Family Protection: Health Insurance

Health insurance is one of the most important purchases a family makes. Health care has increased at more than twice the overall rate of inflation, and the typical family cannot cover these costs without some assistance.

A good health insurance program covers hospital, surgical, and medical expenses. Disability income insurance will replace a portion of income lost because of illness or accident.

Health insurance policy benefits vary considerably, so it is essential for you to understand the provisions of the policy before you buy.

This publication presents the various types of health insurance policies, policy features to look for, and tips to consider when planning a health insurance program.

Group or Individual Plans

Group health insurance plans are offered by employers, labor unions, professional, fraternal, or other organizations. Premiums are usually lower than premiums on individual policies, and part of the premium is frequently paid by the employer or sponsoring organization.

In most group plans, members are automatically eligible for insurance just by becoming a part of the group. A physical examination is not necessary, and age is not a factor in determining the cost. However, if coverage is optional, eligible members must enroll within a specified time or they may have to prove good health at a later time.

Each group member has the same coverage as all other members of the group, although some plans offer several options. Under most group plans, other family members can be added at higher premium rates.

Under group policies, protection usually ends when the insured leaves that job or organization. Some group policies will allow a person who leaves to convert to an individual policy without having to show evidence of insurability, but premiums on the converted policy are often much higher than the group rates, and age and physical condition are important factors in determining cost.

In spite of higher rates, there are certain advantages to individual policies: policies can be selected to meet particular individual or family needs; coverage remains in force if the insured changes jobs or leaves the sponsoring organization; other family members can also be covered for additional premiums.

Basic Types of Policies

1. Hospital Expense Insurance covers the cost of basic hospital care. Included in coverage are room and board, routine nursing care, laboratory tests, x-rays, use of operating room, intensive care, anesthesia, drugs, medication, and ambulance service. Some policies pay a specific amount per day, which may or may not cover the actual charges. Other policies cover the full charges for a room - usually a semiprivate room. You might be required to pay a specific amount (a deductible) before the insurance will pay any of the costs. Some policies require you to pay a certain percentage of all costs (coinsurance), sometimes up to a specific amount. Outpatient hospital services are also covered by some policies.

2. Surgical Expense Insurance covers surgeons' fees, either up to a set limit spelled out in the contract, or the full amount of the surgeon's usual fee. Physicians may choose to accept the amount covered by insurance, provided the insurance is paid to the physician instead of to you. This is known as "accepting assignment." In such cases, the physician cannot bill you for any difference between the physician's fee and the amount paid by the insurance company. If the physician does not accept assignment, you must pay the deductible and coinsurance portion of the bill and any other amount not covered by insurance.

3. Medical Insurance provides for payment of physicians' services other than surgery. Some plans also cover some diagnostic and laboratory tests. Maternity care, psychiatric treatment, and extended care are covered in some policies but not in all. Medical expenses may be covered in full, or the policy may specify a maximum amount that will be paid.

4. Basic Health Insurance usually combines the hospital, surgical and medical plans discussed above. Benefits and limitations vary widely.

5. Major Medical Insurance (sometimes called catastrophe coverage) is designed to cover expenses that result from serious injury or prolonged illness. Benefits are greater than those in the basic protection plan. Included, in addition to those in the basic plan, are special nursing care, physical therapy, prescription drugs, etc. In general, major medical covers all care and treatment prescribed by a physician.

Most major medical policies have a deductible clause and a coinsurance provision, but upper limits of the policy are usually quite high. Major medical policies are frequently purchased to supplement basic health care plans. Their coverage starts where the basic plan stops.

6. Comprehensive Medical Insurance is rapidly becoming the common form of health insurance offered through group plans. It is basically a combination of a basic and major medical plan. The deductible is moderate and has no or limited coinsurance. It is more expensive than either basic health insurance or major medical; however, it is usually less expensive than the same coverage purchased in two or more separate policies. It avoids duplication and gaps in coverage that may occur if you buy several different policies rather than one comprehensive plan.

7. Disability Income Insurance provides income payments when you cannot work because of illness or injury. The amount of coverage is generally a percentage of your gross income. Policies can be purchased for short-term or long-term benefits. Although there is a wide range of plans, short-term benefits generally go up to one year, while long-term benefits may be paid either until the insured is 65 or for a lifetime.

Some policies cover accidents only; others cover both accident and illness. Usually payments are made only in cases of total disability, but partial disability policies are available. The waiting period before income payments begin also varies among policies. Seven days to six months is the usual range of waiting periods.

8. Dental Insurance is a relatively new type of health insurance and the fastest growing segment of the health insurance industry. Policy limitations, exclusions, deductibles, coinsurance, and cost vary widely.

Remember that dental expenses are usually not nearly as great as medical expenses. Major oral disease or dental expenses related to an accident should be covered by health insurance.

