referral. Michigan law sets the test for a policy that covers emergency services: the insurer must cover medically necessary services for a sudden condition that a prudent layperson with average knowledge of health and medicine could reasonably expect to be seriously harmful without immediate attention, and it may not deny payment up to the point of stabilization because of the final diagnosis or because prior authorization was not given (MCL 500.3406k(1)). A member with chest pain that proves to be indigestion has still had an emergency.

Michigan also lets two groups of patients skip the gatekeeper in a plan that requires the member to designate a participating primary care provider. A female insured may go to a participating obstetrician-gynecologist for annual well-woman examinations and routine obstetrical and gynecologic services without prior authorization or referral (MCL 500.3406m(1), (2)). A dependent minor may select and use a participating pediatrician for general pediatric care without either (MCL 500.3406n(1), (2)).

What a PPO Adds

A PPO attaches financial incentives to a network without forbidding outside care. Michigan law allows an insurer to offer a policy that requires care from providers who have signed prudent purchaser agreements as a condition of coverage, which is the exclusive form (MCL 500.3405(2)). It also allows a policy that gives a financial advantage to insureds who choose those providers without requiring them (MCL 500.3405(3)). The second form is what the market calls a PPO, and the first is closer to an EPO.

A PPO member usually needs no primary care referral to see a specialist. Many PPO plans carry indemnity features as well. They pay a percentage of covered charges after a deductible, subject to a cap on the member’s cost-sharing, which is how an indemnity plan works. In network the percentage is higher and the deductible lower, so the member is pushed toward the network without being locked into it.

A POS plan is a combination. In network, the member behaves as in an HMO: chooses a primary care physician, gets referrals and pays copayments. Out of network, the member can still be covered, but at a deductible and coinsurance level like Marta’s out-of-network figures in Claim 3. A producer places a client by asking how much the client values keeping a particular doctor and how much extra cost the client accepts for that.

Utilization Review in Practice

Insurers review requested care against written medical criteria. The reviews differ by when they happen.

Type of review	When it occurs	Example
Prior authorization, or precertification (prospective review)	Before the service	A plan requires approval before a non-emergency MRI or an elective surgery
Concurrent review	While the service is being provided	A reviewer contacts the hospital on the third day of a stay to decide whether more days are needed
Retrospective review	After the service	A claim for a procedure is checked against the criteria before it is paid

Prior authorization and precertification are the same step under two names. An authorization is a decision about whether the plan will treat a service as covered and medically necessary. It is not a promise that the plan will pay in every case, because eligibility and policy exclusions still apply.

A Prior Authorization Case

Priya Nair’s doctor orders a non-emergency MRI that her plan lists as needing authorization.

1. The doctor’s office sends the request with the clinical reasons.
2. The plan decides whether the criteria are met. If they are, it issues an authorization number and the MRI is covered at the plan’s cost-sharing.
3. If the plan denies the request, Priya is entitled to an internal appeal. A health insurance issuer must have an internal claims appeal process, notify enrollees of its internal and external appeal rights, let the enrollee review the file and present evidence, and follow an external review process if the internal appeal fails (42 USC 300gg-19(a), (b)).
4. If Priya has the MRI done without authorization from the plan, the plan may decline to pay under its terms, as in Dev’s case above, unless the service was an emergency. Michigan does not allow a plan to deny emergency services for lack of prior authorization (MCL 500.3406k(1)(b)).

A Step Therapy Case

Step therapy requires a patient to try a lower-cost treatment first and obtain coverage for the more expensive one only if the first does not work or is unsuitable. It is common with prescription drugs. Suppose a plan covers a costly brand-name drug for a chronic condition only after the patient has tried a generic drug for 60 days without enough relief.

1. A patient’s physician prescribes the brand-name drug first. The pharmacy tells the patient that it needs authorization.
2. The plan applies its step requirement. The patient must take the generic drug for 60 days and the physician must document the result.
3. If the generic drug fails, the plan approves the brand-name drug. If the patient had already tried it before changing plans, the physician submits that history so that the step is treated as met.

