INTRODUCTION AND BASICS

 

BACKGROUND ON HIPAA

Congress enacted the Health Insurance Portability and Accountability Act of 1996 (HIPAA) as Public Law 104-191, on August 21, 1996, which, along with subsequent changes and changes,  provided for changes in the health insurance marketplace and imposed certain federal requirements on health insurance plans offered by public and private employers, including certain tax provisions relating to health insurance.  These permitted a limited number of small businesses and self-employed individuals to contribute to tax-advantaged health plans (MSAs, etc.)

As HIPAA regulations become involved in this discussion of Health Insurance, it will be so noted.  In addition, there is an entire chapter devoted to MSAs, HSAs and other tax-favored health plans which for the most part, were created or addressed by HIPAA.

GENERALITIES OF HIPAA

The basic stated intent of HIPAA in respect to health insurance provisions was to decrease the possibility that people and small employers will lose their health insurance coverage by making it easier to switch plans or to purchase individual policies on their own if they lose employer furnished health insurance.  The Act ensures that people who are moving from one job to another, or from being employed to being unemployed, do not lose their health insurance protection because of a preexisting health condition—hence, the portability problem.  It also limits the period of time before a health plan covers a preexisting medical condition for participants and beneficiaries in group health plans.

HIPAA guarantees that individuals and employers who choose to purchase coverage are able to find a plan that is guaranteed issued and that individuals who have coverage are able to renew the coverage.  It also prohibits discrimination on the basis of health conditions and it requires health plans to offer special enrollment periods.

The Act further raised the tax deduction for health insurance premiums paid by self-employed persons.  MSAs were offered on a trial basis (see chapter on MSAs, etc.) and new tax incentives were made available to encourage individuals and employers to purchase Long Term Care Insurance.  It also addresses electronic transmission of health insurance and the privacy of personally identifiable medical information.

Other provisions have been added, including plans that cover newborn delivery, to allow for a minimum two-day hospital stay under certain conditions, required plans that offer mental health services to offer them subject to similar limitations as other health benefits, and required plans that cover mastectomy to also cover reconstructive surgery.  Also, the premium deduction for premium costs for the self-employed was changed.

It should be pointed out that HIPAA’s provisions attempt to help Americans who are insured and who have a preexisting medical condition and have stayed in a job because of the fear that they would not have coverage because of such condition if they changed jobs.  In addition, it attempts to assist individuals who have not been able to purchase insurance because of their health status, either individually or through an employer’s group plan.

On the other hand, the tax deduction for health insurance costs for the self-employed may encourage some uninsured, self-employed individuals to purchase health insurance for themselves.  Also, HIPAA restrains itself to the availability of insurance and it does not regulate the price of health insurance coverage—which is regulated by the states.

The cost of health insurance in the individual marketplace for individuals who are taking advantage of HIPAA provisions relating to group-to-individual portability is higher than the cost for individuals who could otherwise obtain insurance, according to many critics.  Whether this continues for a long period of time remains to be seen, but when viewed as a practical matter, if an employee was covered by group insurance—which had no underwriting requirements—wants to purchase individual insurance—which is, and must be, strictly underwritten—the risk of claims is higher than with those who have been underwritten.  Therefore, their premiums should be higher.  If, as claimed, the individual could purchase individual insurance at a lower premium otherwise, then the individual certainly has the right and prerogative to do so. 

Employer Provided Health Insurance

Contrary to some interpretations, HIPAA does not require employers to offer health insurance for their employees, or pay for such coverage.  Further, it does not require that employer-offered plans pay for dependants or spouses, and importantly, it does not require that coverage be offer to part-time, seasonal or temporary employees.  However, if an employer does provide or sponsors a group health plan, they must comply with some requirements of the Act. 

Requirements that must be complied-with include the restriction of preexisting condition limitation periods, prohibiting an employer from discriminating on the basis of health conditions in determining the eligibility of an employee (and spouse or dependents) to participate in a group health plan, prohibits the requirement for an individual to pay higher premiums for coverage because of health status, and mandating documentation of creditable coverage.

Additional discussions of Health Insurance reforms will be discussed in more detail in the Chapter regarding Group Insurance.  Also, reforms regarding Long Term Care Insurance will be included in that Chapter.

 

HEALTH INSURANCE BASICS

DEFINITIONS

First, it may be of benefit to define what it is that is being discussed.  “Health Insurance” means different things to different folks.  Health insurance policies cover the cost of injuries or sickness, and for the purposes of this text, policies that pay benefits because of physical or mental incapacity.  The formal definition of a Health insurance contract is a policy that pays benefits to an insured that becomes ill or injured, provided that documentation is offered to confirm the illness or injury.  Not commonly known, if anyone cares, is that in many other countries, particularly in Europe, Health Insurance is considered as “non-life insurance,” but in the United States, Health Insurance generally falls within the life insurance branch.

For the purposes of this discussion, Health insurance means any form of insurance whose payment is contingent on the insured incurring additional expenses, or the loss of income, because of either incapacity or loss of good health. 

If the individual receives benefits under such a policy because of physical or mental incapacity so that the insured cannot perform the duties of his occupation, such coverage is called disability income insurance.

If the incapacity requires assistance in the insured’s activities of daily living, this is called Long Term Care Insurance.

If it is necessary for the insured to incur hospital, doctor or other health care expenses, then that is called medical expense insurance.

