Health Care Insurance and Cost Management - Majormedical Insurance and Benefits


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.

Practice Question:
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?

$3,750
$4,125
$5,210
$12,100

Answer: B
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.

A. $13,000
B. $12,000
C. $5,000
D. $4,000

Answer: B
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?

A. $2,000
B. $3,600
C. $1,600
D. $2,560

Answer: C
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."
Harry Insurance
Deductible $2,000 $0
Stop Loss $1,600 $1,600

Continuance and Portability


Related Articles
  1. Insurance

    Understanding Co-Insurance

    Co-insurance is a cost-sharing agreement between an insurer and an insured party.
  2. Home & Auto

    Intro To Insurance: Health Insurance

    By Cathy ParetoHealth insurance may be the most important type of insurance you can own. Without proper health insurance, an illness or accident can wipe you out financially and put you and your ...
  3. Economics

    What's a Deductible?

    With insurance, a deductible is the amount of money the insured pays out-of-pocket before the insurance company pays for the loss.
  4. Professionals

    Taxation of Premiums and Benefits

    Taxation of Premiums and Benefits
  5. Insurance

    Don't Overpay for Health Insurance This Year

    Health insurance open enrollment starts Nov. 1. Choosing the right ACA plan (or plan at work) takes figuring out how often you actually go to the doctor.
  6. Personal Finance

    Some US Households Are Still Seeing High Healthcare Costs

    Even though healthcare premiums have remained steady under the Affordable Care Act, many families are still feeling squeezed by healthcare costs.
  7. Taxes

    Don't Miss These Tax Deductions

    Knowing the tax deductions you're entitled to can make or break your bank account. Do you know about all these insurance-related deductions?
  8. Financial Advisors

    How to Deduct Medical Insurance Premiums

    An overview of tax breaks for those who pay medical insurance premiums.
  9. Insurance

    What You Need To Know About Student Health Insurance

    Before heading off to college, read up on health insurance plans.
  10. Professionals

    Medicare and Medical Expenses

    Medicare and Medical Expenses
RELATED TERMS
  1. Out-of-Pocket Limit

    Out of Pocket Limit
  2. Coinsurer

    One of the parties that provides additional insurance to the ...
  3. Deductible

    1. The amount you have to pay out-of-pocket for expenses before ...
  4. Co-Insurance

    A co-sharing agreement between the insured and the insurer under ...
  5. Corridor Deductible

    Expenses that are paid by the insured in excess of an insurance ...
  6. Waiver Of Coinsurance Clause

    Language in an insurance policy that says the insurance company ...
RELATED FAQS
  1. What is the range of deductibles offered with various health insurance plans?

    Explore the wide range of deductibles available on various health insurance plans, and learn factors to consider when selecting ... Read Answer >>
  2. Is it more important to have a low deductible or a low premium?

    Explore the balancing act that exists between insurance deductibles and premiums, and learn the primary factors to consider ... Read Answer >>
  3. What happens if my insurance claim falls below the deductible level?

    Find out what happens if your insurance claim falls below the level of your deductible, including the basics of deductibles, ... Read Answer >>
  4. How is the deductible I paid for my insurance claim treated for tax purposes?

    Find out how your health insurance deductible is treated for tax purposes and under what conditions you may be able to deduct ... Read Answer >>
  5. Why do insurance policies have deductibles?

    Learn the basic concept of an insurance deductible and why they mitigate moral hazards and provide financial viability to ... Read Answer >>
  6. How do I know whether to itemize deductions or take the standard deduction?

    Taking the standard deduction is the easiest and most common method chosen by filers, but many taxpayers may wind up paying ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center