THE MAJOR MEDICAL APPROACH TO HEALTH CARE

Indemnity health insurance comes in several common

variations. The variations are based on specific coverage

limitations that change the traditional indemnity policy

substantially—so that it becomes, for all purposes, a different

kind of coverage.

The most common variation on indemnity health coverage is

the major medical policy. This coverage focuses on

hospitalization costs, rather than health care costs in general.

And it uses deductibles and absolute dollar limits differently

than traditional indemnity insurance.

Major medical can be sold on an individual and group basis—and is sold

aggressively to both. It provides benefits up to a high limit for most types

of medical expenses incurred, subject to a large deductible. The contract

may contain limits on specific types of charges, like room and board, and a

coinsurance clause.

These policies usually pay covered expenses whether an

individual is in or out of the hospital. Another name for this

coverage is a catastrophe policy.

Because it covers costs related to hospitalization and has high deductibles,

major medical is usu ally an insurance company’s favorite kind of health

policy. It can work well for you—as a consumer— too. But you have to look

at this coverage as one part of a larger approach to health care finance.

In other words, the major medical approach to

hospitalization coverage is designed to provide you with

protection against catastrophic expenses that are a genuine

risk in today’s world.

You need to think of major medical as an approach because

there are a lot of expenses that the plans don’t cover. And

you’re going to have to fund those expenses somehow—either

with out-of-pocket payments or some kind of supplemental

insurance. We’ll consider the options in this chapter.

THE CONCEPT

Major medical plans can be thought of as consisting of a bag of

money, containing $1 million, $2 million, $5 million or an

unlimited amount. The money is to be used to pay for covered

medical expenses, either as an inpatient or as an outpatient.

The only limitation is how much money is in the bag.

Unlike a traditional indemnity policy with benefit amount

limitations, major medical insurance is designed to provide a

large sum of money from which to pay covered medical

expenses.

Major medical plans are characterized by the following:

deductibles,

coinsurance,

stop-loss provisions, and

• annual restoration provisions. We will consider each of

these items in some detail.

DEDUCTIBLES

The deductible associated with a major medical policy has

essentially the same function as it does for any other kind of

insurance—whether health or car or homeowners. For example,

you are responsible for the first $100 of medical expenses

related to a hospital visit; then your insurance company pays

the excess covered medical expenses.

Most major medical plans will offer a variety of deductibles from $100 to

$1,000...or even higher. Some high-risk policyholders—usually people with

histories of health problems—pay as much as $5,000 or $10,000

deductibles. This is truly catastrophic coverage.

The deductible may be expressed as a calendar year deductible

or as a per cause deductible. A calendar year deductible

means that you satisfy the deductible once in a calendar year.

A per cause deductible is similar to the deductible found in

the auto policy. Each time you ding a fender, you are

responsible for a deductible. A per cause deductible basically

states that each medical claim you incur will have a deductible

requirement. Thus, if you had three claims, three deductibles

would need to be satisfied before your insurance company

would begin to pay benefits.

Example: If Scooter has three separate medical claims in a given year and

his Allstate policy con tains a $250 per cause deductible, then he must

satisfy three separate deductibles before Allstate will pay his claim. If his

policy with Allstate con tains a calendar year deductible, he only has to pay

one deductible to cover the entire year.

Another version of the calendar year deductible is the family

deductible. Most plans will specify an individual deductible

such as $250 and a family deductible equal to two or three

times the individual deductible.

So, if the plan had an individual deductible of $250 and a

family deductible of $750, after the family incurred expenses

totaling $750, there would be no further deductibles for the

balance of that calendar year.

Most of the major medical plans contain a deductible

carryover provision. If you haven’t incurred any claims or

received any benefits from the plan, expenses incurred in the

last three months of a calendar year may be applied toward the

new year’s calendar deductible.

In this case, if Scooter has no claims in most of 1998 but does incur $100 of

covered medical ex penses in November 1998, he can apply that $100

toward the annual deductible for 1999.