Health Insurance (and life insurance) is typically purchased by an employer for the benefit of their employees in the form of group insurance.  If the policy is purchased on an individual basis, it may be industrial insurance, although this is rarely sold any longer as these types of policies are issued to individuals in small amounts.  As with life insurance, Health Insurance policies of with larger amounts of benefits than industrial policies are called ordinary Health Insurance.  Lastly, policies issued through a lending institutions to cover debtor’s obligations if they become disabled, is credit health insurance.

Regardless of the terminology, nearly all private Health Insurance in every market must, by law, be issued by an insurance organization.  An insurance organization is simply a mechanism for pooling losses.

MEDICAL EXPENSE INSURANCE BASICALLY

Medical expense insurance, often referred to as simply “health insurance,” provides a wide range of benefits that can cover nearly every hospital and/or medical expense incurred by the insured and covered family members.  Medical expense plans can range from basic benefits for specified kinds and types of medical services, or, on the other hand, can provide major medical expenses associated with severe injury or long-term illnesses.  The insurance benefits can be paid either to the insured as reimbursement for actual expenses he has incurred, or to the health provider or health institution.  With some plans benefits are fixed and are paid regardless of what the actual costs may be or “up-to” some designated amount.

LONG TERM CARE INSURANCE

A Health Insurance product that has increased in popularity—but not as much as anticipated—provides financial protection against the high costs of long-term care expenses by reimbursing such expenses as a result of needing assistance in activities of daily living.  With these policies, benefits are “triggered” by the inability of the insured to perform such activities of daily living (referred to as “ADLs”) and the benefits are usually paid as fixed amounts.

As discussed later in the text, The Health Insurance Portability and Accountability Act (hereinafter referred to as “HIPAA”) officially determined that Long Term Care Insurance is considered as “Health Insurance” for tax purposes, and as federal governmental regulations are apt to do, created a new class of policies with designated benefits in order for the insured to take advantage of the tax benefits. 

DISABILITY INCOME INSURANCE

Sometimes called loss of time or loss of income insurance, Disability Income (DI) Insurance provides benefits in the form of periodic payments when the insured loses income because of injury or sickness.  Typically, the coverage is related—directly or indirectly—to the occupation and earnings of the insured.  Benefits are traditionally paid as fixed amounts while the insured is disabled, however some policies may provide for reimbursement coverage.

CONSTRUCTION OF HEALTH INSURANCE POLICIES

Health Insurance (and Life Insurance) policies are contracts and provisions comply with general contract law.  While Life and Health Insurance contracts are similar, Health Insurance contracts are more complex for various reasons: more than one loss can occur while the policy is in force (people only die once, obviously), there is a wider spread of types of losses, and the cause of loss is more subjective with Health Insurance.  Therefore, Health Insurance policies require more definitions, and more of a technical nature, than Life Insurance, and they offer more optional coverage’s than Life insurance.

One of the most striking differences is that Health Insurance policies must contain many provisions so as to determine how the benefits are determined and maintained.  For instance, Health Insurance contracts require that the insurer must be provided with a written notice of any claim within a certain period of time (such as 20 days).  The insurer is required to provide their own forms needed to provide proof of loss with 15 days (usually), otherwise the insured can provide their own proof of loss.  Proof of loss usually is required within 90 days of the loss, but if the loss is a continuing type of loss, then proof of loss must be provided every 90 days (or so).

The insurer may be required to pay the loss within a designated time period and the insurer usually has the right to require the claimant to be examined (or an autopsy performed) at the expense of the insurer.  The Health Insurance policy contains other, well defined provisions as discussed later in more detail, and they are common to all Health Insurance Policies.  Other provisions are more specific as to the particular coverage’s. 

INDIVIDUAL vs. GROUP INSURANCE

Medical expense, Long Term Care Insurance and Disability Income Insurance may be issued either on an individual or group basis.  The basic differences lie in the methods of marketing and how the coverage’s are issued and administered.

Individual Health Insurance

Individual Health Insurance is simply where coverage is provided to a specific individual under a policy issued to the individual.  The “Individual” policy may cover other family members, and frequently does.  With the exception of most states and in most mass-marketing methods sponsored by some governmental bodies or plans mandated by law, the insured must provide evidence of insurability, not only for himself, but for all covered persons. 

Individual policies are maintained by insurers in separate records for each issued policy and all transactions, such as premium collection, benefit payments, etc., are conducted on a direct basis with the insured (unless benefits are paid directly to the provider, in which case the insured is duly notified).  The insured policyholder is the owner of the contract.

Group Health Insurance

Group Health insurance is where coverage is provided to a group of individuals under a single master contract issued to the group policyowner which may be an employer, an association, labor union, trust or other organization not organized for the purpose of obtaining insurance.  For larger groups, coverage can usually be obtained without providing for evidence of insurability, however, many states allow for smaller groups to be issued coverage without such evidence. 

Because of the lower marketing costs per individual covered, and lower administrative expense, as a general rule, group health insurance costs less than individual plans with comparable coverage’s, particularly for the larger groups.  For the smaller groups that are required by law to provide coverage without evidence of insurability, the claims ratio would be much higher with the resulting higher premium that with the larger groups.  Also, group coverage’s may provide for broader coverage’s, or even coverage’s not available under individual policies.

This section will concentrate on individual policies and group coverage’s will be addressed in a separate section later in this text.

