Medical Insurance Basics

Q: What are the principal types of medical expense insurance coverage?

Major medical plans apply a deductible to initial expenses, generally ranging from to $500 to $1,500 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., $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. Major medical plans provide broader coverage, but 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).

Q: 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) custodial care;

(2) cosmetic surgery unless required to correct a condition resulting from an injury or a birth defect;

(3) occupational injuries and illnesses that are otherwise covered under a Workers' Compensation law;

(4) routine dental and vision care; .

(5) Experimental, investigational, or unproven services;

(6)  Health services received as a result of war or any act of war, whether declared or undeclared or caused during service in the armed forces; and

(7) Growth hormone therapy; sex transformation operations, & treatment of temporomandibular joint syndrome.

Other common exclusions relate to benefits provided by government agencies (e.g., VA hospitals) and expenses paid under other insurance programs, including Medicare.

Q: 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.

Q: 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.

Q: 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., $30, $15, 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.

Q: 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., 6 months, prior to the enrollment date of coverage under the major medical expense plan. A preexisting conditions clause excludes coverage for preexisting conditions for possibly as long as 12 months after the effective date of coverage.

Q: How does the medical expense coverage offered by Health Maintenance Organizations (HMOs) differ from the coverage provided under a major medical expense plan?

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.