Deductibles do have a large affect on the cost of major medical

plans. A plan with a $100 deductible will cost considerably

more than a plan with a $1,000 deductible. So, if you want to

save premium dollars, select a plan with a higher deductible

—it will reduce the cost of the premium.

COINSURANCE PROVISIONS

Once your deductible is satisfied, the major medical insurance

company will then pay for covered medical expenses, on a

coinsurance basis.

(As we’ve seen, coinsurance—sometimes called copayment—

means that you and the insurance company split the cost of a

claim. The company usually pays the larger part and you pay

the smaller part.) Coinsurance requirements are typically

expressed as 80 percent to 20 percent, 70 percent to 30

percent, etc. If you have a plan with an 80 percent to 20

percent coinsurance requirement, the company will pay 80

percent of the covered expenses following the deductible and

you are responsible for the additional 20 percent of the

expenses.

Just as deductibles affect the cost of a plan, so too will

coinsurance. An 80/20 percent coinsurance provision will carry

a higher premium than a 70/ 30 percent coinsurance split. If

you need to keep your premium low, one way to meet this goal

is to have a high deductible and a low coinsurance provision

—such as 60/40 percent.

This is another mechanism that insurance companies can use

to limit the impact of insureds who have histories of health

problems. If you’ve had heart bypass surgery and beaten a

mild case of skin cancer, you may have to settle for a major

medical policy includes a high deductible—say, $5,000— and a

heavy coinsurance split—say, 60/40 percent.

STOP-LOSS PROVISION

The coinsurance requirement continues until you reach the

policy’s stop-loss point. This is the point at which the

insurance company begins to pay 100 percent of a claim.

Without a stop-loss, you would be responsible for 20 percent of

an indefinite amount such as $100,000 or even $1 million.

The stop-loss amount will vary. It could be reached at $2,500,

$5,000 or $10,000 of covered expenses.

For example, a plan with a $250 deductible and an 80/20

percent coinsurance split on the next $2,500 of covered

expenses would result in a total out-ofpocket expense to the

insured of $750—the $250 deductible plus 20 percent of

$2,500. The stop-loss provision establishes the maximum out-

ofpocket expense to you to be equal to the deductible plus the

your coinsurance amount.

The out-of-pocket maximum is a major consider ation when you are

shopping for a policy. Re gardless of the size of a potential claim, the most

that you will have to pay out of your own pocket is the deductible and the

coinsurance amount up to the stop-loss.

The stop-loss point is also a contributing factor in the policy’s

premium. The higher the stop-loss— the lower the premium. A

stop-loss at $2,500 will cost more than a stop-loss at $10,000.

Thus, if you want to keep the premium as low as possible, the

formula becomes: High deductible + low coinsurance + high

stop-loss

ANNUAL RESTORATION PROVISION

Let’s look again at the major medical plan as consisting of a

bag of money—holding a large amount, possibly $1 million, $2

million, etc. This sum is the maximum amount available for

claims. You incur a claim subject to the plan’s deductible and

coinsurance requirements (including the stop-loss point).

Whatever the total claim amount, it will be deducted from the

bag of money leaving a smaller sum for future claims.

Example: Scooter has a $1 million dollar major medical plan with a $500

deductible, 80/20 per cent coinsurance split up to $5,000, and 100 percent

coverage thereafter. He’s hit by a mete orite and incurs $300,000 in

hospital costs recov ering. After the deductible and coinsurance are paid,

$294,100 is withdrawn from the bag of money—leaving $705,900 for future

claims. If Scooter has no large claims for the rest of his life, he has nothing

to worry about.

But, if he’s struck by lightning twelve months later, the money in the bag

would dwindle to $411,800. If he breaks his back in a skiing acci dent a year

after that, the money in the bag would be down to $117,700. And then he

starts having trouble with his prostate....

The annual restoration provision puts back a certain amount of

major medical dollars used each year. These amounts are

generally small, such as $2,000, $3,000 or $5,000 per year.