9. Accident Insurance usually pays a specific amount for a specific injury, such as $500 for the loss of a limb. Many also include a small accidental death benefit. Generally, this is not a good insurance buy. Medical costs of accidents (or illness) should be paid by health insurance, and disability insurance should pay for income lost due to disability resulting from either accident or illness. In the event of death, you should have a life insurance program that provides for economic loss regardless of the cause of death.

10. Hospital Income Plans are also known as supplemental hospitalization insurance. Basically, these plans pay you a specific amount while in the hospital. The benefit is usually figured daily, weekly, or monthly and can be used for any purpose.

Many of these policies do not begin paying benefits until you have been hospitalized several days, and there are usually limits on the amount of time that benefits will be paid. Most policies cover accidents and illness, but some cover accidents only. These policies are frequently sold by mail, and the benefits are often inadequate to cover today's health care costs. They should not be used as disability income protection because they are so limited in time and amount and provide payments only during hospitalization.

11. Dread Disease Insurance covers only a specific disease or illness. The most popular form is one covering the health care costs of cancer. Although these policies may seem inexpensive compared to basic protection and major medical coverage, they are not a bargain, nor do they represent sound planning in spending health insurance premiums. It is best to buy comprehensive coverage that covers costs regardless of cause, including expenses incurred as a result of "so-called dread diseases."

12. Medicare Supplements are available to supplement medicare (administered through the Social Security Administration). Medicare does not cover all health care costs of people who are insured by it. Supplements are designed to pay for the deductible, and some expenses not covered by medicare.

Under Federal law, medicare supplement policies must meet these requirements:

• Clearly disclose the terms of the policy, including benefits, exceptions, and renewal provisions.
• Supplement part A (hospital insurance) for a specified period of time.
• Cover 90 percent of all hospital expenses for 365 days after all medicare inpatient coverage is exhausted.
• Cover at least 20 percent of the eligible medicare expenses under part B (physician and surgeon charges).
• Allow the buyer to cancel a policy within 30 days of purchase for mail-order policies and 20 days for other policies.

Features Common to Most Policies

1. Benefit Payments. Generally, benefit payments fall into one of three categories: 1) service benefit, 2) service benefit with specified maximum, or 3) specified or dollar amount.

Service benefit plan pays all necessary and reasonable charges subject to any deductible or coinsurance clauses in the policy. Payment can be made directly to the hospital or physician or to the insured. It is wise to purchase a policy that pays a service benefit for expenses incurred in the hospital as an outpatient and in the doctor's office. Even though your premiums will rise as costs increase, the benefits will more likely keep up with increased costs.

Service benefit with specified maximum pays up to a specific maximum amount, usually listed in the policy, for each covered service. If the actual cost is less than the stated amount, the policy pays the actual (less) amount. If the actual cost is more than the policy provides, the insurer pays the amount stated in the policy, and you must pay the difference. This type plan is the next most desirable if the maximum for each covered service will pay most of the actual expense. If your policy has this type of benefit, you may eliminate additional out-of-pocket costs by seeking doctors who accept assignment.

Scheduled benefit plan pays a specific dollar amount to you for each day in the hospital or each medical procedure. This is a cash indemnity plan, and you can use the money as you desire. This plan would be the least desirable because it might pay only a small percentage of the actual costs. Although the premium would likely remain level, the benefits would not increase as health-care costs increase. Another disadvantage is that you must be in the hospital before benefits are paid, and some policies have a waiting period of several days before benefits start. This, of course, eliminates coverage for any outpatient procedures.

2. Deductible. This is the amount you pay before the insurer pays any benefits. Some deductibles apply to each injury or illness, and some apply to a given time period, usually one year. Insurance policies include the deductible clause to cut down on small claims. Typically, deductibles start at $100 and go up.

Always check the length of time allowed to accumulate the deductible. Some policies allow as little as three months; others allow a year or more. Some policies have the deductible apply to each illness. This is usually less desirable than for a specific time period. Of course, the longer the time period, the better the policy.

Some family policies apply the same deductible to all family members, so if two or more members of the same family have medical bills in the same deductible period, only one deductible must be paid.

Generally, the larger the deductible, the less expensive the premium. For healthy families with few illnesses, a large deductible may be a better buy. However, the family's financial condition must be able to accommodate the larger deductible.

3. Coordination of Benefits. This provision prevents duplicating or overlapping payments for the same expense from two or more health-care policies. If you have two or more policies with at least one containing this clause, you may be paying for useless duplication of coverage. Generally, it is more economical to purchase the most insurance you can afford in one comprehensive policy.

4. Dependent Coverage. Dependents can be covered under a family plan, but some policies provide fewer benefits to dependents than to the principal insured person. The better policies provide the same coverage to all family members. Benefits for children usually begin at birth and end either at age 19, when they marry, or when they enter the armed services. Some policies continue coverage for disabled or handicapped children as long as they are dependent.

Disability income insurance, which is designed to provide income for living expenses rather than medical bills, covers only the wage earner, not other family members.

