Medical expense insurance, offered through commercial insurers, can be broken down into three basic classes of coverage:
The original, and most common, form of health insurance is called “basic medical expense insurance.” It is also known as “first dollar coverage” because it will pay a medical claim from the first dollar of the claim, up to the maximum amount allowed under the policy.
Basic medical expense policies can be subcategorized into three different policies:
These policies provide benefits on a reimbursement basis with actual hospital expenses paid. They commonly will only provide for care in a semi-private room, up to a certain dollar maximum, for a maximum number of days.
These policies cover many of the extra charges associated with a hospital stay, and can include operating room charges, physician’s fees, medicine, diagnostic lab tests, x-rays, and even ambulance service charges. The amount of benefit provided is commonly expressed either as a stated dollar amount or as a multiple of the hospitalization room and board benefit.
These policies pay surgical expenses for treatment received in a hospital or on an outpatient basis. Most basic medical plans provide benefits that are based on a schedule of operations. This schedule will state how much will be reimbursed for each type of procedure.
Historically, insureds would own one, two, or all three of these basic coverages, which became commonly known as the “base plan” of coverage. Although these coverages are still available today, their low maximum benefits are often inadequate when an insured is faced with a catastrophic event. To accommodate consumers in need of additional coverage, insurers designed Major Medical plans with high policy limits.
As the name implies, Major Medical provides coverage for Major Medical expenses. These policies typically have maximum benefits of several million dollars, and just about any expense is covered.
Major Medical plans are also characterized by the presence of a deductible, which is an amount the insured must pay first before any benefits will be paid by the plan, and by co-insurance, which means that the insured shares in the costs of his/her medical treatment.
Deductible amounts can range from $50 to several thousand dollars depending on the preference of the insured: the higher the deductible, the lower the premium.
A deductible can be accessed on a calendar year basis or per medical occurrence. The calendar year basis is the more common method; this means one deductible applies to any and all medical expenses incurred in that calendar year.
Many plans offer a family deductible. For example, a plan might stipulate that a $100 deductible applies to any one family member, but that the total deductible for the entire family, regardless of how many family members receive treatment, will not exceed $250.
Another cost-saving measure to the insurance company is the use of co-insurance. For all covered expenses in excess of the deductible, a Major Medical plan will generally pay 80%, leaving the policy owner responsible for the remaining 20% of costs. As a means of protecting insureds against the impact of a catastrophic illness or injury, many plans today incorporate a stop-loss feature.
Stop-loss or “max out of pocket” caps the amount of expenses subject to the co-insurance requirement; any expenses in excess of the stop-loss cap will be paid by the insurer at 100%. The stop-loss provision is activated when the insured’s out-of-pocket expenses reach a specified amount.
As the industry evolved, the three policies making up the traditional base plan—hospital, surgical, and regular medical expense—were often paired with a Supplemental Major Medical policy to provide broader coverage. In this arrangement, the Basic Medical Expense Plan offered first-dollar coverage up to a specified limit, without requiring a deductible. After the basic benefits were exhausted, the insured was responsible for a corridor deductible before the Supplemental Major Medical coverage began.
For example, if the base plan paid up to $50,000, and there was a $1,000 corridor deductible, the insured would pay the next $1,000 out of pocket before Major Medical benefits kicked in. Eventually, these separate components were combined into a single policy known as Comprehensive Major Medical, which typically uses a single overall deductible from the start, without a separate base layer or corridor deductible.
Introduced in the 1970s, Health Maintenance Organizations (HMOs) are relatively new providers of medical expense coverage. Recipients of care from an HMO are not called “insureds,” but rather “subscribers.” Subscribers pay premiums directly to the HMO and receive health care from the HMO. HMO premiums actually represent a prepayment of services. These organizations do not function on a reimbursement basis.
The emphasis of an HMO is preventive health care. Accordingly, medical care that is not usually covered under commercial policies is covered under an HMO; the most typical example is an annual physical examination. HMOs attempt to curb the cost of medical care by actually preventing illness from occurring in the first place (i.e., immunizations for children and prenatal care). Mammograms, blood pressure tests, and cholesterol screening are examples of things that will help detect disease or the risk of disease early so that treatment may be more effective.
Patients may avoid medical crises and emergency hospitalization by carefully managing or attempting to manage their ongoing care for diseases like asthma, diabetes, or blood pressure. These are also examples of preventative care.
HMO subscribers are required to obtain medical treatment from the HMO or from a provider approved by (contracted with) the HMO. This is a key distinguishing characteristic of an HMO. To contract with an HMO, a provider will negotiate a capitation. Capitation is when a provider is paid a set fee per HMO subscriber he/she services, regardless of how much treatment they require. After receiving the fee, the physician is responsible for providing a specific range of medical services to a specific number of subscribers.
To assure that subscribers use the HMO providers, the system requires that (except for emergencies) the subscriber first see their primary care provider, aka “gatekeeper”, who will either provide the appropriate care or refer the subscriber to a specialist who is contracted with the HMO.
The most common criticism of HMOs is that they require subscribers to obtain treatment directly from the HMO (or contracted provider). A subscriber has very little control over selecting the physician from whom they will receive treatment. Preferred Provider Organizations (PPOs) were developed mainly in response to this concern.
Under a PPO, a group of doctors and related health care providers, most or all of whom may be unrelated except for the fact that they provide medical care, will contract with a commercial insurer to provide services at an agreed-upon price.
The PPO subscriber chooses his/her physician from an extensive list of providers. The insured is free to choose a non-PPO provider but would then be liable for a portion of any expenses incurred.
A firm that provides administrative services for employers and other associations with group insurance policies is the third-party administrator (TPA). The third party administrator acts as a liaison between the insurer and the employer in matters such as certifying eligibility and processing claims.
If claim costs are fairly predictable, an employer may consider self-funding a health care plan. With a self-funded plan, an employer, not an insurance company, provides the funds to make claim payments and uses third-party administrators to facilitate the claims process.
Medical expense insurance consists of several categories of coverage provided by commercial insurers:
Basic Medical Expense insurance, also known as first dollar coverage, includes:
Hospitalization Room and Board policies provide benefits for hospital expenses in a semi-private room within specific limits. Miscellaneous Expenses policies cover extra charges associated with a hospital stay, such as operating room charges or physician fees. Surgical Expense policies pay surgical expenses for treatments received in hospitals or outpatient facilities based on a schedule of operations.
Major Medical provides coverage for major medical expenses, requires a deductible and co-insurance, and may incorporate a stop-loss provision. Comprehensive Major Medical combines the basic plan coverage without a deductible up to a specified limit, then triggers Major Medical coverage.
Health Maintenance Organizations (HMOs) emphasize preventive health care, with subscribers receiving care directly from the HMO or contracted providers. Preferred Provider Organizations (PPOs) offer more flexibility in choosing providers at predetermined rates.
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