If Scooter’s plan contained a $5,000 restoration provision, one year after

his claim (and, assum ing he doesn’t have such a hard-luck existence) the

total amount available for future claims would be increased to $710,900.

After two years it would be $715,900—and so forth.

The size of a claim is usually several times larger than the

amount restored. Many view this as a token reassurance that

some sum of money will be in the plan for claims. If the plan

only has a $1 million lifetime maximum, it is possible to exhaust

this sum with a major illness such as a prolonged battle with

cancer. To offset this disadvantage, many insurers provide

major medical plans with $2 million lifetime maximums or

unlimited maximums.

A $2 million dollar maximum is more realistic with regard to the size of

typical claims. Even with a major prolonged illness, it would be difficult to

exhaust benefits of $2 million.

The following chart illustrates the major medical concepts

we’ve considered so far.

MAJOR MEDICAL INSURANCE

Deductible CoinsuranceStop Loss

Must be

satisfied

The insured pays The

insurer pays

before any

a small part

of

100% when

stop

benefits

are paid the claims

loss is

reached

USUAL, CUSTOMARY AND REASONABLE CHARGES

Coinsurance amounts are based on what the insurance

company considers the usual, customary and reasonable

(UCR) expenses or charges. In addition, when the stop-loss is

reached, the insurer will pay 100 percent of the UCR expenses.

The introduction of reasonable and customary language into

the policy means you may incur some additional out-of-

pocket expenses—if the expenses incurred are not considered

reasonable and customary.

The UCR amounts are determined by the insurance company.

Periodically, the services provided and charges made by

doctors and hospitals are reviewed by the insurance company.

The review takes into account geographical differences that

allow for differences in the charges relative to the provider’s

overhead expenses, location, etc. The insurance company then

establishes UCR charges for specific services in a specific

geographical area.

Example: Julie has an tonsillectomy performed in a small farm community in

central Nebraska. She is charged $1,500 for the procedure. By coinci dence,

Julie’s friend Suzy has the same proce dure performed at a New York City

hospital and her charge is $2,000. It’s possible that Julie’s in curred

expense of $1,500 for the tonsillectomy would be considered reasonable

and customary by her insurance company. It is also conceivable that Suzy’s

$2,000 charge would be reasonable and customary for the New York City

area. If so, their claims would be paid in full by their respec tive insurance

companies. On the other hand, assume that Julie incurs a $2,000 charge for

her tonsillectomy. She hasn’t reached the stop-loss point but has satisfied

her deductible. Julie’s insurance company will pay 80 percent of $1,500—the

UCR charge—or $1,200. Julie is responsible for 20 percent ($300) and now

she must contend with a $500 excess charge. Her insurance company views

the $500 as excess or unreasonable for that part of Nebraska. Julie has to

pay $800 out of her own pocket to cover the expense. The excess is an

additional out-of pocket expense for Julie which is not counted by the

insurer towards the stop-loss point or any other provision of the policy.

What can someone dealing with a UCR dispute do? One option

—the one that insurance companies and health care providers

hope you will choose—is simply to pay the difference and

forget it. Another option is to appeal the decision with the

insurance company’s internal review structure. A third is to

file a complaint with state regulatory authorities, though

major medical insurance companies are usually allowed wide

discretion in setting UCR fee schedules.

But there’s a less contentious approach that often works.

Explain to your health care provider that your insurance

company uses a UCR limit that’s lower than the fee you’ve

been charged. If you back this argument up with the insurance

company’s paperwork, you may be able convince the provider

to bring the bill in line with the UCR fee schedule.

Often, doctors and hospitals would rather coordinate their

fees with an insurance company’s UCR schedule than fight it.

They don’t want to be identified with difficult claims...this

sometimes brings scrutiny and slower payments.

In Julie’s case, she could tell her doctor that her insurance company

considers $1,500 to be a UCR fee for her tonsillectomy and will only

reimburse that amount. The doctor may agree to accept the insurance

company’s reimbursement and Julie will only owe the $300 coinsurance

portion. If the doctor insists that the full amount be paid, Julie could simply

ignore the bill—and the doctor’s collection efforts which will likely follow.

