Insurance and Medical Expense Lecture Review

Major Medical Plans and Cost Containment

• Common cost containment measures for emergency hospital care under major medical expense plans include the use of a Deductible. The deductible serves as a primary financial barrier to curb unnecessary utilization of services and shift a portion of the initial cost to the insured.

• Medical Loss Ratio (MLR): As established by federal regulations, insurers must adhere to specific standards regarding how premium dollars are spent.

  • If an insurer violates the MLR rule by spending an excessive amount on administrative costs rather than medical care, they are required to provide rebates to their customers.
  • They must also take active steps to reduce their future administrative spending.
  • For health insurance issuers offering coverage in the individual market, the minimum MLR threshold is generally set at $80\%$. If the ratio of medical claims to premiums falls below this level, rebates are mandatory.

• Stop-Loss Provision: This is a critical feature in a health insurance policy designed to protect the insured from the financial devastation of a catastrophic illness. Once the insured’s out-of-pocket expenses reach a specific dollar limit (the stop-loss point), the insurer pays $100\%$ of all remaining covered expenses for the duration of the policy year.

• Usual, Customary, and Reasonable (UCR) Charges: When medical expense policies do not list specific dollar amounts for benefits, they base payment on UCR charges. These represent the standard cost for similar services provided by health care professionals within the same geographical area.

• Coordination of Benefits (COB): This contract provision addresses the risk of overinsurance. It ensures that when a claimant is covered under more than one group medical plan, the total benefits received do not exceed $100\%$ of actual expenses.

  • Under standard COB rules, coverage as an employee is considered primary, while coverage as a dependent is considered secondary.

Group Insurance and Eligibility

• Enrolling without Evidence of Insurability: To obtain group insurance without proving health status, eligible individuals must typically enroll within a specified eligibility period. This window allows for entry into the plan without medical group underwriting.

• Conversion Privilege: A terminating employee may convert group coverage to an individual policy. Importantly, this conversion process does not require the individual to supply evidence of insurability.

• Probationary Periods: These are used by employers to reduce costs. During this time, the employer may wait before an employee is eligible for benefits. It is noted that the employee does not have to pay the entire premium during this phase as a way to reduce employer costs; the cost reduction comes from the delay in eligibility itself.

• Key Employee Insurance: This specific type of coverage provides financial payments directly to a business upon the death of a critical employee, helping the business navigate the loss of expertise or revenue.

Long-Term Care (LTC) and Activities of Daily Living

• Activities of Daily Living (ADLs): Long-term care insurance policies use ADLs as triggers for benefits. Two common ADLs include Eating and Dressing. Other triggers can include mobility or cognitive impairment. However, sensory impairments like Deafness are typically not included as chronic illness triggers in LTC policies.

• Levels of Care and Coverage:

  • Adult Day Care: Provides part-time nursing at a facility for elderly individuals who live at home but require supervision and assistance during the day.
  • Home Health Care Benefit: Covers part-time nursing that follows a hospitalization and can be provided in the patient's private residence.
  • LTC Riders: Can be added to other policies to cover various expenses, though they generally exclude Hospital Acute Care.

• Inflation Protection: This provision in a long-term care policy allows for a periodic increase in the benefit levels to keep pace with the rising costs of care over time.

• Unnecessary Replacements: Under the California Insurance Code, replacing an LTC policy is considered unnecessary unless the new policy offers equal or better benefits for a lower premium. For an agent, the first-year sales commission on a replacement policy is calculated based on the difference between the new premium and the original policy’s annual premium.

Medical Expense and Reimbursement Models

• Health Maintenance Organizations (HMOs): These entities are unique because they provide both the health care services and the health care coverage. They focus on preventative care and high integration.

• Preferred Provider Organizations (PPOs):

  • PPOs do not typically use primary care physicians as "gatekeepers."
  • They offer financial incentives for using network providers. For example, a plan might apply a $90\%$ coinsurance rate to network providers and a $70\%$ coinsurance rate to non-network providers.
  • PPOs pay more for care received within the network than for care received outside of it.

• Traditional Comprehensive Major Medical Plans: These plans typically involve deductibles and coinsurance but do not offer First-dollar coverage (coverage that pays from the first dollar of expense without a deductible).

• Specific Medical Coverages:

  • Vision Care: Usually covers routine examinations but excludes major medical events such as Eye Surgery.
  • Hospital Confinement Indemnity: A supplemental policy that pays a fixed, set dollar amount for each day an individual is hospitalized, regardless of the actual medical costs incurred.
  • Maternity Coverage: Not an optional group medical coverage; it is generally mandated.