Marketing Individual Health Insurance

As indicated above and described later in more detail, there are certain basic differences between individual and group markets, with the result that marketing individual health insurance can be quite complex as compared to group or mass-marketed health insurance plans.  This causes natural difficulties for the consumers as because the obtaining of information in various coverage’s must be sought for individual plans, as compared to the providing of information by the group policyholder.  Individuals must make choices from a plethora of complex products that can be extremely difficult to compare.  Even after a particular product is chosen, they must still select from a variety of cost-sharing arrangements (deductible and coinsurance, etc.) and most importantly too many purchasers; the insured must bear the total cost of the coverage.

Contrast this with group insurance offered to employees, starting with the fact that they do not have to face the formidable task of just accessing the insurance marketplace as this is done for them by group insurance (or it just does not apply with governmental insurance).  Further, the employer usually offer only one (or no more than a few) health plans, so the job of finding and then comparing plans has been eliminated or at least greatly simplified.  Plus, paying for the products is simplified and the cost is considerably lower in most cases for group insurance because of cost sharing with the employer and the ease of payroll deduction.

Most Individual Health Insurance is purchased through agents, except in some cases it is sold directly by insurers that are well recognized—such as Blue Cross/Blue Shield or HMOs who target individuals in their marketing efforts.

Another way to purchase Health Insurance is through business or social organizations, such as trade associations, unions, chambers of commerce, religious organizations, etc.  By using the power of pooling risks, these organizations can often negotiate competitively priced products for their members.

THE NEED FOR INDIVIDUAL MEDICAL EXPENSE INSURANCE

The market for Individual Medical Expense Insurance is large and consists of men and women, rich and poor, with various ethnic, religious and educational backgrounds—such as self-employed persons, young people (students generally) no longer covered under the parent’s insurance, employees whose employer does not provide group coverage including part-time, temporary or contract workers, unemployed persons, those ineligible for coverage (such as children, spouses and other dependants) or those whose employer’s plan is too costly to coverage of dependants, and those persons who have retired early or are not in the workforce (such as between jobs). 

According to the U.S. General Accounting Office, almost 5 percent of the non-elderly US population relies on private Individual Medical Expense Insurance as their only source of such insurance.  Large proportions of the population have no Medical Expense Insurance and some of the states have installed programs to encourage access to such coverage’s.  One approach used in about half of the states allows those “high-risk” applicants to obtain needed medical expense insurance when (usually) they have been rejected for insurance by at least one insurer because of health conditions.  The premiums usually are as much as 50% higher than the standard rates for like policies in that jurisdiction available in the individual market.  Also, these “pools” are usually restricted to a limited number of individuals, often as little as 5% of those under age 65 with individual insurance; such restrictions due mostly to limited funding, lack of public awareness and high premiums, not to mention higher than anticipated claims.

Individual Health Insurance may be used as supplements to other coverage’s, such as those who are covered under government health insurance programs that do not cover all health care expenses or usually have delays in obtaining government-provided care.  This is, of course, the situation with Medicare Supplement policies.

And there are those who have inadequate coverage from other sources, such as paying less than current hospital charges or inadequate amounts for surgery.  Therefore, the use of supplemental health policies, such as a hospital indemnity policy can be important.  Some people that can afford to cover some of their own medical expenses or have insufficient coverage may purchase “catastrophe” coverage with a deductible of several thousand dollars.

COMPREHENSIVE MEDICAL INSURANCE

Perhaps the most popular and common type of medical insurance is the Comprehensive Medical Insurance plans that cover a wide variety of medical care charges, have few internal limits and a high maximum benefit.  These plans are most often offered by life insurance companies, Blue Cross/Blue Shield insurers and Health Maintenance Organizations (HMOs).  The life insurance companies offering health insurance have offered Comprehensive plans for many years.

Blue Cross/Blue Shield organizations and insurers are major insurers in many states and they offer relatively comprehensive plans.  In some states the “Blues” offer the same type of policy as other insurers, but in many states the Blues negotiate and pay hospital and other health care providers directly—usually at a lower rate than would be paid in a reimbursement plans.  In these states, the traditional life insurers use indemnity-type reimbursement plans.  (This also applies to Blue Cross/Blue Shield group plans also.)

In respect to HMOs, they offer health care and its financing through a single organization, with individual coverage much akin to their group programs (with obvious exception of administration and pricing).  HMOs will be discussed in detail later, but suffice it to say that HMOs have grown in importance as attempts are made to hold down the rapidly escalating medical care costs.  HMO individual plans are similar to group plans that they offer except for the difference in administration and pricing.

TYPES OF BENEFITS

As indicated by its name, Comprehensive medical insurance covers a wide range of health care benefits such as hospital services (both inpatient and outpatient), physician and diagnostic services, various types of physical therapy, and often, prescription drugs (which are usually more liberal in group insurance plans).

There are various cost-sharing arrangements in individual plans, with deductibles of $250 to $2,500 (or more for “catastrophe” plans) and with limits on the total amount that the insured would pay during a specified period of time (usually one year) which can be anywhere from $1,200 to over $6,000 during this period.

Major Medical Expense Insurance

The most popular type of health expense insurance is Major Medical Expense Insurance, which is offered by most life insurers and Blue Cross/Blue Shield organizations.  Under these types of plans, the medical expense reimbursement applies to both the deductible and coinsurance.  For instance: a plan that pays for 80% of all combined covered expenses during a calendar year after a $500 deductible, and with a lifetime maximum benefit of $1 million.

