Health-Care Reform; Individual Health Insurance
Coverages
Teaching Note
This chapter is the first of two chapters dealing with private health insurance. Chapter 15 is limited primarily to health-care reform, the Affordable Care Act, and important individual health insurance coverages. Chapter 16 discusses group health insurance coverages. Although most people are covered under group insurance plans, individual plans are still important for individuals and families who are not covered by group health insurance.
This chapter is divided into three major parts. The first part discusses the major health-care problems in the United States and the need for health-care reform. The second part examines the major provisions of the new Affordable Care Act that was enacted to reform the present health-care delivery system. The final part discusses several individual health insurance coverages including individual medical expense
insurance, health savings accounts, long-term care insurance, and disability-income insurance.
Outline
I. Health Care Problems in the United States
A. Rising health-care expenditures
B. Large number of uninsured in the population C. Uneven quality of medical care
D. Considerable waste and inefficiency E. Defects in financing health care F. Abusive insurer practices
II. Health Care Reform
III. Basic Provisions of the Affordable Care Act
A. Individual Mandate B. Health Insurance Reforms C. Essential Health Benefits D. Affordable Insurance Exchanges
E. Premium Credits to Eligible Individuals and Families F. Employer Requirements
G. Premium Subsidies to Small Employers H. Early Retirement Reinsurance Program I. Expansion of Medicaid
J. Preexisting Condition Insurance Plan K. Improving Quality and Lowering Costs L. Cost and Financing
IV. Individual Medical Expense Insurance
A. Major medical benefits B. Broad range of benefits C. Calendar-year deductible D. Coinsurance and copayments E. Annual out-of-pocket limits F. Exclusions
V. Medical Expense Insurance and Managed Care Plans VI. Health Savings Accounts (HSAs)
A. Eligibility requirements B. High-deductible health plan C. Contribution limits D. Favorable tax treatment E. Rationale for HSAs
VII. Long-Term Care Insurance—becoming more important as the population ages
A. Chance of entering a nursing home B. Basic characteristics
a. Types of policies b. Choice of benefits c. Elimination period
d. Eligibility for benefits (benefit triggers) e. Inflation protection
f. Guaranteed renewable policy g. Expensive coverage
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i. Taxation of long-term care insurance
VIII. Disability-Income Insurance
A. Meaning of total disability a. Definitions of total disability b. Partial disability c. Residual disability B. Benefit period C. Elimination period D. Waiver of premium E. Rehabilitation provision
F. Accidental death, dismemberment, and loss-of-sight benefits G. Optional disability-income benefits
VIX. Individual Medical Expense Contractual Provisions
A. Renewal Provisions
B. Preexisting Conditions Clause
C. Notice of Ten-Day Right to Examine Policy D. Claims
E. Grace Period F. Reinstatement
G. Time Limit on Certain Defenses
Answers to Case Application
a. Since Lori cannot work as a nurse, she meets the definition of total disability. After a 90-day elimination period, she would receive $2800 monthly for the remainder of the period of disability. b. The policy contains a residual disability benefit. Since Lori’s earnings are reduced 50 percent, she
would receive a pro rata disability income benefit, or $1400 monthly.
c. After two years of benefit payments, the second part of the definition of disability becomes operational. A job as a lab technician is reasonably consistent with Lori’s education, training, and experience. Lori would be considered capable of working as a lab technician. Thus disability benefits would not be payable.
d. Since Lori has a guaranteed renewable policy, it cannot be cancelled. Lori alone cannot be singled out for a premium increase. However, premiums for the underwriting class in which Lori is placed could be increased if premiums for the class are inadequate.
Answers to Review Questions
1. The major health-care problems in the United States are rising health-care expenditures, large numbers of uninsured in the population, uneven quality of medical care, considerable waste and inefficiency, defects in financing health care, and abusive insurer practices.
