Types and Sources of Health Insurance
Chapter objectives
After completion of this chapter, the student should be able to:
1. Describe the two basic types of health insurance plans and how each functions.
2. Compare a group insurance contract with an individual policy.
3. List the major sources of health insurance and briefly explain each.
4. Assess the benefits of the various optional healthcare plans.
5. Discuss the purpose and function of the Consolidated Omnibus Budget Reconciliation Act (COBRA).
6. Evaluate the importance of the health insurance “watchdogs.”
Chapter terms
Accountable Care Organization (ACO)
balance billing
birthday rule
cafeteria plan
CHAMPVA
CMS-1500 form
coinsurance
comprehensive plan
Consolidated Omnibus Budget Reconciliation Act (COBRA)
coordination of benefits (COB)
deductible
disability insurance
enrollees
exclusions
flexible spending account (FSA)
group contract
health insurance exchanges
indemnity (fee-for-service)
insured
maintenance of benefits (MOB)
managed care
Medicaid
medically necessary
medical savings account (MSA)
Medicare
Medicare Supplement plans
Medigap
nonparticipating provider (nonPAR)
out-of-pocket maximum
participating provider (PAR)
policyholder
preexisting conditions
premium
Social Security Disability Insurance (SSDI)
TRICARE
usual, customary, and reasonable (UCR)
workers’ compensation
Types of health insurance
Most people in the United States know how important it is to have health insurance in today’s world of spiraling medical costs. You may have heard a lot of confusing terms when people speak of health insurance, such as “major medical,” “comprehensive,” and “managed care.” Acronyms such as HMOs, PPOs, and POS make things even more confusing.
In Chapter 1, we learned how insurance got its start. Chapter 2 discussed the education and preparation necessary for becoming a health insurance professional and what job duties and responsibilities are common in this field. Chapter 2 also explained various career opportunities and certification possibilities. Chapter 3 provided a solid background on medical law and ethics. This chapter is the last step in building the foundation in medical insurance. Here, we look at the different types of health insurance and the various ways an individual (and his or her family) may be entitled to or eligible for health insurance benefits. We also explore the different types of health insurance and their sources and things that are common to all carriers. By the end of this chapter, we hope that you will begin to make sense of a lot of this medical insurance jargon.
The two basic types of health insurance plans today typically are described as indemnity (also called fee-for-service) and managed care. These two types of plans differ in their basic approach to paying healthcare benefits in three primary ways:
Indemnity (Fee-for-Service)
Indemnity (fee-for-service) is the traditional kind of healthcare policy in which patients can choose any healthcare provider or hospital they want (including specialists) and change physicians at any time. With indemnity plans, the insured (or policyholder) typically pays a monthly fee called a premium. Premiums are based on the policy type and coverage, and the better the coverage, the higher the premium. The patient also pays a certain amount of money up front each year toward his or her medical expenses, known as the deductible, before the insurance company begins paying benefits. Historically, this deductible amount was $100 to $500 per year; however, as health insurance costs continue to increase, deductibles of $1000 to $5000 per year are commonly seen. Typically, the higher the deductible, the lower the premiums. In policies that cover whole families, it is common that at least two people in the family must meet this yearly deductible before benefits begin; however, this differs from policy to policy and from one insurance company to another. Additionally, not all medical expenses count toward the deductible, but only those covered in the policy.
After the yearly deductible is met, the patient shares the bill with the insurance company in an arrangement called coinsurance. The policy may have an 80/20 coinsurance clause, which means that after the deductible is met, the patient must pay 20% of covered medical expenses and the insurance company pays 80%. This payment is based on what is referred to as usual, customary, and reasonable (UCR) rates. UCR rates are the part of a provider’s charge that the insurance carrier allows as covered expenses. The UCR value of the provider’s service is based on historical data developed from the following criteria:
• How much the provider charges his or her patients for the same or a similar service
• The variance in the charges by most providers for the same service in the same geographic area
• Whether the procedure requires more time, skill, or experience than it usually requires
• The value of the procedure in comparison with that of other services
Resource-based relative value scale (RBRVS) is a formula which assigns a value to every medical procedure to calculate Medicare’s fee schedule allowance. RBRVS is utilized by many health plans in negotiating fee schedules with in-network physicians. RBRVS is discussed in detail in Chapter 17.