There is always a chance that the doctor will give up. But that’s a risky

approach that most people should probably avoid to protect their credit

ratings.

The problem with UCR disputes is that a doctor may not

consider a high fee to be unreasonable; only the insurance

company does. And you are caught in the middle.

Unfortunately, there is no simple answer when the insurance

company deems a charge to be unreasonable.

One obvious preventive measure is to find out the cost of a

procedure before it becomes a claim and then check with the

insurance company to determine how much of this charge will

be paid. This gives you the chance to discuss the fee with your

doctor before incurring any expense.

And your doctor will probably be more inclined to reduce the

fee before it becomes a claims matter.

Another alternative is to find a doctor or surgeon who will

perform the surgery for the UCR charge as determined by

the insurance company. However, this is probably an

unacceptable option because, if you are considering having

surgery or some similar medical work, you have enough to

worry about without shopping for a bargain from an unknown

doctor.

People usually take the position that they buy major medical

insurance because they’d prefer to have surgery done by their

own doctors.

So—as difficult as it may be—the best strategy is to get a copy of your

insurance company’s UCR fee schedule to your provider before you undergo

major treatment.

MAJOR MEDICAL VS. BASIC MEDICAL

For many, major medical is the most feasible health care plan

in spite of its deductible and coinsurance provisions. The “bag

of money” concept works bet-ter—is more affordable or

available—in the present health care environment than a pure

indemnity plan’s first-dollar coverage approach.

An important point: With the major medical approach, not only

inpatient expenses are covered but outpatient expenses

are, too. Outpatient diagnostic services, doctors office calls,

etc., are covered expenses under the major medical plan.

The same bag of money used to pay inpatient expenses can be

used to cover outpatient expenses subject to the plan’s

deductible and coinsurance features. In addition, the major

medical approach may not involve the limitations of time and

money that a basic plan does.

The major medical plan will have a lifetime maximum

benefit such as $1 million or $2 million. Some plans are even

written with an unlimited lifetime maximum.

This form of limitation is much more workable than one which

limits dollars for specific expenses such as surgery and room

and board expenses. It is unlikely that an insured will “run out

of money” with the major medical plan.

With regard to the cost of the plans, the premium for a major medical plan

could be less than the premium for a basic medical expense plan. This is

especially true if the individual is relatively young and has no dependents.

The size of the deductible and the coinsurance provisions can usually result

in a lower premium than for a plan which has no deductibles or coinsurance.

COMPREHENSIVE MEDICAL EXPENSE

As we’ve already seen, major medical coverage is considered

hospitalization insurance. It doesn’t cover all medical expenses

—the way that traditional indemnity coverage does. What do

you do about these other expenses? Paying for them out-of-

pocket is the simplest option. But you need to be cash-rich to

do this. So, most people will look for some kind of insurance to

add on to their major medical.

An additional challenge to a smart insurance consumer is that

many companies don’t sell traditional indemnity health

coverage that starts with the first dollar. These companies

force policyholders to start with major medical and build

additional coverage from there.

So, in some situations, you may be faced with the prospect of

buying a comprehensive medical expense plan. This kind of

insurance adds coverage for basic—and not necessarily

hospital-related— medical expenses to the major medical

coverage.

As we saw in the previous chapter, basic medical expenses are sometimes

insured on a stand-alone basis.

The comprehensive plan is simply a combination of:

Basic Medical Expense + Major Medical

This may seem like a long way to walk around the insurance

block in order to get back to something like the traditional

indemnity coverage we’ve considered earlier. It is. The long

walk is a testiment to how convoluted insurance coverage can

be.

The comprehensive plan consists of a block of first dollar

benefits followed by a deductible and a typical major medical

plan. This plan might specify that 100 percent of the first

$5,000 or $10,000 of reasonable and customary expenses will

be covered. Once this bundle of first dollar benefits is

exhausted, you must satisfy a deductible, usually referred to as

a corridor deductible, and then the major medical benefits

are activated.