As with most other Health Insurance plans, there are a variety of plan variances, such as providing for “first-dollar” coverage.  Some plans allow certain expenses (such as hospital expenses) to be reimbursed without a deductible and with no coinsurance on the initial hospital expenses (usually with a maximum of $2-5,000).  Surgeon’s fees may also be subject to the no-deductible, no-coinsurance provision.  Various other and similar plans are discussed later in this text.

Health Maintenance Organizations

HMOs offer individual policies that provide basically the same or equal to the coverage’s provided under major medical plans; however, the HMOs usually offer coverage’s not usually offered under the major medical policies.  Preventative care services are a hallmark of the HMO with coverage for periodic examinations, immunizations and health education.  Also, they are more apt to provide significant prescription drug coverage than other medical expense plans.

Deductibles are generally much more liberal with HMOs, typically ranging from $10 or $15 for physician office visits and $100 to $500 for hospital admission.  However, their out-of-pocket maximums are similar to major medical plans.

MISCELLANEOUS INDIVIDUAL INSURANCE PLANS

In addition to the policies discussed, insurers offer several other types of individual policies.  These can be broken down into (1) hospital confinement and hospital indemnity policies; (2) Medicare supplement insurance; and (3) specified disease policies (or dread disease policies).

Hospital Confinement Indemnity Plans

These plans pay a fixed sum for each day of hospitalization.  Simple plan, not very expensive, and often is purchased by those who just cannot afford any other type of health insurance and are not eligible for Medicaid or other government program.  The benefits are sold as monthly amounts between $1,000 and $6—$7,000 for continuous confinement for periods of up to one year or more.  The monthly amount, when designated in this manner, is actually an aggregate of potential daily payments (30-day months) so that a $1,500 monthly payment would pay $50 for each day that the insured was in the hospital.  Some policies pay a daily amount stated, such as $100 a day and can go up to $400 a day.

Benefits are paid from the first day of hospital confinement and pays for either sickness or injury.  The maximum benefit period is usually 3, 6, or 12 months.

The purpose of this coverage is to provide money for the insured to pay for out-of-pocket expenses required by other coverage’s (deductibles, coinsurance, etc.), medical expenses not covered by other policies (such as additional medical opinions, prescription drugs, rehabilitation services, home health care, etc.) and incidental expenses during illness, such as child care, transportation, housekeeping, loss of income due to illness, etc.

Critical Illness Insurance

Similar to Hospital Indemnity insurance, this coverage is not based on actual expenses, but is paid in addition to and regardless of other benefits the insured may receive.  It is intended to provide money for the insured to help pay for medical and related out-of-pocket expenses not paid by other coverage.

Critical Illness Insurance pays a lump sum if the insured suffers from one of the specified serious illnesses or injuries, such as heart attack, angioplasty, heart bypass, organ transplant, stroke, kidney failure, paralysis, cancer, Alzheimer’s, multiple sclerosis, and the loss of limb, sight, hearing or speech.

The amount of the benefit varies according to the illness and the seriousness of the illness or injury.  Different plans have different benefits, with maximums ranging from $10,000 to as high as $2 million.  The lump sum payment is usually paid following a waiting period of 30 days after the confirmed diagnosis of a covered illness or accident.

Policies are available to persons age 18 through 64 and terminate after the lump sum payment has been made or the person reaches age 65.  These policies are either individually issued, part of group coverage, or riders to existing life insurance policies.

ACCIDENTAL DEATH AND DISMEMBERMENT INSURANCE (AD&D)

Accidental death and dismemberment insurance pays benefits when the insured dies, loses the sight of one or both eyes, or loses a hand or a foot directly as the result of an accidental bodily injury.  It is usually offered on a group basis, but may also be sold as an individual policy.

This policy establishes the maximum benefit, known as the principal sum.  Typically, benefits are paid for loss of life (full principal to designated beneficiary), the severance of hand or foot at or above the waist or ankle, or irrecoverable loss of sight of one eye (one-half the principal sum); and for loss of more than one loss of hand, foot or eye from the same accident, the full principal sum is paid.  The benefit for any one accident never exceeds the principal sum, even if there are more than two losses.

There are several limitations and exclusions.  Losses that result directly or indirectly, wholly or partly from any of the following, are excluded:

1. disease or bodily or mental infirmity or their medical or surgical treatment;
2. ptomaine or bacterial infection, except infections occurring through an accident cut or wound;
3. suicide or an intentionally self-inflected injury;
4. war, or act of war; drug use, except if taken as prescribed by a physician.

Difference by Time

AD&D policies are either nonoccupational or 24-hour coverage.  Nonoccupational policies do not cover accidents resulting from the insured’s employment; 24-hour coverage cover accidents occurring at any time, on or off the job.

Group Supplement or Voluntary

AD&D may be sold either as a supplement to an employer’s group life insurance (usually not optional) or sold on a voluntary basis.  Voluntary AD&D is also sold on a group basis, but each employee or group member may or may not receive (and pay for) the coverage.

Note:  The principal sum of group life supplement AD&D is usually the same as the benefits of the group life insurance.  While group life insurance may continue after the retirement of the insured, usually AD&D coverage does not continue.