2. Provisions in the Affordable Care Act that will affect individuals and families include the following: • Individual mandate. Beginning in 2014, most citizens in the United States and legal residents
must have qualifying health insurance or pay a financial penalty.
• Preexisting conditions exclusions prohibited. Children under age 19 with a preexisting condition cannot be denied coverage or rated up because of a preexisting condition. Beginning in 2014, adults cannot be denied coverage or rated up because of a preexisting condition.
• Retention of coverage until age 26. The new law allows young adults to remain on their parents’ policy until age 26.
• Guaranteed access to health insurance. Effective January 1, 2014, policies in the individual and small group markets will be able to purchase qualifying health insurance from a state Affordable Insurance Exchange. The insurance will be sold on a guaranteed issue basis and is guaranteed renewable. Applicants cannot be denied coverage or rated up because of their health.
• Premium credits to eligible individuals and families. Refundable premium tax credits are available to eligible individuals and families with incomes between 133 percent and 400 percent of the federal poverty level, which will enables them to purchase qualified health insurance through a state Affordable Insurance Exchange. The tax credits are based on income and are designed to limit the amount spent on health insurance from 2 percent to a maximum of 9.5 percent of income, which makes the insurance affordable.
• Preexisting Condition Insurance Plan. The new law created a temporary high-risk program, which provides affordable and subsidized health insurance to individuals with preexisting conditions until the Affordable Insurance Exchanges begin operating in 2014. The program is called the Preexisting Condition Insurance Plan (PCIP) and is funded entirely by the federal government.
3. (a) A typical individual medical insurance plan has certain basic characteristics: (1) Major medical benefits
(2) Broad range of benefits (3) Calendar year deductible (4) Coinsurance and copayments (5) Annual out-of-pocket limits (6) Exclusions
(b) A deductible is used to eliminate small claims and reduce administrative expenses. As a result, premiums are lower, and the policy is more affordable. The purposes of coinsurance are to reduce premiums and prevent over utilization of policy benefits.
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4. Federal legislation allows all eligible persons under age 65 to establish health savings accounts and receive favorable income tax treatment. A health savings account (HSA) is a tax-exempt or custodial account established exclusively for the purpose of paying qualified medical expenses of the account beneficiary who is covered under a high-deductible health insurance plan. Health savings accounts have two components: (1) a high deductible health insurance policy that covers catastrophic medical bills, and (2) an investment account from which the account holder can withdraw money tax-free to pay for medical costs.
5. Long-term care insurance has the following characteristics: • The policies typically are guaranteed renewable.
• The types of policies include (1) a facility-only policy that provides care in a nursing facility, assisted living facility, or other facility, (2) a home health-care policy that provides benefits to patients in their homes, and (3) a comprehensive policy that covers care in a nursing home, assisted living facility, and hospice, and also makes available optional benefits for home health care and adult care.
• Purchasers have a choice of benefits, such as daily benefits of $150, $200, $250, or even higher. • Elimination periods range from zero to 365 days; common elimination periods are 30, 60, 100, or
180 days.
• To be eligible for benefits, the insured must meet one of two benefit triggers. The first trigger is that the insured is unable to perform a certain number of activities of daily living (ADLs). The second trigger is that the insured needs substantial supervision because of a severe cognitive impairment.
• Some type of inflation protection is frequently made available as an optional benefit. • Coverage is expensive, especially at the older ages.
• Nonforfeiture benefits may be available if the policy lapses. Examples are a return of part of the premiums paid or a shortened benefit period.
• Long-term care plans receive favorable income tax treatment if certain conditions are met.
• Some states have long-term care partnership programs. People who purchase qualified partnership policies from private insurers must first rely on benefits from their private policies before they are eligible for coverage under the state’s Medicaid program.
6. (a) The definition of total disability is stated in the policy. There are several definitions of total disability:
(1) Inability to perform all duties of the insured’s own occupation
(2) Most insurers today use a modified own occupation definition of total disability. Because of injury or sickness, you are unable to perform the material and substantial duties of your own occupation, and are not engaged in any other occupation.
