Life & Health Chapter 15 | Health Chapter 6: Medical Expense Insurance

CHAPTER SUMMARY

Basic Health Insurance Policies

Basic Health Insurance

Basic health insurance is:

• Limited in scope

• Limited in benefits

• “First dollar” coverage

Basic Hospital Expense Policies

• Basic hospital expense policies cover hospital room and board and miscellaneous hospital expenses.

[EXAM TIP: When in doubt, basic hospital covers “things” as opposed to “people,” especially in contrast to basic surgical expense policies (nurses being the exception).]

• Hospital indemnity = flat rate per day

• Hospital reimbursement = actual expenses up to a daily limit

Basic Surgical Expense Policies

Basic surgical expense policies only cover listed operations. The three methods for determining benefits are:

1. Surgical Schedule – Every covered operation has an assigned fee that must be updated.

2. Relative Value Scale – Every covered operation is assigned a certain number of units, and the insurer assigns the unit value. Changes in the unit value easily update all surgical coverage.

3. Usual, Customary, and Reasonable – This is non-scheduled and based on average local pricing.

Basic Physician Expense Policies

• Basic physician expense coverage (also referred to as basic medical expense coverage) provides coverage for non-surgical medical services on a scheduled or non-scheduled basis.

• This type of policy can be purchased to cover emergency accident benefits, maternity benefits, mental and nervous disorders, home health care, hospice care, critical care, outpatient care, nurses’ expenses (including private duty nursing), dental, and vision.

Major Medical Insurance Policies

Major Medical Expense Plans

• Major medical expense plans offer high maximum benefits and broad coverage under one policy.

Supplemental Major Medical Policies

• Supplemental major medical policies are used to supplement the coverage payable under a basic medical expense policy.

• These policies often feature a corridor deductible.

Comprehensive Major Medical Policies

• Comprehensive major medical policies combine basic medical expense (first dollar) coverage and major medical insurance sold as one policy.

Major Medical Policy Cost-sharing Features

• A deductible is what an insured must pay before the insurer starts to pay.

  • Flat (Initial) Deductible – The stated dollar amount that applies to a covered loss (e.g., $500)

  • Corridor Deductible – The amount that an insured must pay after basic coverage ends and before major medical begins.

  • Integrated Deductible – Similar to a corridor deductible except that the basic benefits satisfy the deductible, thereby reducing it.

  • Per-Cause Deductible – Must be satisfied for each accident or illness.

  • Family Deductible – Credits all family expenses against a single limit and waives the deductible for all members when the family deductible is met, even if individual deductibles have not been met.

  • Common Accident or Sickness Deductibles – Limits the insured’s exposure to a single deductible in situations when multiple insureds are injured in the same accident or suffer concurrently from the same illness.

• Coinsurance is a percentage participation. Insureds must pay a portion of covered claims (no more than 50%) up to a defined policy maximum over the course of a single policy period.

• The Stop-Loss Provision is a feature that’s designed to limit an insured’s out-of-pocket medical expenses.

  • Policies define the insured’s “out-of-pocket maximum” as the total amount of covered costs that the insured can be required to pay during one year. It consists of the following:

    • Deductible

    • Co-insurance, and

    • Other co-pays (if applicable)

[EXAM TIP: Treat the “stop-loss” amount as being equivalent to the “out-of-pocket maximum.”]

Other Major Medical Features and Concepts

• Internal Limits are limits are individual policy benefits or healthcare services.

• Pre-existing Conditions are health conditions that exist prior to the start of coverage.

  • Traditionally, existing conditions revealed on applications are covered or permanently excluded with an impairment rider.

  • Insurers use a blanket pre-existing condition exclusion when policies are not medically underwritten. It excludes coverage for any health condition that became manifest within a preset time prior to the effective date of coverage. Exclusions are temporary.

Statutes Governing Medical Insurance

The Affordable Care Act

• The Affordable Care Act restructured the market for major medical insurance. Qualified major medical plans are those that are ACA-compliant and available on federal and state exchanges.