Federal Health Care Regulations (PPACA, COBRA, ERISA, FMLA)

• Patient Protection and Affordable Care Act (PPACA):

  • Dependent Coverage: Adult children may remain on a parent's health insurance plan until they reach the age of $26$.
  • Actuarial Value Tiers: Coverage levels are categorized by actuarial value. The Gold tier represents an actuarial value of $80\%$.
  • Health Benefit Exchanges: These are new entities created to allow individuals and small businesses who lack affordable employer coverage to purchase health insurance.
  • Bronze Level Plans: Individuals enrolling in bronze level plans are eligible for reduced cost-sharing under certain conditions, making it an entry-level tier for coverage.

• COBRA (Consolidated Omnibus Budget Reconciliation Act):

  • Applies to group health plans for employers with at least $20$ employees.
  • It ensures that an employee who loses coverage due to a qualifying event can elect to continue their coverage for a specific period.

• ERISA (Employee Retirement Income Security Act of 1974):

  • Regulates group health and disability insurance primarily in the areas of Disclosure and Reporting to participants.

• FMLA (Family and Medical Leave Act):

  • Provides job-protected leave for specific family and medical reasons. It does NOT cover leave for traveling with a spouse who has been transferred overseas.

Medicare Programs and Supplemental Insurance

• Medicare Part A: Covers Hospitalization. It is generally available to individuals at the age of $65$. Claims for Part A are submitted directly by the Hospital.

• Medicare Part B:

  • Provides coverage for physician services, diagnostic tests, and X-rays on an outpatient basis.
  • After the deductible is met, Medicare Part B typically pays $80\%$ of reasonable charges, leaving the patient to pay the remaining $20\%$.
  • Enrollment: The initial enrollment period ends $3$ months after the month of the individual's $65$-th birthday.
  • Coverage Exclusions: Part B does NOT pay for virtually all drugs prescribed by a physician.

• Medicare Part C: Also known as Medicare Advantage. It is important to note that Medicare Part C does NOT cover long-term care.

• Medicare Supplements (Medigap): These plans are specifically designed to cover medical expenses that are not covered by the original Medicare Part A and Part B (such as deductibles and coinsurance).

• Claims and Appeals: The first step in submitting a Medicare claim is for the medical provider to submit the expenses to Medicare. If an individual disagrees with a payment decision, they have the right to ask the Medicare carrier to review the decision.

Social Security and Social Insurance Benefits

• Social Insurance Purpose: These programs are designed to protect vulnerable segments of the population.

• Quarters of Coverage:

  • Fully Insured Status: Requires a person to have accumulated $40$ quarters of coverage.
  • Currently Insured Status: Requires an individual to be credited with a minimum of $6$ quarters of coverage during the last $13$-quarter period.

• Survivor and Retirement Benefits:

  • Social Security benefits are only available to workers who are Fully Insured.
  • Normal retirement age is determined by the worker's year of birth.
  • Survivor benefits are available to specific dependents, but they are not available for parents of any age who were dependent upon the worker; there are specific age requirements.

• Disability Definition: Social Security defines disability as the inability to engage in any substantial gainful activity.

• Medi-Cal: The California version of Medicaid, designed to provide medical assistance to people with low incomes. It also pays the cost of nursing home care for those who cannot afford it. It is jointly administered by federal and state governments.

Disability Income Insurance Principles

• Total Disability: Under an "own occupation" clause, total disability is the inability to perform the tasks of the specific job held at the time of the injury.

• Partial Disability: Under group disability, an employee is eligible for benefits if they can perform some job activities on a part-time basis after an injury.

• Residual Disability: Payments are determined based on the amount the insured’s income is reduced due to the disability. Requirements for these benefits usually do not include qualifying for Social Security disability benefits.

• Benefit Calculation Example:

  • Policy benefit: $\$1,500$ monthly.
  • Elimination period: $30$ days.
  • Total time disabled: $120$ days.
  • Calculation: The insured is paid for the days beyond the elimination period ($120 \text{ total days} - 30 \text{ elimination days} = 90 \text{ days}$). Since $90$ days equals $3$ months, the policy pays $\$1,500 \times 3 = \$4,500$.

• Elimination Period: This functions as a time deductible. Increasing the elimination period will lower the premium of the disability policy.

• Exclusions: Injuries caused by workplace accidents are excluded from individual health insurance because they are covered by State Workers' Compensation.

Life Insurance Policies and Rider Options

• Policy Types:

  • Decreasing Term: Often used for mortgage redemption; the death benefit decreases over time to match the projected outstanding debt (e.g., $\$150,000$ at $7.5\%$ interest over $30$ years).
  • Whole Life: Offers a death benefit and a cash value savings element. The cash value can be used for nonforfeiture options, such as Reduced Paid-Up insurance ($10,000$ cash value converted to a smaller permanent policy, such as $\$20,000$ face amount).
  • Universal Life: Features both a savings element and a flexible premium option.
  • Variable Life: Death benefits and cash values fluctuate automatically based on investment results in separate accounts.
  • Joint Life: Covers two or more individuals and pays the benefit upon the death of the first person.
  • Modified Endowment Contract (MEC): A policy written after $1988$ that fails the "seven-pay test" is classified as a MEC and loses certain tax advantages.