Trip AD&D

Some employers want to furnish supplementary accident insurance protection for employees who travel on company business, and the employer usually pays for the coverage.  This coverage usually is one of three types:

1. Comprehensive (all-risk) plans which provide 24 hours coverage for the entire trip, from the time the employee leaves home or business, until he returns.
2. Common-carrier plans cover only accidents involving common carriers, defined as public conveyances licensed and used for transportation of passengers.
3. All conveyance plans cover accidents involving any sort of conveyance, including person or company-owned vehicles. 

Dependents AD&D

There are also AD&D plans for employees who may cover their dependents.  It is always 24-hour coverage, regardless of what coverage is provided for employees.  Eligible dependents include the employee’s spouse and unmarried children, up to a specific age.

Medicare supplement Policies

Medicare is discussed in more detail later, but for purposes of definition of types of plans, Medicare contains certain deductible (such as $100 annual deductible) and coinsurance requirements (Part B has a 20% deductible of “reasonable charges”).  Medicare was introduced in 1965, probably because the insurance industry was unable to provide meaningful and affordable health insurance to its senior citizens (and to those eligible for Social Security Disability payments, after a 24-month waiting period in most cases).  The insurance industry provided a mish-mash of supplemental plans, sometimes with the result that a senior citizen could find himself with several “supplemental” policies.  In 1991, the National Association of Insurance Commissioners (NAIC) implemented the law that introduced 10 standard plans.  These plans were accepted by all of the states and companies are not allowed to sell any unapproved Medicare supplement policies (also called “Medigap” policies). 

Specified (Dread) Disease Policies

These types of policies pay a variety of benefits up to rather-substantial maximums solely and exclusively for the treatment of the disease(s) named in the policy.  This type of policy started with the “Polio” policy during the time in history when there was a near-epidemic of polio patients and must of the medical care expenses were not covered under the typical health insurance policy.  After a cure to Polio was discovered, the insurers that had been offering these plans switched to other dread disease coverage’s, primarily cancer coverage.

Benefits are paid as scheduled amounts of indemnity as the result of a specified and designated event (such as diagnosis of cancer, hospital care as a result of cancer, etc.) or for specific treatment (such as chemotherapy, etc.).  These policies provide coverage only for certain diseases; therefore they should be used only for supplementing other health insurance.

This has proven to be an interesting product as when it was introduced, it was generally ignored by life and health insurers.  However, when clever marketing produced significant premium income for a very few insurers offering the product, some of the major life insurers took notice.  They attempted to “squelch” the sale of this product (primarily at the request of their General Agents who were losing agents to these companies) by the “Coordination of Benefits” clause, which would have made these policies unattractive to anyone with health insurance as both policies could not pay if the specified disease were contracted by the insured.  Whereupon the President of the major writer of the dread disease policy met with the Presidents of two of the largest life insurance companies and threatened a lawsuit with a jury in his state of domicile—with the predictable result that the Duplication of Coverage provisions does not apply to these policies.

This product is often marketed on a group basis and is sometimes bundled with a short-term disability insurance product.  Another interesting item is that an American insurer has marketed these policies with considerable success in Japan, using primarily women agents.

DENTAL INSURANCE

Dental insurance policies are reimbursement type plans covering the expense of dental services and supplies, usually excluded from medical expense plans.

Plans differ between integrated and nonintegrated plans:  An integrated plan may be integrated into a medical expense policy, or a separate policy (nonintegrated or stand-alone).

They also can be scheduled or non-scheduled reimbursement plans.  The plan may reimburse for dental services based on a schedule or based on the “usual and customary” charges for dental services.  The dental schedule specifies amounts for certain services and reimburses up to that amount.  The amounts may vary with geography to reflect the level of charges in that particular area of the country.  Usually integrated plans reimburse on a nonscheduled basis, while nonintegrated plans may reimburse on either basis.

Classification of Dental Services

Dental services are classified as diagnostic, preventative, restorative, prosthodontics, oral surgery, periodontics, endodontics or orthodontics.  Most dental claims relate to restorative charges; fillings, cleaning, etc.  The distribution of charges from one of the larger writers of Dental Insurance is as follows:

 

 

Policy Deductible, Coinsurance, Benefits

Deductibles:  Most plans have deductibles (like most medical expense plans) and generally it must be satisfied by each individual during each calendar year.  In integrated plans there is a single deductible for both dental and medical expenses.  To encourage preventative care, the deductible is usually not applied to preventative and diagnostic services.

Coinsurance:  Generally, Dental plans also have coinsurance and the percentage may differ by services performed or class of service, ranging from 20% to 50% as a general rule.  Coinsurance is usually higher for major procedures (as opposed to “basic” services).

Maximum Benefit:  Some of the nonintegrated dental plans have a calendar year or policy year maximum on benefits.  Some have a lifetime maximum for orthodontic benefits, and some have a lifetime maximum for periodontal care.

Policy Details

The frequency of some services may be limited such as not allowing more than two dental cleanings and one fluoride treatment in a 12-month period.  There usually is a restriction on bridgework and dentures, such as they may not be replaced for a period of (usually) 5 years except under certain specified situations.

Cosmetic and experimental services are excluded.

Replacement of missing teeth that were missing prior to the effective date of the plan may be excluded entirely, or sometimes covered at a reduced reimbursement rate.

Orthodontic services are usually either not covered or available as an (expensive) option as these services are expensive and can increase the premiums significantly. 

