9 Health and Disability Income Insurance

• Eases the financial burden people may experience as a result of

illness or injury (pay a premium to transfer risk of loss)

– Medical expense insurance- pays actual medical costs

– Disability income insurance- provides replacement income

• Group and individual health insurance coverage available

• COBRA – Requires many employers to offer employees and dependents the option

to continue their group coverage for a set period of time following a layoff

• The Health Insurance Portability and Accountability Act

– Established federal portability standards

– If you change jobs, you need not lose your health insurance9-1

Sources of Health Care Plans

• Health Care Plan- generic name for any program that pays or provides reimbursement for health care expenses

• Group Health Care Plan – health coverage sold collectively to an entire group of persons rather than to individuals

• Open Enrollment Period – during this time, you can begin or make changes in coverage or switch among alternative plans– Requirements are generally waived for family

changes (e.g., birth of a child, adoption, marriage)

• Group Plans:

– Covers most individuals

– Usually employer sponsored (also unions, trade groups)

– Employer pays part or most of cost

• Coordination of Benefits: combine benefits from >1 plan– Benefits received from all sources limited to 100% of

allowable medical expenses

– Married couples/partners need to consider

Objective 1Recognize the Importance of Health

Insurance in Financial Planning

9-3

Objective 2Analyze the Costs and Benefits of Various Types of Health Insurance as well as Major Provisions in Health Insurance Policies

Types of Health Insurance Coverage

Basic Major medical Both

• Basic Health Insurance– Hospital Expense Insurance

• Hospital room, board, and other charges (usually with a cap)

– Surgical Expense Insurance• Surgeon's fee for an operation (often specify amount per service)

– Physician Expense (Medical Expense) Insurance• Pays for physician’s care that does not include surgery, such as

office visits, lab tests, X-rays (often specify amount per service) 9-4

Types of Health Insurance Coverage

• Major Medical Expense Insurance– Covers expenses for serious injury or long-term illness

– Goes beyond what basic health insurance pays

– May include a deductible (initial amount paid before insurance co. pays), coinsurance (e.g., 20% to 25% of expenses after deductible), and a stop-loss provision

– Policy limits of $1 million are common

– Stop-loss: policyholder pays coinsurance up to a certain amount, after which insurance company pays 100% (typically $3,000 and $5,000)

– Comprehensive Health Insurance- combines basic health insurance and major medical into a single policy

9-5

Types of Health Insurance Coverage

• Hospital Indemnity

– Pays you a fixed amount for each day you are hospitalized

– Does not cover medical costs

– Supplement to the other plans

• Dental Expense Insurance

– Covers exams, cleaning, x-rays, fillings, root canals, and oral surgery

• Vision Care– Exams, contact lenses, and glasses

• Dread Disease Policies– Pays out for very specific conditions (e.g., cancer)– Illegal in many states

• Long-Term Care Insurance– Virtually unknown 25 years ago– Covers daily help if seriously ill or disabled– Nursing home or in-home care

9-6

Major Provisions in a Health Insurance Policy

• Eligibility– Varies with age, marital status, and dependency

• Assigned Benefits– Insurance pays your doctor or hospital directly

• Internal Limits– Fixed amount per day for a hospital room

• Copayment– Cost sharing in the form of a flat dollar amount

you pay, such as $15 per office visit or $10 per prescription

– NOT the same as co-insurance, which is a percentage of expenses 9-7

Major Provisions in a Health Insurance Policy

• Service Benefits – Entitlement to specific services

• Benefit Limits

– Maximum dollar amount or maximum number of days in the hospital

• Exclusions and Limitations– Pre-existing conditions

– Cosmetic surgery

• Guaranteed Renewable (can’t cancel policy unless fail to pay premiums; insurer can’t raise premiums for one person unless raised for an entire group)

• Cancellation and Termination – Explains the circumstances under which policy can be

canceled and/ or converted 9-8

Objective 3Assess the Trade-offs of

Different Health Insurance Plans

Trade-Offs in Choosing a Policy

• Reimbursement versus indemnity– Reimbursement pays actual costs

– Indemnity pays specific amounts (regardless of expenses)

• Internal (fixed amount per expense) vs. aggregate limits

• Deductibles and coinsurance• Out-of-pocket limits (after reach limit, get 100% coverage)

• Benefits based on reasonable and customary charges (policy won’t pay more than that amount)

9-9

Health Insurance Must-Haves

9-10

Objective 4 Evaluate the Differences Among

Health Care Plans Offered by Private Companies and by the

Government

Private Health Care Plans• Private Insurance Companies

– Individual policy– Group policy sold to an employer

• Hospital and Medical Service Plans– Blue Cross = hospital care – Blue Shield = surgical and medical services

9-11

Private Health Care Plans

• Health Maintenance Organization (HMO)

– Managed care

• Prepaid health plan

• Primary care physician

– Contracts with selected care providers

– Fixed pre-paid monthly premium

– Focus is on prevention and wellness

– Usually pay small copayment to see doctor9-12

Private Health Care Plans• Preferred Provider Organization (PPO)