(3) Inability to perform the duties of any occupation for which the insured is reasonably fitted by education, training, and experience
(4) Inability to perform the duties of any gainful occupation (5) Loss-of-income test in some companies
Some individual disability income policies have a two-part definition. For some initial period of disability, such as two to five years, total disability is defined in terms of your own occupation. After the initial period of disability expires, the any occupation definition of disability is applied. (b) (1) Residual disability means that a pro rata disability benefit is paid to an insured whose earned
(2) The benefit period is the length of time that disability benefits are payable after the elimination period is met.
(3) An elimination period is a waiting period during which time benefits are not paid. Insurers offer a range of benefit periods, such as 30, 60, 90, 180, or 365 days.
(4) Most policies include a waiver-of-premium provision. The insured must meet the definition of disability stated in the policy. If the insured is totally disabled for 90 days, future
premiums will be waived as long as the insured remains disabled.
7. Several optional benefits include a cost-of-living rider, an option to purchase additional insurance, a Social Security rider, and a return-of-premium rider.
8. (a) Guaranteed renewable. Under this type of policy, the insurer guarantees to renew the policy to some stated age. The policy cannot be canceled, and renewal of the policy is at the insured’s sole discretion. However, the insurer has the right to increase premium rates for the underwriting class in which the insured is placed.
(b) Noncancellable. Under a noncancellable policy, the insurer cannot change, cancel, or refuse to
renew the policy as long as premiums are paid on time. In addition, the insurer cannot change the premiums or rate structure specified in the policy.
(c) Conditionally renewable. Under a conditionally renewable policy, the policyholder can renew the
policy until a specified age; however, the insurer has the right to decline renewal under conditions specified in the contract.
9. A preexisting condition is a physical or mental condition of the insured that existed prior to issuance of the policy. A typical clause states that the preexisting conditions are not covered until the policy has been in force for a specified period, such as one or two years, unless the condition is disclosed in the application and is not excluded by a rider. However, the new Affordable Care Act now prohibits the use of preexisting conditions to deny or limit coverage for children under age 19. For adults, the ban on preexisting conditions will become effective January 1, 2014.
10. After the policy has been in force two years, or three years in some states, the company cannot void the policy or deny a claim on the basis of a preexisting condition or misstatements in the application, except for fraudulent misstatements. However, as stated earlier, the Affordable Care Act prohibits insurers from rescinding coverage unless there is fraud or an individual makes an intentional misrepresentation of a material fact. This provision applies to both individual and group coverages.
Answers to Application Questions
1. (a) Total covered medical expenses are $17,400. Mark must pay a deductible of $1000. He must also pay 25 percent of the amount exceeding the deductible up to the maximum annual out-of-pocket limit. Because of the annual out-of-pocket limit, Mark pays only $2000 plus the deductible of $1000. As such, the insurer pays $14,400.
(b) As noted above, Mark pays $2000 plus the deductible. The policy does not cover the loss of earnings.
(c) Yes. Care outside the network is covered. However, the policyholder must pay substantially higher deductible and coinsurance charges.
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2. (a) Because Jeff cannot work at his job, he meets the definition of total disability stated in the policy. After satisfying the elimination period, he will receive disability benefits of $2000 monthly for three months, or $6000.
(b) The policy contains a residual disability benefit, which pays a pro rata disability benefit if earned income is reduced because of an accident or sickness. Because Jeff earns only $1500 monthly, he has experienced a 50 percent reduction in earnings. As such, he can receive a prorated disability benefit, or $1000 monthly.
3. No. Under the Affordable Care Act, insurers are prohibited from denying claims or excluding coverage for children under age 19 with preexisting conditions.
4. Under the Affordable Care Act, insurers must allow young adults to remain on their parents’ policies until age 26. As such, Brandon will be covered.