Fee-for-service policies generally have an out-of-pocket maximum. This means that when medical expenses reach a certain amount, the UCR fee for covered benefits is paid in full by the insurer. Additionally, there might be lifetime limits as to how much an insurance company pays under the policy (e.g., $1 million).
For the medical bills to be paid, the patient or the healthcare provider must fill out forms and send them to the insurance carrier. The form that is most commonly used is referred to as the CMS-1500 form, a universal form created by the government for Medicare claims and since adopted by most third-party carriers. The CMS-1500 may be submitted in paper form or electronically. To view both the back and front of the CMS-1500, see Appendix A.
Two kinds of fee-for-service coverage exist: basic and major medical. Basic coverage pays toward the costs of room and care while the patient is hospitalized. It also may cover some hospital services and supplies, such as x-rays and prescribed medicine. Basic coverage also pays toward the cost of surgery, whether it is performed in or out of the hospital, and for some physician visits. Major medical coverage takes over where basic coverage leaves off. It covers the cost of long and high-cost illnesses or injuries. Some policies combine basic and major medical coverage into one plan referred to as a comprehensive plan. Sometimes the insurance policy does not cover certain medical conditions. These are known as exclusions (illnesses or injuries not covered by the policy) and may be due to a preexisting condition, which is a physical or mental condition of an insured person that existed before the issuance of a health insurance policy or that existed before issuance and for which treatment was received. Preexisting conditions are excluded from coverage under some policies, or a specified length of time must elapse before the condition is covered.
Larry Burton, a self-employed carpenter, injured his back in a skiing accident, requiring surgery and extensive treatment and therapy. Larry’s medical expenses were covered through an individual policy with HealthNet Insurance Company. Several years later, because of HealthNet’s rising premiums, Larry decided to apply for coverage under American Carpenter’s Indemnity (ACI), which had lower premiums. ACI required Larry to complete an application form, which included an extensive questionnaire regarding his medical history. Eventually, ACI granted Larry coverage but excluded payment for treatment of future medical services or procedures involving his back and spine.
Managed Care
The term “managed care” is often heard on the news to describe certain medical plans, and many people do not know what it means. Managed care is medical care that is provided by a corporation established under state and federal laws. This corporation makes medical decisions for its enrollees (people who are covered under the managed care plan). A managed care provider tells patients which physicians they can see, monitors the medications and treatments prescribed, and ensures enrollees that their costs will remain as low as possible. For these services, enrollees pay a set insurance premium each year and a small copayment with each visit. To perform these services satisfactorily, the corporation typically hires a medical staff (physicians, nurses, and other healthcare providers). These “employees” are under contract and, to some degree, take their orders from corporate management. Many types of managed care organizations are available. For more detailed information on managed care, see Chapter 7.
Sources of health insurance
Individuals can obtain healthcare coverage in today’s insurance markets in several ways. Many individuals are eligible for coverage through their employers. Self-employed individuals and individuals who are ineligible for coverage through their employer should contact a professional health insurance agent and apply for a private policy. Additionally, government programs, such as Medicare and Medicaid, are available for qualifying individuals.
Group Contract
A group contract is a contract of insurance made with a company, a corporation, or other groups of common interest wherein all employees or individuals (and their eligible dependents) are insured under a single policy. The group policy is issued to the company or corporation, and everyone receives the same benefits. Often, when one thinks of a group healthcare plan, the first thing that comes to mind is coverage that is acquired through an individual’s employment.
Group healthcare plans through an employer or other group have many advantages and some disadvantages.
Advantages
• Group policies are usually less expensive than individual policies.
• Everyone is usually eligible for coverage regardless of health status.
• Coverage is typically comprehensive.
• Premiums can be deducted from paychecks (if it is the policy of the employer).
• Coverage generally cannot be terminated because of frequent claims.
Disadvantages
• Individuals have little or no choice in the type of coverage provided under the group contract.
• Individuals must accept whatever coverage the group policy provides; modifications are not optional.
Some professions, such as the American Association of Professional Engineers, and individuals sharing a common occupation (e.g., farmers or labor union members) offer group health insurance plans for their members.
Individual Policies
If a person is self-employed or if the company with whom he or she is employed does not offer a group policy, the individual may need to buy individual health insurance. Individual health insurance policies can be purchased from most commercial insurers and companies such as Blue Cross and Blue Shield. As with group policies, there are advantages and disadvantages of having an individual health insurance policy.
Advantages
Disadvantages
• Requirements are usually more restrictive.