Michigan sets a procedure for prescription drugs that a plan limits to a formulary. The insurer must provide for exceptions when a nonformulary alternative is medically necessary and appropriate, and it may still require prior authorization or another process for consideration (MCL 500.3406o(1)(c)). If the patient is in exigent circumstances, such as a condition that may seriously jeopardize life, health or the ability to regain maximum function, or a current course of treatment with a nonformulary drug, the insurer must decide and notify within 24 hours after it receives the information it needs. Otherwise the limit is 72 hours (MCL 500.3406o(2), (3)). Michigan’s rule that limits the cost-sharing on orally administered cancer drugs says it does not prevent an insurer from using prior authorization or step therapy on cancer drugs (MCL 500.3406ff(3)).

Renewability: The Rule That Keeps a Health Policy in Force

The federal Health Insurance Portability and Accountability Act of 1996 first required guaranteed renewability for health coverage, and the rule now stands in 42 USC 300gg-2. A health insurance issuer that offers individual or group coverage must renew or continue it at the option of the individual or, for group coverage, the plan sponsor. Michigan states the same rule for a health insurance policy delivered, issued for delivery or renewed in the state (MCL 500.2213b(1)). Michigan’s rule governs a Michigan policy. An optional policy provision that lets an insurer cancel on notice therefore does not let it end a health insurance policy for a reason the statute does not list.

Both laws list the reasons that justify a nonrenewal. Michigan’s list is the one that applies here: fraud, intentional misrepresentation of a material fact, nonpayment of premium, failure to meet a group’s minimum contribution or participation requirement, an insurer’s decision to stop offering that type of coverage in the market, and a move outside the service area (MCL 500.2213b(4)). A claim history and a change in the insured’s health are not on the list.

At renewal an insurer may change an individual policy only if the change is consistent with state and federal law and takes effect on a uniform basis among all individuals with coverage under that policy (MCL 500.2213b(2)). A group policy issued under chapter 34 may be modified at renewal (MCL 500.2213b(3)).

Situation	Result
A member has a $48,000 hospital claim this year. The insurer wants to drop the member at renewal.	Not allowed. A claim is not a reason for nonrenewal.
An individual misses premium payments past the grace period.	Allowed. Nonpayment is on the list.
A group fails to meet the insurer’s participation minimum.	Allowed. The group has not met a participation requirement.
An insurer discontinues one plan but continues others in the market.	Allowed only with 90 days’ notice to the Director and each insured or group, an offer to buy any other plan the insurer offers in that market without a preexisting condition limit or waiting period, and uniform treatment without regard to health status (MCL 500.2213b(5)).
An insurer leaves the market.	Allowed only with 180 days’ notice. It may not sell new plans in that market for five years (MCL 500.2213b(6), (7)).

The federal rule sets the same 90-day and 180-day notice periods and the same five-year bar on reentering the market (42 USC 300gg-2(c)). A short-term policy of 185 days or less that meets the statute’s conditions is not subject to the renewal rule (MCL 500.2213b(8), (9)).

One more point about the 1996 law belongs here. It also placed limits on preexisting condition exclusions and gave credit for earlier creditable coverage. For a health insurance policy in Michigan, those limits no longer decide the question. Michigan bars a preexisting condition exclusion altogether (MCL 500.3406ii(1)), with exceptions for grandfathered coverage and for limited policies such as hospital confinement indemnity, accident-only and specified disease coverage (MCL 500.3406ii(2)).

Lesson summary

• A covered charge may be a scheduled amount, the insurer’s usual, reasonable and customary figure or a contracted allowed amount. The method decides how much of the bill counts before the deductible and coinsurance apply.
• In a major medical claim the insured pays the deductible first, then the coinsurance percentage, until the annual cap on cost-sharing is reached. After that the insurer pays covered charges in full for the rest of the year.
• Balance billing is the difference between a non-network provider’s bill and the covered charge. The insured owes it, and it does not count toward the federal annual cap on cost-sharing.
• An HMO pays for care within its network under copayments and requires a primary care physician’s referral for specialists. A PPO pays for network and non-network care at different cost-sharing levels, and a POS plan combines the two.
• Prior authorization, concurrent review and retrospective review check care against medical criteria before, during or after the service. Step therapy requires a lower-cost drug first. A denial can be appealed, internally and then externally.
• A Michigan policy that covers emergency services must cover them under a prudent layperson test and may not deny payment because of the final diagnosis or the lack of prior authorization.
• A health insurance policy must be renewed or continued at the option of the insured or, for a group, the plan sponsor, except for the reasons the statute lists. A claim or a change in health is not one of them.
• Michigan bars preexisting condition exclusions in a health insurance policy, with exceptions for grandfathered and limited coverage.