MAJOR MEDICAL INSURANCE AND THE CALCULATION OF BENEFITS
As the name implies, this type of medical insurance is designed to insure against catastrophic loss. Typically, these policies will pay or cover a broad spectrum of loss associated with illness or injury. To properly manage the risk associated with the increasing cost of health care it is essential to understand these policies and how the benefits are calculated. There are two types of major medial plans.
1. Supplemental (or superimposed plan)
- The base plan covers a fixed amount of hospital and surgical costs. Once a participant incurs a set amount of expenses, called the corridor deductible, the participant will be covered under a major medical policy.
- This plan is old and rarely seen anymore.
2. Comprehensive major medical plan
- This is the most common form of medical insurance today.
- As stated, the plan will cover a broad array of loss associated with illness or injury.
- Calculation of Benefits
- This plan has four major categories that a covered individual must understand when calculating the benefits.
Deductible - This is the amount the covered individual must pay before the insurance company will pay any benefits. This is amount is reset annually and varies. Typically a person's deductible will range from $500 - $2,500 dollars. Also, with a family policy the deductible amount is per person.
Co-insurance - This is the percentage that in insured will have to pay once all deductibles have been met. Typically, the co-insurance amount is 80%/20%. For example, if Jack incurs $3,000 dollars in medical expenses and pays his $2,000 deductible the insurance company will pay 80% of the remaining $1,000 ($800) and Jack will pay the remaining $200.
Maximum out-of-pocket - This is the maximum amount of money that an insured has to pay out-of-pocket including deductibles and co-insurance. Once the maximum out-of-pocket limit is reached the insurance company will pay 100% of expenses. This amount is an annual amount. ·
- Stop Loss Method - This method is different in that the maximum a plan participant will have to pay is a percentage of the stop-loss amount plus the deductible. For example, If Jane has a policy with a $500 deductible and a 50% stop loss to $10,000, the maximum she would have to pay is $500 + $5,000 (50% of $10,000) or $5,500.
Benefit Ceiling - This the maximum amount of money an insurance company will pay for the life of the policy.
Tina has a major medical policy with a $1,000 deductible, 75/25 co-insurance, and a $12,000 maximum out-of-pocket. She has already incurred $500 in medical expenses this year. Last month she underwent an operation and the total bill is $15,000. How much will Tina have to pay out of pocket for this operation?
Since Tina has already paid $500 towards her deductible for the current year she has $500 remaining to pay ($15,000 - $500) and leaves $14,500 for the insurance company to cover. Since she has a 75/25 co-insurance she will also have to pay 25% of $14,500 ($3,625). The total she will have to pay is her remaining deductible ($500) plus the co-insurance ($3,625) which equals $4,125.
Using the example above, what is the maximum out-of-pocket expense Tina will ever incur.
Using the maximum out-of-pocket method the maximum he will ever pay out-of-his pocket (annually) is $12,000. This includes the deductible and co-insurance.
Practice Question: Harry has two children, Mary and Jeremy, and they are all covered under Harry's major medical policy. The terms of Harry's policy are $2,000 deductible, 50% co-insurance to $7,000. The maximum benefit is $1,000,000. Harry recently paid $4,000 out-of-his pocket for an operation incurred earlier in the year. Last month Jeremy incurred medical bills of $5,200. How much of Jeremy's expense will the insurance company cover?
Remember there is a difference between the stop-loss method and the maxim out-of-pocket method. The key phrase in the question is "50% co-insurance to $7,000."
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