• Dividend Options: Policyowners of participating policies can use dividends in several ways, such as purchasing paid-up additions or reducing premiums. However, dividends are NOT typically used to fund the distribution of monthly income payments.

• Riders:

  • Payor Rider: Specific to juvenile policies; if the payor dies or is disabled, the insurer waives premiums until the child reaches a certain age (usually $21$ or $25$).
  • Accidental Death Benefit: Attaching this rider does not affect the cash value of the policy.
  • Waiver of Premium: Keeps the policy in force without further payments if the insured becomes totally and permanently disabled.

• Provision Highlights:

  • Reinstatement: Allows an insured to put a lapsed policy back in force.
  • Suicide Clause: Protects the insurer against adverse selection by limiting the payout if the insured commits suicide within a specified period (usually $2$ years).
  • Grace Period: Allows a premium payment after the due date without losing coverage.
  • Free-Look Period: Usually begins on the date of policy delivery. For seniors ($60+$), the free cancellation period is $30$ days.

Annuity Products and Distribution

• Annuity Functions: Annuities are savings instruments designed to accumulate funds and then systematically liquidate them to protect against the risk of outliving one's financial resources.

• Annuity Types:

  • Variable Annuity: The value is determined by multiplying the number of "accumulation units" by the value of the "separate account."
  • Deferred vs. Immediate: Deferred annuities have longer accumulation periods before payments begin.

• Taxation and Distributions:

  • Exclusion Ratio: Used to determine the portion of an annuity distribution that is exempt from taxation.
  • Nonqualified Annuities: Characterized by tax-deferred earnings.
  • Life Annuity with Period Certain: A "$10$-year certain" life annuity pays for a minimum of $120$ months and a maximum of the remainder of the annuitant's life. If an annuitant with a $10$-year certain installment refund dies after $5$ years ($60$ months), the insurer will make the remaining $60$ payments.

General Insurance Principles and Risk Management

• Risk and Loss:

  • Risk: Defined as the possibility of loss, but not the cause of loss itself (which is a peril).
  • Pure Risk: The only type of risk that is insurable.
  • Speculative Risk: Involves the possibility of both gain or loss; not insurable.
  • Loss Exposure: Any situation that presents the possibility of a loss.
  • Morbidity: The frequency and severity of certain illnesses and accidents. Rising morbidity rates lead to increased insurance premiums.
  • Mortality: Based on death data. Life insurance premiums use Mortality Tables to apply the theory of probability to death rates based on age and gender.

• Management Techniques:

  • Loss Retention: Effective when the probability of loss is known and manageable. It is NOT effective if the probability is unknown.
  • Large Number of Similar Exposure Units: Essential for insurers to accurately predict losses and set appropriate premiums.

• Legal Principles:

  • Indemnity: The principle that an insured should be restored to the same financial position as before the loss, receiving no more than the actual amount of the loss.
  • Aleatory Contract: A contract where the values exchanged are not equal. The insured and insurer do NOT contribute equally.
  • Adverse Selection: The tendency for high-risk individuals to seek insurance more often than low-risk individuals.

California Insurance Code and Regulatory Statutes

• HICAP (Health Insurance Counseling and Advocacy Program):

  • Provides information about health-related issues to the elderly.
  • Services are provided at No Charge.
  • Counselors are NOT qualified to give legal advice and cannot charge for services.

• Consumer Protection and Agent Conduct:

  • Misrepresentation: An agent misrepresenting dividends is guilty of a Misdemeanor.
  • Fiduciary Capacity: Agents act as fiduciaries when handling premiums or return premiums.
  • Seizure Orders: Refusing to deliver records to the Commissioner after a seizure order is a Misdemeanor.
  • Concealment: Unintentional concealment entitles the injured party to Rescission of the contract. The importance of a representation is determined by the Materiality of Concealment.
  • Agent Authority: Implied Authority covers acts reasonably necessary to perform duties expressly authorized.
  • Records Access: Insurance records must be made available to the Insurance Commissioner at all times.

• Administrative Actions:

  • If an insurer's certificate of authority is revoked, the Commissioner can proceed with various actions, but using Guarantee Funds to pay administrative salaries is NOT an authorized action.
  • Direct Response Distribution: Uses various media to promote sales but does not utilize telephone calls from agents.
  • Life Insurance Illustrations: A presentation of policy features that includes non-guaranteed elements. Agents who violate laws governing these are subject to penalties, but not necessarily mandatory termination of all appointments.
  • Replacement and Conservation: Conservation is an attempt by an agent to prevent an insured from replacing an existing policy.