5. Coinsurance. Under coinsurance, after you pay the deductible, the insurer pays a portion (usually 70 percent to 90 percent) of the covered expenses. You pay the remaining 30 percent to 10 percent. Some policies set a maximum amount to be paid by you. When you have paid the maximum amount, the insurer pays all of the covered services beyond that amount.

A policy without a coinsurance clause is desirable but may be more expensive than you can afford. If you are choosing a policy with coinsurance, select one with a low percentage to be paid by you. More importantly, be sure to choose a policy with a maximum dollar amount that you must pay. The insurer would pay 100 percent of covered expenses after the maximum amount has been met. This prevents the possibility of very large out-of-pocket expenses.

6. Exclusions. This term refers to illnesses and injuries the insurer will not pay. Policies vary in the number and types of exclusions, but common exclusions are care in a hospital owned and operated by the Federal government, illnesses or injuries covered by worker's compensation laws, injuries or illnesses acquired while serving in the armed services, cosmetic surgery unless required after an accident, intentional self-inflicted injuries, dental care, hearing aids, and eye glasses. Policy provisions related to pregnancy and mental illness vary a great deal.

Provisions and care that are considered experimental are excluded from some policies even though they are prescribed by a physician. Avoid policies with these exclusions. The best insurance policies offer broad coverage with few exclusions.

7. Limitations. Some policies limit benefits to certain physicians, hospitals, or other care facilities. Benefits for expenses from certain causes, such as psychiatric care, may also be limited. The country in which care is received also might be limited. Desirable policies have few, if any, limits on where care is received.

8. Maximum Benefits. Most policies have a maximum dollar amount that will be paid under that policy. Maximum benefits may apply to each illness or accident, a given period of time (usually one year), or over life of the policy. The best policy will not have a maximum; however, since most policies do have this provision, it should be as high as possible.

In most basic health insurance plans, the maximum, regardless of how applied, is far too low for large medical claims. It is not unusual to use the policy's entire coverage and still have a sizable bill to pay. Policy maximums in major medical plans are usually substantial. A maximum of at least $100,000 is suggested; $500,000 is preferable. With some policies it is possible to reinstate the maximum after a specified sum has been used, if evidence of sound health is provided at that time.

9. Pre-existing Conditions. This is one of the most important but least understood of all policy provisions. Pre-existing conditions refer to an illness or condition that began before the insurance policy was issued. Some policies require a waiting period, often a year or more, before paying any benefits related to that particular condition. In some instances, the exclusion may be permanent.

Desirable policies have few waiting periods for pre-existing conditions, and those periods should be short. Avoid policies with permanent exclusions if at all possible.

10. Renewability. There are basically three types of renewability provisions:

• Non-cancellable, guaranteed renewable cannot be canceled by the insuring company as long as the premiums are paid. The company cannot alter any provisions, including premium rates, even though you have incurred high medical and hospital bills. Most of these types of policies can be kept in force until age 65; some can be renewed for life.
• Guaranteed renewable policies cannot be terminated by the insuring company as long as premiums are paid. However, the company can raise rates at its discretion, but no other provision of the policy can be altered. (Rates cannot be raised for you specifically but can be raised for everyone in a given category).
• Optional renewal policies can be changed or canceled at the discretion of the insuring company when the policy comes up for renewal.

Be sure your policy is renewable at your option and not the insurance company's. The premium will be higher, but it will be worth the additional expense.

11. Waiting Period. This provision, also known as the elimination period, refers to the time that must elapse at the onset of the policy before any benefits will be paid, usually two weeks. Longer waiting periods are sometimes specified for certain conditions such as pregnancy or removal of tonsils.

The fewer and shorter the waiting periods, the more desirable the policy.

Health Insurance Shopping Tips

When planning your health insurance program, follow these guidelines:

• Be sure your coverage fits your needs. Consider a high-benefit major medical policy and protection against loss of income.
• The policy should offer broad coverage rather than protection against specific illnesses, such as cancer.
• Know exactly what expenses are not covered by your insurance.
• Avoid duplicate coverage. Look closely at group plans offered by your employer. If both spouses are employed, select the best, most cost-effective coverage for both.
• Is the policy guaranteed non-cancelable and renewable? With this provision the company must renew the policy and can raise the premiums only on the renewal date. With a policy that is optionally renewable, the company can refuse to renew the policy.
• Review your policy every few years. Make sure you have coverage for your family's current situation as well as today's costs of health care.
• Compare policies and premiums. You want the most coverage for your insurance dollar.

By Beverly Riggs Howell, Extension Family Economics and Management Specialist

Mississippi State University does not discriminate on the basis of race, color, religion, national origin, sex, age, disability, or veteran status.

Publication 1553
Extension Service of Mississippi State University, cooperating with U.S. Department of Agriculture. Published in furtherance of Acts of Congress, May 8 and June 30, 1914. Ronald A. Brown, Director