Medical expense insurance, offered through commercial insurers, can be broken down into three basic classes of coverage: • Basic Medical Expense • Major Medical • Comprehensive

Basic Medical Expense Insurance The original, and most common, form of health insurance is called basic medical expense insurance. It is also known as first dollar coverage because it will pay a medical claim from the first dollar of the claim, up to the maximum amount allowed under the policy. Basic medical expense polices can be subcategorized into 3 different polices: • Hospitalization room and board • Miscellaneous expense • Surgical expense

Hospitalization Room and Board-- These policies provide benefits on a reimbursement basis with actual hospital expenses paid. They commonly will only provide for care in a semi-private room, up to a certain dollar maximum, for a maximum number of days. Miscellaneous Expenses-- These policies cover many of the extra charges associated with a hospital stay, and can include operating room charges, physician’s fees, medicine, diagnostic lab tests, x-rays and even ambulance service charges. The amount of benefit provided is commonly expressed either as a stated dollar amount or as a multiple of the hospitalization room and board benefit.

Surgical Expense-- These policies pay surgical expenses for treatment received in a hospital or on an outpatient basis. Most basic medical plans provide benefits that are based on a “schedule of operations.” This schedule will state the maximum that will be reimbursed for each type of procedure. Historically, insureds would own one, two or all three of these basic coverages, which became commonly known as the “Base Plan”. While these coverages are still available today, their low maximum benefits are often inadequate when an insured is faced with a catastrophic event, thus, insurers designed major medical plans with high policy limits.

Major Medical Policies As the name implies, major medical provides coverage for major medical expenses. These policies typically have maximum benefits of several million dollars and just about any expense is covered. Major medical plans are also characterized by the presence of a deductible, which is an amount the insured must pay first before any benefits will be paid by the plan, and by coinsurance, which means that the insured shares in the costs of his/her medical treatment. Deductible amounts can range from $50 to several thousand dollars depending

on the preference of the insured, the higher the deductible, the lower the premium. A deductible can be accessed on a calendar year basis or per medical occurrence. The calendar year basis is the more common method. In which case, one deductible applies to any and all medical expenses incurred in that calendar year. Many plans offer a family deductible. For example, a plan might stipulate that a $100 deductible applies to any one family member, but that the total deductible for the entire family, regardless of how many family members receive treatment, will not exceed $250.

Another cost-saving measure to the insurance company is the use of coinsurance. For all covered expenses in excess of the deductible, a major medical plan will generally pay 80%, leaving the policy owner responsible for the remaining 20% of costs. As a means of protecting insureds against the impact of a catastrophic illness or injury, many plans today incorporate a stop-loss feature. Stop-loss or “max out of pocket” caps the amount paid by the insured. Expenses in excess of the stop-loss cap will be paid by the insurer. The stop-loss is activated when the insured's out-of-pocket expenses reach a specified amt.

Service Providers HMO Health Maintenance Organization. Introduced in the 1970s, HMOs are relatively new providers of medical expense coverage. Recipients of care from an HMO are not called insureds, but “subscribers.” Subscribers pay premiums directly to the HMO and receive health care from the HMO. HMO premiums actually represent a prepayment of services. These organizations do not function on a reimbursement basis. The emphasis of an HMO is preventive health care.

Accordingly, medical care that is not usually covered under commercial policies is covered under an HMO; the most typical example is an annual physical examination. HMOs attempt to curb the cost of medical care by actually preventing illness from occurring in the first place (i.e. immunizations for children and prenatal care). Mammograms, blood pressure tests and cholesterol screening are examples of things that will help detect disease or the risk of disease early so that treatment may be more effective.

Patients may avoid medical crises and emergency hospitalization by carefully managing or attempting to manage their ongoing care for diseases like asthma, diabetes or blood pressure. These are also examples of preventative care. HMO subscribers are required to obtain medical treatment from the HMO or from a provider approved by (contracted with) the HMO. This is a key distinguishing characteristic of an HMO. To contract with an HMO, a provider will negotiate a capitation.

Capitation is when a provider is paid a set fee per HMO subscriber he/she services, regardless of how much treatment they require. After receiving the fee, the physician is responsible for providing a specific range of medical services to a specific number of subscribers. To assure that subscribers use the HMO providers, the system requires that (except for emergencies) the subscriber first see their primary care provider, AKA "gatekeeper," who will either provide the appropriate care or refer the subscriber to a specialist who is contracted with the HMO.

Preferred Provider Organizations (PPOs) The most common criticism of HMOs is that they require subscribers to obtain treatment directly from the HMO (or contracted provider). A subscriber has very little control over selecting the physician from whom they will receive treatment. Preferred Provider Organizations (PPOs) were developed mainly in response to this concern. Under a PPO, a group of doctors and related health care providers, most or all of whom may be unrelated except for the fact that they provide medical care, will contract with a commercial insurer to provide services

at an agreed upon price. The PPO subscriber chooses his/her physician, from an extensive list of providers. The insured is free to choose a non-PPO provider but would then be liable for a portion of any expenses incurred.

A firm that provides administrative services for employers and other associations with group insurance policies is the third-party administrator (TPA). The third-party administrator acts as a liaison between the insurer and the employer in matters such as certifying eligibility, and processing claims. If claim costs are fairly predictable, an employer may consider self-funding a health care plan. With a self-funded plan, an employer, not an insurance company, provides the funds to make claim payments and uses of third-party administrators to facilitate the claims process.

Exclusions that are common to most medical expense insurance policies include: • Custodial care in nursing homes • Dental care • Vision care • Anything covered by Workers Comp • Hearing aids • War-related injury • Pre-existing conditions • Injury sustained during illegal activity • Injury sustained while intoxicated • Intentionally self-inflicted injury • Maternity care • Elective cosmetic Surgery

Cost Containment Most medical expense policies contain a coordination of benefits provision, requiring that when an insured is covered by more than one policy, one policy is considered to be primary (pays first) and the other excess (pays after the benefit of the first policy is exhausted). Coordination of benefits reinforces the principal of indemnity and prevents the client from recovering more than the actual loss. Note: If a married couple has a child who is covered as a dependant on both parents’ group plans, the parent whose birthday falls 1st in the calendar year will be the primary insurance.