• Premiums are typically higher and often depend on the individual’s age and health risk.
• There are lower limits for certain coverages (e.g., mental health, substance abuse).
• Preexisting conditions are often excluded, or there is a waiting period before coverage begins.
• The insurer can terminate some individual healthcare policies under certain circumstances.
Medicare
Medicare is a federal health insurance program that provides benefits to individuals 65 years or older and individuals younger than 65 years with certain disabilities. In many parts of the United States, Medicare-eligible patients now have a choice between managed care and indemnity plans. For individuals who enroll in the traditional Medicare plan, private insurance options help cover some of the gaps in Medicare coverage. These supplemental policies are called Medigap or Medicare Supplement plans. These policies must cover certain expenses, such as deductibles and the daily coinsurance amount for hospitalization. Some Medicare managed care policies may offer additional benefits, such as coverage for preventive medical care, prescription drugs, or at-home recovery, that original Medicare does not cover. For more details on Medicare, Medigap, and Medicare Supplement plans, see Chapter 9.
Medicaid
Medicaid covers some low-income individuals (particularly children and pregnant women) and certain disabled individuals. Medicaid is a joint federal-state health program that is administered by the individual states. Medicaid coverage differs from state to state. See Chapter 8 for more extensive information on Medicaid.
TRICARE/CHAMPVA
TRICARE is the U.S. military’s comprehensive healthcare program for active-duty personnel and eligible family members, retirees, and family members younger than 65 years and survivors of all uniformed services (i.e., Army, Air Force, Marines, Navy). The TRICARE program is managed by the military in partnership with civilian hospitals and clinics. It is designed to expand access to care, ensure high-quality care, and promote medical readiness. All military hospitals and clinics are part of the TRICARE program.
The Civilian Health and Medical Program of the Department of Veterans Affairs (CHAMPVA) is a health benefits program in which the Department of Veterans Affairs (VA) shares the cost of certain healthcare services and supplies with eligible beneficiaries. CHAMPVA is managed by the VA’s Health Administration Center in Denver, Colorado, where applications are processed, eligibility is determined, benefits are authorized, and medical claims are processed. Military insurance programs are discussed in detail in Chapter 10.
Standardized Benefits and Coverage Rule
In August 2011, the Department of Health and Human Services (HHS) announced a new rule that will help consumers choose new and/or understand their existing health insurance policies. Starting in March 2012, all insurance vendors will be required to provide consumers with a standard four-page “summary of benefits and coverage,” along with a universal glossary of common health insurance terms (e.g. “deductible,” “copay,” etc.). The summary will spell out what the policy does and does not cover, the cost of the monthly premium, what the deductible is, and how much an individual should expect to pay in out-of-pocket costs. The Rule is part of the Affordable Care Act, disclosed by the Centers for Medicare and Medicaid Services (CMS).
Under this Rule, if an insurance company wants to make major changes to a policy, policyholders would have to be notified of the changes 60 days in advance. Prior to the Rule, insurers offered policy information in a lengthy, often difficult-to-understand, document called a “certificate of coverage,” generally provided after the policy was purchased. This summary also will contain real-life examples explaining what proportion of healthcare expenses a policy will cover, such as having a baby, treating breast cancer, and managing diabetes. Those who are shopping for or enrolled in a healthcare plan can request a copy of the Summary of Benefits and Coverage and must receive it within 7 days. The uniform glossary will be made available upon request, as well as in a link provided in the coverage label by the plan or insurance company. Refer to the Evolve site for links to the uniform glossary.
Disability Insurance
Disability insurance is a form of insurance that pays the policyholder a specific sum of money in place of his or her usual income if the policyholder cannot work because of illness or accident. It is not health insurance coverage, per se. Usually, policies begin paying after a waiting period stipulated in the policy and pay a certain percentage of the policyholder’s usual income. Sometimes disability insurance is provided by employers, but it also is available as individual private coverage. Several types of disability insurance are available.
Private
An individual can purchase a private disability insurance policy or can be covered by a disability policy offered by his or her employer. Disability insurance does not cover illnesses or injuries related to one’s employment. It is designed to replace 45% to 60% of an individual’s gross income on a tax-free basis should an illness unrelated to the job prevent him or her from earning an income. Disability insurance policies vary from one insurance company to another, and each can be different. Disability insurance can provide short-term or long-term benefits, depending on the stipulations of the policy. Private disability insurance can be costly; however, some employers offer it to their employees at more reasonable rates. There is often a waiting period (e.g., 30 days) before benefits begin.
