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Chapter 9
Health and Disability
Income Insurance
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Health and Disability Income
Insurance
Chapter Learning Objectives
LO9.1 Recognize the importance of health insurance in
financial planning.
LO9.2 Analyze the costs and benefits of various types of
health insurance coverage as well as major provisions
in health insurance policies.
LO9.3 Assess the trade-offs of different health insurance
plans.
LO9.4 Evaluate the differences among health care plans
offered by private companies and by the government.
LO9.5 Explain the importance of disability income insurance in
financial planning and identify its sources.
LO9.6 Explain why the costs of health insurance and
health care have been increasing.
9-2
Learning Objective LO9.1
Recognize the Importance of Health
Insurance in Financial Planning
Health Insurance
• Eases the financial burden people may
experience as a result of illness or injury
• Includes:
– Medical expense insurance
– Disability income insurance
9-3
Health Insurance
• Group Plans:
– Covers most individuals
– Usually employer sponsored
– Employer pays part or most of cost
• The Health Insurance Portability and
Accountability Act of 1996 (HIPAA):
– Federal portability standards
– If you change jobs you need not lose your
health insurance.
9-4
Health Insurance
• Group Policy Supplements
– Coordination of benefits = benefits
received from all sources limited to 100%
of allowable medical expenses
• Individual Health Insurance
• COBRA
– Requires many employers to offer
employees and dependents the option to
continue their group coverage for a set
period of time following a layoff
9-5
Learning Objective LO9.2
Analyze the Costs and Benefits of Various
Types of Health Insurance Coverage as
well as Major Provisions in Health
Insurance Policies
Types of Health Insurance Coverage
Basic
Major medical
Both
9-6
Types of Health Insurance Coverage
• Basic Health Insurance
– Hospital expense insurance
• Hospital room, board and other
charges
– Surgical expense insurance
• Surgeon's fee for an operation
– Physician expense insurance
• Pays for physician’s care that does not
include surgery, such as office visits, lab
tests and X-rays
9-7
Types of Health Insurance Coverage
• Major medical expense insurance
– Covers expenses for a serious injury or longterm illness.
– May include a deductible, coinsurance, and a
stop-loss provision (maximum out of pocket)
• Comprehensive major medical insurance
– Low deductible offered without a separate,
basic plan
– Covers hospital, surgical, and other bills
9-8
Types of Health Insurance Coverage
• Hospital indemnity
– Pays you a fixed amount for each day you
are hospitalized
– Does not cover medical costs
– Supplement to the other plans
• Dental expense insurance
– Covers exams, cleaning, x-rays, fillings, root
canals, and oral surgery
9-9
Types of Health Insurance Coverage
• Vision care
– Exams, contact lenses, and glasses
• Dread disease policies
– Pays out for very specific conditions
– Illegal in many states
– AFLAC Cancer Coverage
• Long term care insurance
– Makes sense for those with net worth of
$100,000 to $2 million
– Covers daily help if seriously ill or disabled
– Nursing home or in-home care
9-10
Major Provisions in a Health
Insurance Policy
• Eligibility
– Varies with age, marital status, and
dependency
• Assigned benefits
– Insurance pays your doctor or hospital
directly
• Internal limits
– Fixed amount per day for a hospital room
9-11
Major Provisions in a Health
Insurance Policy
• Copayment
– Cost sharing in the form of a flat dollar
amount you pay, such as $15.00 per
office visit or $10 per prescription
• Service benefits
– Entitlement to specific services
• Benefit limits
– Maximum dollar amount or maximum
number of days in the hospital
9-12
Major Provisions in a Health
Insurance Policy
• Exclusions and limitations
– Pre-existing conditions (Ended
2014)
– Cosmetic surgery
• Guaranteed renewable
• Cancellation and termination
– Explains the circumstances
under which policy can be
canceled
9-13
Learning Objective LO9.3
Assess the Trade-offs of Different Health
Insurance Plans
Trade-Offs in Choosing a Policy
• Reimbursement versus indemnity
– Reimbursement pays actual costs
– Indemnity pays specific amounts
• Internal limits versus aggregate limits
• Deductibles and coinsurance
• Out-of-pocket limit
• Benefits based on reasonable and customary
charges
9-14
Health Insurance Must-Haves
9-15
Learning Objective LO9.4
Evaluate the Differences Among Health Care Plans
Offered by Private Companies and by the
Government
Private Health Care Plans