• Insurers cannot deny or cancel coverage due to pre-existing conditions.

• Plans can no longer enforce a lifetime cap or annual dollar limit on benefits except for certain treatments and follow-up care.

• All premiums are unisex.

• The Health Insurance Exchange (Marketplace) is a federal website that allows consumers to buy qualified major medical plans.

• For 2025, the individual out-of-pocket limit is $9,200.

• For 2025, the out-of-pocket family limit is $18,400.

• Eligible dependents include cohabiting spouses and dependent offspring up to the age of 26.

The Structure of Coverage

• The ACA requires health insurers to offer plans within health insurance exchanges that conform to four “metal tiers.”

• Bronze plans must have an actuarial value of 60%.

• Silver plans must have an actuarial value of 70%.

• Gold plans must have an actuarial value of 80%.

• Platinum plans must have an actuarial value of 90%.

Essential Health Benefits

The ACA defines the 10 essential health benefits that major medical plans must offer without a lifetime limit or annual cap.

1. Ambulatory Patient Services: Healthcare that an insured receives without being admitted to a hospital (i.e.,out-patient).

2. Emergency Services: Healthcare that an insured receives for conditions that, if not immediately treated, could lead to severe disability or death.

3. Hospitalization Coverage: Healthcare that an insured receives as an inpatient in a hospital.

4. Pregnancy, Maternity, and Newborn Care: Maternity care and newborn care describe the ongoing care an insured woman receives during her pregnancy and during and after labor (i.e., Pre- and post-natal services). It also provides care for newly born children.

5. Mental Health and Substance Use Disorder Services: Mental health and substance use disorder services describe the care that an insured receives for behavioral health treatment. It includes the evaluation, diagnosis, and treatment of mental health and substance abuse issues.

6. Prescription Drugs: The prescription drug benefit covers drugs that are prescribed by a doctor to treat an acute illness (e.g., an infection) or an ongoing condition (e.g., high blood pressure.). Includes FDA approved methods of contraception.

7. Rehabilitative and Habilitative Services and Devices: Rehabilitative and habilitative services and devices refer to services and devices that help an insured who suffers from injuries, disabilities, or chronic conditions to gain or recover her mental and physical skills. Includes domestic violence screening and counseling.

8. Laboratory Services: Laboratory services include the testing of blood, tissues, and other substances that are derived from a patient to help a doctor diagnose a medical condition and monitor the effectiveness of treatment. Includes HIV screening.

9. Preventive and Wellness Services and Chronic Disease Management: Preventive or wellness services include routine physicals, screening, and immunizations. Chronic disease management is an integrated approach to managing an ongoing condition, such as asthma or diabetes. This includes breast and cervical cancer screenings, including mammograms, HPV screenings, and PAP smears.

10. Pediatric Services: Pediatric services are the care that an insured child receives. Treatment by a participating physician who specializes in pediatrics as the child’s primary care health care professional is available, including oral (dental) and vision care. Since “vision” is not defined in the statute, the American Academy of Pediatrics (AAP) and the American Association for Pediatric Ophthalmology developed evidence-based recommendations. Accordingly, the essential children’s vision benefit begins with regular eye screenings within the medical home and covers a comprehensive eye exam. It also includes refraction for children or adolescents who fail a screening, have an unfavorable risk assessment, report a visual problem, or cannot complete a screening.

Grandfathered Plans

Grandfathered plans have existed in their current form since before the ACA became law and avoid the requirements to:

• Cover preventive care for free,

• Cover all the essential health benefits, and

• Cover pre-existing conditions in the individual market.

Affordable Care Act (ACA) – Subsidies and Tax Credits

• For employers with fewer than 25 employees, a maximum 50% tax credit is provided on employer paid premiums for employee insurance.

• Subsidies are available for individuals and families with incomes up to 400% of the federal poverty level who purchase coverage from a government exchange.