Social Security Disability Insurance
Social Security Disability Insurance (SSDI) is an insurance program for individuals who become unable to work. It is administered by the Social Security Administration (SSA) and is funded by Federal Insurance Contributions Act (FICA) tax withheld from workers’ pay and by matching employer contributions. SSDI pays qualifying disabled workers cash and healthcare benefits. Workers who have worked and paid FICA tax for at least 5 of the 10 years before the date they become disabled typically are covered by SSDI. In other words, applicants must have worked 20 out of the 40 calendar quarters immediately preceding the onset date of disability to be covered. Younger workers can qualify with fewer years of work. A person can apply for SSDI benefits at any SSA office. A free booklet entitled Social Security Disability Benefits (SSA Publication No. 05-10029) is available at any Social Security office or through the SSA toll-free phone number: 800-772-1213. Individuals can apply via the Internet, at www.ssa.gov, but the procedure is relatively new, and there are still some “bugs” in the system.
The supplemental security income (SSI) disability program has marked similarities to SSDI. Both programs are run by the SSA, both offer disability benefits, and both use the same legal definition of “disability.” The programs differ significantly, however, in their financial qualifications and benefits.
Workers’ Compensation
Workers’ compensation insurance pays workers who are injured or disabled on the job or have job-related illnesses. Laws governing workers’ compensation are designed to ensure that employees who are injured or disabled on the job are provided with fixed monetary awards, eliminating the need for litigation. These laws also provide benefits for dependents of workers who die as a result of work-related accidents or illnesses. Some laws also protect employers and fellow workers by limiting the amount an injured employee can recover from an employer and by eliminating the liability of coworkers in most accidents. State workers’ compensation statutes establish this framework for most employment and differ from state to state. Federal statutes are limited to federal employees or workers employed in some significant aspect of interstate commerce.
The Federal Employment Compensation Act provides workers’ compensation for nonmilitary federal employees. Many of its provisions are typical of most workers’ compensation laws. Awards are limited to “disability or death” sustained while in the performance of the employee’s duties but not caused willfully by the employee or by intoxication. The act covers medical expenses resulting from the disability and may require the employee to undergo job retraining. In other words, if the employee is unable to return to his or her original position because of a particular disability, the employee is trained to perform in a different position, ideally at an equal level of pay. A disabled employee receives two- thirds of his or her normal monthly salary during the disability period and may receive more for permanent physical injuries or if he or she has dependents. The act provides compensation for survivors of employees who are killed. The Office of Workers’ Compensation Programs administers the act.
The Federal Employment Liability Act, although not a workers’ compensation statute, provides that railroads engaged in interstate commerce are liable for injuries to their employees if they have been negligent. Disability insurance and workers’ compensation are discussed in Chapter 11.
Miscellaneous healthcare coverage options
Medical Savings Account
A medical savings account (MSA), sometimes referred to as a Health Savings Account (HSA), is a special tax shelter set up for the purpose of paying medical bills. Known as the Archer MSA, it is similar to an IRA (individual retirement account, which allows an individual to make tax-deferred contributions to a personal retirement fund) and works in conjunction with a special low-cost, high-deductible health insurance policy to provide comprehensive healthcare coverage at the lowest possible net cost for individuals who qualify. MSAs currently are limited to self-employed individuals and employees of small businesses comprising fewer than 50 employees where a small group MSA health plan is in place.
Here’s how an MSA works. Instead of buying high-priced health insurance with low copays and a low deductible, the individual or business purchases a low-cost policy with a high deductible for the big bills and saves the difference in the MSA to cover smaller bills. Money deposited into the MSA account is 100% tax deductible (as with a traditional IRA) and can be easily accessed by check or debit card to pay most medical bills tax free (even expenses not covered by insurance, such as for dental and vision care). The funds that are not used for medical bills stay in the MSA account and keep growing on a tax-favored basis to cover future medical bills or to supplement retirement. An MSA plan offers (1) lower premiums, (2) lower taxes, (3) freedom of choice, and (4) more cash at retirement.
Funds can be withdrawn for other purposes but if that is done, the individual will face both increased income taxes and a 20% penalty. (Currently, the penalty does not apply to people over age 65.)
Medical savings accounts under HIPAA provide federal tax deductions for contributions to multiyear savings accounts established for medical purposes.
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