Health Insurance
Medical
Insurance pays the large expense that can be incurred when you or a family
member, see doctors, go to the hospital, or seek other costly medical services.
Medical insurance allows you to obtain high quality medical care without severe
financial hardship to your family. If you have assets, or intend to have assets,
those assets can be largely taken away if you run up large medical/hospital
costs. Medical insurance insures your assets and your access to good medical
care. Listed below is a brief description of the major types of medical
insurance. For more detail on the various coverage features go to the important
provisions section.
General
categories of Health Insurance are:
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Indemnity
Plans
Indemnity plans
allow you to choose any doctor or hospital when seeking medical care. These
plans typically have a deductible which must be met
before any benefits are payable to the insured. After this deductible the plans
pay a co-insurance percentage, typically
70% to 90% of billed charges. The remainder of the bill is paid by the insured.
Preferred
Provider Organization(PPO) Plans
PPO
plans usually offer a large list of doctors and hospitals from which you must
select in order to receive maximum benefit. These plans typically have a deductible
and co-insurance like the indemnity plan.
Doctors, hospitals and other medical providers generally agree to charge reduced
fees in order to participate in these PPO plans. Because of this reduced fee,
these plans tend to be less expensive than indemnity plans.
Health
Maintenance Organization(HMO) Plans
HMO plans
usually offer a smaller list of doctors from which the insured may choose. These
plans generally have no deductibles or claim forms. With an HMO you typically
have a small co-pay per visit ($5 or $10) and all other charges are fully
covered by the plan. Generally, each insured selects a Primary Care Doctor and
that doctor is responsible for meeting all your healthcare needs. If you need to
visit a specialist, you must get a referral from your primary care doctor. HMO
providers usually agree to substantially reduced charges, and these lower fees
can be reflected in lower insurance premiums.
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If you do not
work for a company that provides medical insurance, you should purchase
individual medical insurance. Many people assume they will purchase medical
insurance later in life, or if and when they become ill. The problem with this
approach is that if your health is not good, you might not be approved by the
insurance company. Even if approved, you may be subject to pre-existing
condition restrictions that will not pay for your previous illness(es). If you
have a medical insurance policy, you generally do not have to worry about
qualifying in the future, or about preexisting conditions. More importantly, you
have coverage in place in the event that you have a medical problem.
If your company
is willing to pay most of your medical insurance cost, you should be enrolled in
the company's group medical insurance. If the company does not pay a percentage
of your dependents' cost for coverage, you should compare those costs with the
cost of obtaining a private plan. If your dependents are healthy, and your
company is not paying a percentage of their medical insurance, you will often
find a better price by buying an individual plan for your dependents. Individual
insurance can be less expensive because most group insurance plans have to
insure everyone, regardless of health, smoking habits, and age. Therefore, one
can often insure young, healthy dependents at lower cost by purchasing an
individual plan.
Avoid Double
Coverage
Generally, you
will not need to supplement a good medical insurance plan. Owning more than one
policy usually adds unnecessary costs and often does not add any benefit, since
the insurance companies coordinate benefits. Coordination of benefits means that
if one company pays on a medical claim, the other company often reduces the
amount it will pay by that amount. If you currently have a plan that needs
supplementing, you should consider replacing the coverage with a more
comprehensive plan.
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While people
have many different reasons for selecting their medical insurance plan, an
overriding factor is value. For that reason the following sections discuss how
to get the most value out of the insurance plan you select:
Managed
Care Saves Money
Managed care
occurs when insurance companies actively get involved in negotiating fees for
medical services and set guidelines for treatment. While virtually no medical
provider enjoys accepting less payment for services or being told what to do,
most providers agree that managed care saves the consumer money. In fact,
Preferred Provider Organizations (PPOs) and Health
Maintenance Organizations (HMOs) have successfully reduced
medical insurance premiums for millions of people in the United States.