All of the provisions common to a basic hospitalization plan as

well as the provisions and concepts related to major medical

plans, ie., deductibles, coinsurance, stop loss, etc., are found in

this type of plan.

The following table illustrates key features of a comprehensive

medical expense plan.

COMPREHENSIVE MEDICAL EXPENSE PLAN Basic Medical Plan 100% of the

first $10,000 of expenses 80/20% coinsurance on the first $5,000

Corridor Deductible $500

Major Medical Plan No deductible or coinsurance 100% after $10,000 to the

policy maximum The question raised by the comprehensive plan is

whether or not you would be better off with this plan or simply

a “straight” major medical plan. Does the block of first dollar

benefits really enhance your overall protection?

To answer these questions, let’s use the same $20,000 hospital

bill just used to reflect the payment of major medical expenses.

We’ll use the comprehensive plan illustrated above.

Calculation of the comprehensive benefits would be as follows:

Total Expense: $20,000

100% of the first

$10,000: Balance of

$10,000: ($10,000 -

$500 deductible)

$9,500 80% of $5,000:

100% of balance

($4,500): Total paid by

comprehensive plan:

$10,000

$ 4,000

$ 4,500

$18,500

Total benefits provided by the comprehensive plan are $18,500

which is the same 92 percent of covered expenses we saw

with the regular major medical plan. In other words, as long as

the expenses exceed the package of first dollar benefits

($10,000) and the deductible and coinsurance amounts (an

additional $5,500), there is no difference in the benefits

provided.

There usually will be a difference in the premium, since a

higher premium will be charged for the first dollar benefits in

the plan. You are getting into your insurance company’s

pockets immediately (up to $10,000) when a claim is incurred;

so you will have to pay for this by means of a higher premium.

A regular major medical plan will do essentially the same job as the higher-

priced comprehen sive plan, unless the claim is relatively small ($10,000 or

less). The first dollar benefits will cover the relatively small claim without

any deductible or coinsurance.

In small claim situations, the extra premium for the

comprehensive plan has to be weighed against the likelihood of

a small claim of a few thousand dollars. By today’s health care

costs, it is difficult to spend a few days in a hospital, have

surgery and not incur expenses exceeding $10,000.

Comprehensive plans vary, but generally cover the same kinds

of services. Some of these include:

professional services of doctors of medicine and

osteopathy and other recognized medical practitioners;

hospital charges for semiprivate room and board and

other necessary services and supplies;

surgical charges;

services of registered nurses and, in some cases, licensed

practical nurses;

home health care;

physical therapy;

anesthetics and their administration;

x-rays and other diagnostic laboratory procedures;

x-ray or radium treatment;

• oxygen and other gases and their administration;

blood transfusions, including the cost of blood when

charged;

medicine requiring a prescription;

specified ambulance services;

rental of durable mechanical equipment required for

therapeutic use;

artificial limbs and other prosthetic appliances, except

replacement of such appliances;

casts, splints, braces and crutches;

rental of a wheelchair or hospital bed.

SUMMARY

Major medical coverage is considered by many people with

histories of health problems to be a realistic approach to

getting indemnity-type coverage. The major medical plan

provides a supply of money to be used over the lifetime of the

insured.

Major medical plans are characterized by deductible,

coinsurance and stop-loss provisions. After the deductible is

satisfied, you and your insurance company coinsure claims

expenses. But coinsurance only applies up to a pre-set stop-loss

amount. Once the stop-loss is reached, the insurance company

takes over paying the claim in full.

(Most major medical plans contain an annual restoration

provision whereby a small amount of money is restored to the

plan each year after plan dollars have been used to pay medical

expenses.) Expenses are covered based on the premise of UCR

fees. The plan’s coinsurance provisions will provide coverage

for those expenses deemed reasonable and customary by

geographical reason per the research of the insurance

company.

Some people supplement major medical coverage with basic

medical expense coverage to create a comprehensive health

insurance package. This complex approach is made necessary

by the fact that many people can’t qualify for or afford

traditional indemnity coverage.