PRESCRIPTION DRUG INSURANCE

Prescription Coverage for Medicare beneficiaries and certain others has been approved and will go into effect in the latter months of 2005 and early 2006.  Basically, there will be a monthly premium which will usually be deducted from an individual’s Social Security benefits each month.  There will be a deductible depending upon the plan and whether the drug is generic or preferred brand.  For drug costs between $2,251 and $5,100, the person must pay all of the drug costs, and over $5,100, the person will pay only 5%.  Anyway, that is generally what it will accomplish, but there are already supplemental policies available weeks before the plan is offered.

For “regular” Prescription Drug insurance, the plans cover drugs and medicines prescribed by a physician, and usually are offered through an employer on a group basis.  These plans usually use a co-payment feature, which is a flat amount that the insured pays each time a certain kind of service is provided—much like coinsurance but the amount is a flat dollar amount.  These co-payments range from $5 to $15 usually and can be as high as $50 with some plans.  Usually there are lower co-payments for generic drugs.

There are two types of drug plans:

Reimbursement plans are where the insured pays a pharmacist for prescribed drugs, the pharmacist completes a claim form, and the insured submits the form to the insurer and the insurer reimburses the insured.  These are based upon usual and customary charges.

Service Plans are where the insured obtains prescription drugs from the pharmacies who participate in the plan.  Therefore, the insured does not pay the pharmacist or pays only a co-payment.  The insurer reimburses the pharmacist.

Service plans need large networks of participating pharmacies and involve large numbers of small claims.  About the only way that this can be profitable is for a third-party to administer the business that can manage the business and negotiate discounts with the pharmacies.

Service plans include mail-order prescription drug programs who basically serve those who use maintenance medication and order 60 to 90 day supplies.

Exclusions and Limitations

As a general rule, any drugs that are dispensed while the insured is confined to in a hospital or extended care facility are usually covered by regular health insurance, so they are excluded.  Prescription drugs are usually limited to a specific number-of-days supply, such as 30-days for a drug obtained from a regular pharmacy and 90-day supply from mail order pharmacies.

Also excluded are medical devices, such as syringes, hypodermic needles, bandages, compresses, etc.  Sexual dysfunction drugs are usually excluded, as are beauty aids, cosmetics, dietary supplements, immunization agents, sera, and blood or blood plasma.  Contraceptive drugs and devices are usually excluded, but may be covered with some plans at additional premium.

VISION CARE INSURANCE

Vision care is usually offered as part of group coverage and usually provides reimbursement for such as eye examinations; single vision, bifocal and trifocal lenses; contact lenses; other aids for subnormal vision; and frames with some limitations.  Services covered require the authorization of an ophthalmologist or optometrist. 

These are reimbursement plans that reimburse for all expenses up to a stated maximum per person per year based on usual and customary charges, or based upon a schedule.

Coverage is usually limited to one examination and one pair of lenses in any 12 month period and frames every 2 years (which are limited to a certain amount that covers the “average” frames.  Luxury frames incur added cost to the insured.  Sunglasses, tinted lenses and safety glasses are usually excluded, as is duplication of glasses due to breakage or loss.

Medical or surgical treatment is usually excluded as it would be covered by medical expense plans.

TRAVEL ACCIDENT INSURANCE

Travel accident insurance provides benefits in case of accidental death or dismemberment while the insured is a passenger on a common carrier—usually an airplane.    Protection is for a single trip, usually on a round-trip basis.  These policies may be sold by machines located in airports and terminals.  They may also be sold at travel agencies where they can be purchased as an option or prepackaged into the traveler’s tour plan.  Some credit card companies provide travel accident as an additional benefit.

This coverage is classified differently than AD&D because of the method in which it is marketed.  These sales methods make it very limited as to type of coverage and the low cost.

ACCIDENT MEDICAL EXPENSE INSURANCE

Accident medical expense insurance reimburses for care needed because of an accidental injury.  Benefits are not paid for any disease.  Benefits include treatment by a physician, hospital care, nursing care and X-ray and laboratory work.  This is usually sold as a supplement to regular medical expense insurance.

Usually the coverage applies only if the expenses occur within a specified time from the date of the accident.  Benefits are subject to an overall maximum benefit for any one accident.  The plan may have a small deductible, or not.

POLICY PROVISIONS

There are many provisions that are common to all health insurance policies and are discussed later in this text.  Benefits and cost-sharing provisions of medical expense insurance policies were mentioned earlier.  However, the contract provisions dealing with future premium levels and renewability of the policy are of specific interest.

Most individual medical expense insurance policies provide that the insured can continue coverage under the policy if the premiums are paid in full and on time, up to a specific age—usually age 65.  Premiums in the future are not guaranteed but are subject to change from year to year by the insurer with the approval of the appropriate regulatory body.  Most importantly, the premiums on an individual policy cannot be revised or the policy cannot be non-renewed based on the claims experience of any particular individual.  Premiums can be increased only on a class basis.

Even with the guaranteed right to continue a policy and the rate increase restrictions, there have been concern about certain insurer practices, such as the closed block durational rating.  With this system, an insurer can offer guaranteed renewable policies at very low rate to attract new insureds and increase their market share.  Then the insurer, at some later time, closes this block of business by no longer accepting new applicants, and then increases rates on that block.  Coincidentally (?) they start marketing a new policy with low rates.