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Preferred
Provider Organizations (PPOs)
PPOs negotiate
with medical providers to reduce their charges. The providers in turn, are
referred business from the PPO. Often PPOs will negotiate fee reductions in
excess of 25%. These reductions are usually reflected in much lower premium
rates for PPO plans, relative to the indemnity plans. If buying a medical
insurance plan that uses a PPO, check to see if the providers you would like to
see are on the provider list of that PPO. If they are, you will usually be
better off purchasing a PPO plan rather than an indemnity plan.
PPO plans can
immediately save you money, even if you do not meet your plan deductible.
Assume you have a $1,000 deductible program, and run up a $1,000 claim.
Obviously, the insurance company will pay nothing since you have not exceeded
the deductible. However, under many PPO plans, the claim would be discounted by
the PPO, and you would only need to pay the doctor $750 (assuming a 25% PPO fee
reduction). You would have saved $250 without the insurance company paying
anything! The main disadvantage of PPOs is that they usually pay a far lower
benefit percentage if you select a provider from outside the network.
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Health
Maintenance (HMOs)
Health
Maintenance Organizations (HMOs) have a different way of saving money. Doctors
are paid a fixed amount per month (capitation). This means they get the same
amount of money whether you are healthy or sick. This gives the doctors less
incentive to do unnecessary surgeries, lab work, etc. Studies have shown that
billions are spent annually on unnecessary tests, surgeries, and
hospitalization. An HMO definitely cuts down on the financial incentives to do
unnecessary surgery or over treat patients.
With HMOs you
usually name one doctor, or group of doctors, to be your primary care doctor. In
order to go to a specialist you must be referred by your primary doctor. This
referral system saves money because unnecessary (and costly) visits to
specialists can be avoided. HMOs also have the advantage of discounting doctor
and hospital fees. Most HMOs have deep discounts negotiated with hospitals. In
order to get the referrals from the HMOs, the hospitals have to cut their fees.
This, in turn, saves the insured money in premium savings.
While HMOs can,
and do, save you money, there are some potential disadvantages. In an HMO, you
must select a primary care doctor from a limited list. Consequently, if you do
not like the listed doctors, an HMO may not work for you. Also, many HMOs
compensate primary care doctors in a way that will reduce their compensation if
they send you to a specialist. This may cause a primary care doctor to attempt
procedures that should be done by a specialist. It is important to understand
this compensation method clearly before selecting an HMO medical insurance plan.
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High
Deductible Plans and Saving Money
If selecting an
indemnity or PPO plan, our analysts recommend selecting plans with high
deductibles. Consider plans with deductibles as high as $1,000 or $2,000 (when
making this assessment, also take into account the maximum out
of pocket limit). When considering which deductible plan represents the best
value, calculate how much you will save by purchasing the higher deductible.
Often the amount saved will be enough to pay the difference between the
deductibles. For example, it would not be unusual for an individual's $1,000
deductible plan to cost $50 per month less than a $500 deductible plan. In this
example, the deductible difference is $500 and the cost difference is $600. This
means that even in the unlikely event that you met your deductible, you would
still save $100 by selecting a higher deductible!
Deductible
The deductible
on a health insurance plan is the amount of money that an insured must pay
before the insurance company pays anything. Usually the deductible accumulates
throughout the calendar year. This means that any eligible medical bills that
you run up between January 1 and December 31 count toward the deductible. Once
you have met your deductible, the insurance company starts paying benefits. You
should be aware that there is usually a family
deductible and sometimes a deductible carryover.
Our consultants generally recommend that you save yourself premium by obtaining
as high a deductible
($1,000 to $2,000) as you can afford to pay.
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Deductible
Carryover
Many
plans offer a provision called a deductible carryover. This provision allows you
to carry over to the next year any unmet portion of the deductible that you, or
your family, run up in October, November and December. For example, assume you
had no medical claims in the first part of the year. In November, you run up
$350 worth of claims. If your deductible was $500, you would start the next year
with $350 of your $500 deductible already met.