– Several providers to choose from

– Costs more than an HMO

– More choices, fewer restrictions than an HMO

– If you go to a non-PPO provider, you pay more

– Example: NJ Direct for state of NJ employees

• Point-of-Service (POS)– Combines features of HMOs and PPOs

• Home Health Care Agencies– Medical care in a home setting for a fraction of the cost of hospitals

• Employer Self-Funded Health Plans– Company runs self-insured insurance program

– Collects premiums from employees

– Pays medical benefits as needed 9-13

New Health Care Accounts

• Health Spending Accounts (HSA)– Money contributed to pre-tax dollar account

– Must have a high-deductible policy

• Health Reimbursement Accounts (HRA)– Also tied to high-deductible policies

– Funded solely by employer

– Unused funds carried over to next year

• Flexible Spending Accounts (FSA)– Workers contribute pre-tax dollars

– Funds managed by employer– Unused funds forfeited at year end 9-14

Government Health Care Programs

• Medicare

– Federally funded health insurance program

– Covers those age 65+ and certain disabled persons

– Does not cover everything

– Patient liable for the difference in costs

– Program in financial trouble; needs changes

– 4 parts: A, B, C, D

• Medicaid- health care program for the poor that is jointly administered and funded by the federal and state governments

9-15

MEDICARE• Part A:

– Hospital insurance helps pay for inpatient care in a hospital or skilled nursing facility (following a hospital stay), some home health care, and hospice care (paid for by workers’ payroll deductions)

• Part B: – Medical insurance helps pay for doctors’ services and many other

medical services and supplies not covered by hospital insurance

– Beneficiaries pay a monthly premium (varies according to income)

• Part C:– Medicare Advantage plans available in many areas– Those with Parts A and B can choose to receive all of their health care

services through one of these provider organizations under Part C

• Part D: – Prescription drug coverage helps pay for medications doctors prescribe

for treatment9-16

Government Consumer Health Information

Websites

• Healthfinder: www.hhs.gov

• Medline Plus:

www.nlm.nih.gov/medlineplus

• NIH Health Information Page: www.nih.gov

• FDA: www.fda.gov

• Medicare: www.medicare.gov

9-17

Objective 5 Explain the Importance of

Disability Income Insurance in Financial Planning and Identify its

SourcesDisability Income Insurance

• Designed to protect against loss of income; protects your “earning power”

• Most overlooked type of insurance

• Young, healthy people don’t consider the risks related to their future earning potential

• Provides regular cash income lost by employees as the result of an accident or illness

9-18

Sources of Disability Income

• Workman’s Compensation– Disability from on-the-job accident or illness

• Employer Plans– Short or long-term group disability policy

• Social Security– Covers total disability lasting > 12 months – Starts in the 6th month– Strict definition of disability to qualify

• Private Income Insurance Programs– Supplements other disability income sources– Normally provides 40-60% of income (up to 75%)

9-19

Disability Income Insurance Trade-Offs

• Policy’s definition of disability

– Own Occupation- can no longer perform previous job

– Any Occupation- can’t work at any job

• Waiting or elimination Period

• Duration of benefits

• Amount of benefits

• Accident and sickness coverage (want payment for both; accidents are not the only cause of disability!)

• Guaranteed renewable (guarantees coverage as long as you pay your premium, but premiums can change for you within a class of insureds)

• Noncancellable- Better but more expensive; no future change in premium

• Cost-of-Living Adjustments (adjusts benefit for inflation)

• Partial benefits (pays benefit if person can only work part-time)

9-20

• 2009 Health care costs ≈ $2.56 trillion

• U.S. has highest per capita health care cost of any country in the world.

• Rapid increase in medical expenditures

– 16.9% of GDP in 2009

• High administrative costs

– Administration = 26% of costs

Objective 6 Explain Why the Costs of Health Insurance and Health Care have

been Increasing

9-21

Reasons for High Health Care Costs

• Sophisticated technologies

• Duplicate tests

• Variety and frequency of treatments

• Increasing number and longevity of elderly

• Regulations

• Increase in emergency treatments

• Limited competition

• Rapid earnings growth for health care professionals

• Using more unnecessary medical care

• Built-in inflation in the health care system

• Aging baby boomers

• Other major factors: fraud, waste9-22

What Can You Do to Reduce Personal Health Care Costs ?

• Eat a balanced diet • Keep weight under control• Avoid smoking • Don’t drink excessively• Get sufficient rest, relaxation, and

exercise• Drive carefully • Protect yourself from medical ID theft• Carefully review health care fees• Community health education programs 9-23

Wrap Up

• Chapter Quiz

• Concept Check 9-1- True or False?

• Concept Check 9-2- Health Insurance Terminology

• Concept Check 9-3- What Trade-offs Would You Consider?

• Concept Check 9-5- Disability Insurance Terminology