The Health Insurance Portability and Accountability Act (HIPAA)

• HIPAA reduced or eliminated pre-existing condition exclusions or waiting periods when previously insured individuals changed jobs and were covered under a new group plan as long as the individuals maintained creditable coverage with no break or gap in coverage of 63 days or more.

• It allows employees to use evidence of their previous insurance coverage to eliminate any pre-existing condition exclusion or reduce its length.

• HIPAA has changed how the term “pre-existing condition” is defined by limiting the “look-back period.”

• For major medical plans, the only conditions that count are those treated during the six months before coverage begins.

• The term also includes conditions for which a reasonable person would seek treatment, even if treatment were not sought.

• Newborns with congenital conditions are covered if added to the insurance plan within the first 30 days after the child’s birth or adoption.

• HIPAA also limited the exclusion of pre-existing health conditions in medical plans to 12 months generally and 18 months for late enrollees.

Innovations and Taxation

Cafeteria Plans

• A cafeteria plan allows U.S. businesses to offer employee benefits on a pre-tax basis, with multiple options available for participants.

Consumer Driven Health Plans (CDHPs)

• Consumer Driven Health Plans (CDHPs) incentivize individuals to consider the cost of medical care.

• The three elements of a CDHP include:

  • A tax-advantaged (pre-tax) savings vehicle

  • A corridor or integrated deductible

  • A qualifying high deductible insurance policy

Health Savings Accounts (HSAs)

• HSAs are tax-favored vehicles for accumulating funds for medical expenses.

• Contributions are not taxable (they’re either tax-exempt or tax-deductible).

• Balances roll over and accumulate year-to-year

• HSAs are owned by the individual and are portable.

• Withdrawals for qualified health care costs are tax-free, but non-qualified withdrawals are subject to income tax and a 20% penalty.

• Individuals must have a qualified HDHP to contribute to an HSA, but any person can use the funds that are already in the account.

• Annual HSA contributions are allowed up to the IRS maximum.

• Individuals aged 55 and older can make additional catch-up contributions.

Health Reimbursement Accounts (HRAs)

• Health Reimbursement Accounts (HRAs) resemble HSAs, BUT:

• Only employers can set up an HRA

• There’s no limit on annual contribution amounts.

• HRA funds are NOT portable.

Medical Savings Accounts

• Archer Medical Savings Accounts (Archer MSAs) were a pilot program for today’s HSAs, which targeted the self-employed and employees of small employers and helped them pay for medical expenses.

Flexible Spending Accounts (FSAs)

• Flexible Spending Accounts are tax-advantaged accounts that allow employees to set aside a portion of their earnings to pay for qualified medical expenses.

• Except for a small amount (640 in 2025), funds must be used in the current year or lost (use it or lose it).

High Deductible Health Plan (HDHP)

• A qualifying high deductible health plan (HDHP) is a major medical insurance contract that does not cover basic expenses (other than preventative care that’s mandated by the ACA), and establish an annual cap on out-of-pocket costs.

• For 2025, the minimum deductible allowed is $1,650 (up from $1,600 in 2024) for individual coverage and $3,300 (up from $3,200 in 2024) for a family.

• For 2025, the maximum out-of-pocket cost allowed is $8,300 (up from $8,050 in 2024) for an individual plan and $16,600 (up from $16,100 in 2024) for plans that cover families.

Taxation of Medical Expense Insurance

• Medical and dental expenses exceeding 7.5% of an individual's adjusted gross income (AGI) may be tax-deductible for taxpayers who itemize.

  • For most individuals, medical and dental expenses can be tax-deductible under the following conditions:

    • Premiums for medical expense insurance and dental insurance are paid with after-tax dollars, and

    • Cost-sharing amounts (e.g., co-insurance, deductibles, and certain expenses) are not covered by a policy.

• Those who are self-employed or sole proprietors may deduct 100% of their health insurance premiums as business expenses.

• Partnerships and Limited Liability Companies (LLCs) may deduct premiums from their taxable income.

CONTRIBUTIONS, POLICY LIMITS, AND PENALTIES - SUMMARY TABLE FOR 2025