Family
Deductible
The family
deductible is the maximum amount of money that your family must pay in
deductibles before the insurance company begins to pay. If your plan has a $500
deductible and you have five family members, you could potentially incur $2,500
of deductible expenses, assuming everyone ran up just $500 worth of claims. To
avoid this, most plans have a family deductible limit equal to two or three
times the individual deductible. So, the family mentioned above would only have
to pay $1000 (2x) or $1,500 (3x) before the insurance company began to pay
benefits. Expenses incurred beyond the family deductible limit would be eligible
for reimbursement at the co-insurance
percentage.
Some family
deductibles specify that two or three family members have to meet the individual
deductible completely. Others only require that the family, in aggregate,
accumulate the family deductible limit before benefits are paid. Obviously, the
requirement that individuals meet their deductible entirely is not quite as good
as the cumulative family deductible provision. The family deductible is
important because it can limit the total amount of deductible that can be
charged to your family.
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Co-Insurance
Percentage
Co-insurance is
the percentage of a medical bill that the health plan will pay after you have
met the deductible. Most plans pay about 80%. A few
plans pay as high as 100% and others pay as low as 50% of covered charges. With Indemnity
plans the co-insurance percentage does not usually change regardless of the
medical providers you choose. With Preferred
Provider Organization plans (PPO), the co-insurance percentage is usually
quite good if you use the PPO providers, but it will drop considerably if you
use non-PPO providers.
If an insured
has to pay 20% co-insurance of a $100 claim that is usually not a large
financial hardship. If, however, you run up a $500,000 medical claim, you might
feel uncomfortable having to pay 20% of so large a figure. That is why insurance
plans change their co-insurance percentages to 100% after an insured has
incurred a certain level of paid expenses (in most cases). This provision is
called the "Out of Pocket Maximum".
Out
of Pocket Maximum
Assume you were
unfortunate enough to run up a $1,000,000 claim. If your health insurance plan
pays 80% of claims, your remaining 20% could be $200,000. Most people can't
afford this big of loss. Consequently, good health insurance policies might pay
80% of the first $10,000 of billed charges and then pay 100% beyond that. In
this example the most you would be liable for is 20% of $10,000 ($2,000) plus
your deductible. In this example, if your deductible was $1,000 your "Out
of Pocket Maximum" would be $3,000 ($1,000 deductible plus 20% of $10,000).
There are
slight terminology differences in referring to the Out of Pocket Maximum. Some
companies use the term "Stop Loss" and other companies use the term
"Co-insurance Maximum". Nevertheless, it is imperative to have a
maximum loss provision in any medical insurance you purchase. Keep in mind that
on many Preferred Provider Organization plans, you could have an unlimited out
of pocket expense if you do not go to preferred providers.
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Benefit
Ceiling
The Benefit
Ceiling is the maximum amount that a medical insurance policy will pay. Most
financial planners suggest that you purchase medical insurance policies with a
benefit limit of at least $1,000,000. Beware of policies that advertise a high
benefit ceiling but have a much lower benefit limit per claim, or a lower
maximum benefit per year.
Some policies
have benefit ceilings for a specific illness. Our consultants warn of several
policies that are currently being telemarketed in which the insurer promises a
benefit ceiling of $2,000,000. Unfortunately, the fine print says that the most
that the company will pay for a specific disease or illness is $500,000. This is
inadequate coverage. To get to their $2,000,000 benefit ceiling in this example,
you would have to have four separate and unrelated illnesses totaling $500,000
each. This is a virtual impossibility. It would be to your advantage to avoid
this type of coverage.
Final
Considerations
There is no
substitute for a comprehensive medical insurance plan. If you think that you can
put a plan together piecemeal by combining several plans, such as a cancer
insurance plan, an accident plan, and a hospital plan, you are fooling yourself.
You will pay more in premium than you would if you bought one good comprehensive
plan. Moreover, you will have several gaps in your coverage and areas of double
coverage that may not be double paid since the insurance companies in most cases
will coordinate their benefits. Our consultants believe that if you purchase one
comprehensive medical insurance plan you will not need other medical insurance
coverage.
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