This is not as convoluted as it may seem.  Simply, a closed block of health insurance business creates premium increases at a more rapid rate as healthy insureds lapse their policies and buy new ones—many times from the same insurer and/or agent—creating adverse selection.  Those who are not all-that-healthy remain in the closed block with its increasing growth of poorer risks and increasing rates, or they lapse their policies and risk not being able to purchase similar or acceptable coverage at affordable prices.

Actually, this does not occur as often as it once did, as regulators in most states will not allow this practice.  They recognize that the effect of this procedure is to change a block of guaranteed renewable policies into policies whose premiums escalate with advancing age.  Many states have prohibited this practice through guaranteed-issue requirements and restrictions on raising premium rates.

SECTION II - UNDERWRITING INDIVIDUAL HEALTH INSURANCE

There are similarities between group and individual health insurance underwriting, but there are important differences.  A good example is that individual underwriters often decline applications, which group underwriters rarely do.  Individual underwriters are concerned with the health, occupation and financial status of the individual prospect.  Obviously, therefore, the individual and group underwriters use different sources of information to make their decisions.

Group or individual, the underwriter’s function is to make sure that the proper premium is received for the risk assumed.  In either case, the projection of claims is the heart of the underwriting process.

As discussed later, group underwriters can look at the group’s previous experience, or of similar groups.  Individual underwriters look at the past experience of many individuals as to how often they have become ill or injured over a certain period of time, and then use this information to determine how often on the average, the prospect will become ill and/or injured.

While this sounds simple, actually it is quite involved and complex.  An individual underwriter can make claims projections (assumptions) more accurately by using the averages of persons with the same general characteristics—age, sex, marital status, occupation, income, etc.—as the person being underwritten.

An area unique to individual underwriting is that underwriters examine each applicant to determine whether they are more likely to make claims.  This is reasonable as if a person is an asthmatic it is very likely that they will continue to have asthma attacks, if a person has had a myocardial infarction, they will in all likelihood have another heart attack, etc. 

The group approach is that of accepting large numbers of applications on the basis that there will be a balance between those who use the benefits often, and those who do not.  The reason is adverse selection against the insurer.  In a preexisting group, the underwriter may assume that future claims experience will mirror past experience where there is a mix of healthy and unhealthy persons.  This will not work for individual insurance as many people seek health insurance because they have a particular health problem or are likely to become ill in the near future—selection, therefore against the company, is appropriately called adverse selection.  Individual underwriters try to identify such persons and then either decline coverage, provide modified coverage (such as excluding certain conditions from benefits) or adjust the premiums accordingly.

Insurers have more latitude in accepting or declining a risk in individual policies than in group health insurance plans, but there are still some restrictions.  Under HIPAA, individual health insurance coverage must be made available without preexisting condition limitation to certain individuals who have lost group coverage.  Some state laws require guaranteed availability of individual insurance or limit the rate differentials to different applicants.

Adjusting for Characteristics

Adjusting for general characteristics are similar in group and individual health insurance (this is discussed in more detail in later discussion of group underwriting) but occupation and income are more important in individual policies, particularly for disability income and AD&D policies.

Generally, higher-paid individuals and those in professions have fewer disability claims and shorter disability claim periods than the average.  Conversely, those who have jobs requiring heavy manual labor or where there are accidental hazards have, on the average, higher numbers of disability and longer period of disability coverage.  Because of this, underwriters use Occupational Manuals where occupations are classified as to risk, and these manuals are heavily used to determine premiums and types and amount of coverage offered. 

Occupation is really not a major factor in underwriting individual major medical expense insurance and premiums do not vary by occupation.  Having said that, the fact is that insurers look very closely at those who are in extremely hazardous occupations, and if they do issue insurance to these applicants, they usually exclude occupational injuries—rodeo riders, deep-sea divers, and stock car racing come to mind.

MEDICAL CONDITION & HISTORY OF APPLICANTS

The two most important factors in underwriting individual health insurance are the present physical condition of the applicant and his medical history.  From this information the underwriter hopes to be able to determine if the present health condition and his health history differ significantly from the average for persons of his age, sex, etc., and what will his present medical condition have on future claims, taking into consideration his past medical history.  What they are looking for primarily is whether the applicant has a medical condition that will lead to future claims and if so, what additional illness or injury would he suffer and would it prolong a disability from an unrelated cause? 

Details of the applicant’s past medical history is necessary in respect to the possibility of a recurrence or complication as some conditions can have problems or complications that can arise much later.

FINANCIAL CONDITION

In most cases, the applicant’s financial status is not under consideration, except in underwriting of disability income insurance. In disability income applications, the underwriter must set benefits at a level so that the disability income of the individual is not considerably less than his present income, but at the same time the disability income should never be higher than the present income.

For disability income, the underwriter must consider income, both earned and unearned (such as from investments) and also the owned assets of the applicant.  If a person has considerable assets, it could be possible to shift the assets into a situation creating substantial investment income if he becomes disabled.  Then, when it is combined with income from the disability income policy, it would make it unattractive to return to work.

ADDITIONAL UNDERWRITING INFORMATION

After reviewing the application and agent’s statements, the underwriter may find it necessary to obtain additional information so as to either provide the requested coverage, modify the benefits, or decline the application—or as happens often, more information is needed before making a decision.  Additional information generally consists of a medical or paramedical examination, an attending physician’s statement (APS), inspection report from an independent inspection company, income or other financial documentation, and information available from industry databases.  It is necessary for an applicant to sign a release so that the insurer can have access to his medical records.

Understandably, medical records and more frequent use of examinations are used to underwrite older applicants.

If a medical examination is requested, it is generally because of age or some other reason, and the underwriter needs the information that provides such important items as height and weight, pulse, blood pressure and other medical findings.  Insurers have limits as to height and weight, beyond which the application cannot be considered—such information is furnished to the agents who should make the decision whether to submit an application if the applicant does not meet the height and weight standards. 

Another valuable feature of medical records is that an individual will discuss his health with his physician much more readily than they will with an insurance agent. However, even if it appears that medical records are “clean” and the applicant’s health history is excellent, it still is possible for a person to be totally uninsurable, such as an individual who has had a coronary infarction or history of heart attacks but who has not revealed this to his present doctor, therefore the record is clean but the individual is a heart-attack-waiting-to-happen.

Sometimes a paramedical examination may be required, which is conducted by a medical technician under the supervision of a physician.  These are popular as they are more economical, easier for the applicant, and they free physicians from the time-consuming task of insurance physicals. 

APSs are invaluable at times as they are usually the source of disclosures of serious medical conditions or questionable history, and is considered as the most complete and accurate source of information on medical history.  Usually there is a charge for an APS by the physician to offset the cost of duplicating records, such charge is usually paid by the insurer, but in some cases, the applicant may have to pay this fee—usually when an applicant is asking for reconsideration of an application.

Laboratory tests are necessary, of course, but the interpretations of lab results are usually included in the APS.  If additional lab work is required, usually it is in the form of blood work to resolve or explain an abnormality.

Inspection reports are investigations conducted by inspection companies who investigate the individual’s occupation, financial status, health history and personal information within the privacy laws and guidelines. 

The Medical Information Bureau has always been referred to as the “MIB,” and in recent years it has changed its name to “MIB, Inc.  It is an association of more than 700 companies writing life and health insurance in the US and Canada.  It manages an information exchange used by insurers in their underwriting process.  Member companies may request information on the MIB records—which are records of medical conditions and non-medical impairments (driving records, for instance).  Any member of the MIB is required to file all impairments on an individual developed by the member company during their underwriting process.  The MIB does not employ investigators or obtain copies of records, but reports the impairment information using a code number.  They do not report the underwriting action or the type of amount of insurance applied for.

 

Disability Income Record System (DIRS)

The MIB also maintains the Disability Income Record System, a similar system used for disability income insurance.  When a member company receives an application for disability income with a monthly benefit of $300 or more, with benefit period of one year or more, this is reported to the DIRS and the information is stored for a minimum of 5 years.  Other member companies can access this information for the purpose of making sure that the applicant is not over-insuring by obtaining coverage from more than one company.

 

STUDY QUESTIONS

1. The principal purpose of the Health Insurance Portability and Accountability Act of 1996 (HIPAA) was

      A.  to make insurance more affordable.   

      B.  to provide health insurance to all working Americans.

      C.  to increase agent’s compensation.

      D.  to decrease the possibility that people will lose their health insurance by making it easier

            to switch plans or buy individual coverage on their own.

 

2.  Disability Income insurance is often called

      A.  loss of time insurance.

      B.  job security insurance.

      C.  casualty insurance.

      D.  worker’s compensation insurance.

 

3.  Group insurance must

      A.  always be an employer-employee contract.

      B.  be considerably cheaper than individual insurance.

      C.  insure employers, association, labor union, trust or other organization not organized for

            the purpose of obtaining insurance.

      D.  be sold only by salaried representatives.

 

4.  The most common and popular type of medical insurance is

      A.  Long Term Care Insurance.

      B.  Disability Income Insurance.

      C.  Comprehensive Medical Insurance.

      D.  Hospital indemnification.

 

5.  Accidental Death and Dismemberment insurance is

      A.  too expensive for most people to consider.

      B.  the same as Dread Disease policies.

      C.  either occupational or 24-hour coverage.

      D.  issued only by mutual companies.

 

6.  When AD&D insurance is part of an employees benefit package, dependents

      A.  are never covered.

      B.  are always covered with 24-hour coverage, regardless of the employee’s coverage.

      C.  coverage is prohibitive in cost.

      D.  are covered at 50% of the employees coverage.

 

7.  Dread Disease benefits

      A.  are paid as scheduled amounts of indemnity as the result of a specified event or treatment.

      B.  are only sold as part of a group life plan.

      C.  are illegal in many states.

      D.  are always reimbursement plans.

 

8.  Of the various dental services available in a dental plan, the one that is most used is

      A.  oral surgery.

      B.  restorative.

      C.  periodontics.

      D.  orthodontics.

 

9.  The underwriter’s primary function is

      A.  to seek reinsurers to accept part of the risk.

      B.  to make sure that the proper premium is received for the risk assumed.

      C.  to pay claims.

      D.  decline as many applications as possible and still keeps the agents happy.

 

10.  The “MIB” is

      A.  an independent company that reports criminal violations of applicants to the FBI.

      B.  an association of life and health insurers in the US & Canada that manages an information

            exchange used in the underwriting process by member companies.

      C.  medical information in physicians records that can be used for underwriting purposes.

      D.  a laboratory that serves life and health insurers in interpreting EKGs and EEGs.

 

ANSWERS TO STUDY QUESTIONS

1D     2A     3C     4C     5C     6B    7A     8B     9B     10B