• Private Insurance Companies
– Individual policy
– Group policy sold to an employer
• Hospital and Medical Service Plans
– Blue Cross = hospital care
– Blue Shield = surgical and medical services
9-16
Private Health Care Plans
• Health Maintenance Organization
(HMO)
– Managed care
• Prepaid health plan
• Primary care physician
– Contracts with selected care providers
– Fixed pre-paid monthly premium
– Focus is on prevention and wellness
– Basic and supplemental services
9-17
Private Health Care Plans
• Preferred Provider Organization (PPO)
–
–
–
–
Several providers to choose from
Costs more than an HMO
More choices, fewer restrictions than an HMO
If you go to a non-PPO provider you pay more
• Point-of-Service (POS)
– Combines features of HMOs and PPOs
– HMO-PPO
– Hybrid or Open-ended HMO
9-18
Private Health Care Plans
• Home Health Care Agencies
– Medical care in a home setting for a fraction
of the cost of hospitals
• Employer Self-Funded Health Plans
– Company runs self-insured insurance
program
– Collects premiums from employees
– Pays medical benefits as needed
9-19
New Health Care Accounts
• Health Spending Accounts (HSA)
– Money contributed to tax-free account
• Health Reimbursement Accounts (HRA)
– Tied to high-deductible policies
– Funded solely by employer
– Unused funds carried over to next year
• Flexible Spending Accounts (FSA)
– Pre-tax dollars
– Funds managed by employer
– Unused funds forfeited at year end
9-20
Government Health Care Programs
• Medicare
– Federally funded health insurance program
– Covers those age 65+ and certain disabled
persons
– Does not cover everything
– Patient liable for difference
– 4 Parts
•
•
•
•
Part A = Hospital insurance
Part B = Medical insurance
Part C = Medicare Advantage Plan
Part D = Prescription Drug Coverage
9-21
MEDICARE
• Part A:
– Hospital insurance helps pay for inpatient care
in a hospital or skilled nursing facility (following a
hospital stay), some home health care and
hospice care
• Part B:
– Medical insurance helps pay for doctors’
services and many other medical services and
supplies not covered by hospital insurance
9-22
MEDICARE
• Part C:
– Medicare Advantage plans available in
many areas
– Those with Parts A and B can choose to
receive all of their health care services
through one of these provider
organizations under Part C
• Part D:
– Prescription drug coverage helps pay for
medications doctors prescribe for
treatment
9-23
MEDICARE
• Medicare Choice
– Created by Balanced Budget Act of 1997
– Allows choice of a managed care plan in
addition to Medicare coverage
• Medigap (MedSup)
– Medicare Supplement Insurance Policy
– Private coverage fills gaps in Medicare Parts
A and B
9-24
MEDICAID
• Medical assistance offered to certain low-income
individuals and families
• Administered by states
• Typical benefits:
–
–
–
–
–
–
–
Physicians’ services
Inpatient and outpatient hospital services
Lab services
Skilled nursing and home health services
Prescription drugs
Eyeglasses
Preventative care for those under 21
9-25
Health Insurance and the Patient
Affordable Care Act of 2010
“Obamacare”
• A Few of the key plan provisions:
– Tax credits to small business to offer
coverage
– Prohibits denying coverage to children with
pre-existing conditions
– Temporary high-risk pool for uninsurable
– Eliminates co-pays for preventative care
– Allows young people to remain on parents’
coverage to 26th birthday
9-26
Learning Objective LO9.5
Explain the Importance of Disability Income
Insurance in Financial Planning and Identify its
Sources
Disability Income Insurance
• Originally designed to protect against loss of
income
• Young, healthy people don’t consider the risks
related to their future earning potential
• Provides regular cash income lost by
employees as the result of an accident or illness
9-27
Sources of Disability Income
• Workman’s Compensation
– Disability from on-the-job accident or illness
• Employer Plans
– Short or long-term group disability policy
• Social Security
– Covers total disability lasting > 12 months
– Starts in the 6th month
• Private Income Insurance Programs
– Supplement other income sources
– Normally provide 40-60% of the income
9-28
Disability Income Insurance
Trade-Offs
• Policy’s definition of disability
• Waiting or elimination Period
• Duration of benefits
• Amount of benefits
• Accident and sickness coverage
• Guaranteed renewability
9-29
Learning Objective LO9.6
High Medical Costs
• 2012 Health care costs ≈ $2.83 trillion
• U.S. has highest per capita health care
cost of any country in the world
• Rapid increase in medical expenditures
– 17.7% of GDP in 2011
• High administrative costs
– Admin ≈ 26% of health care costs
9-30
Reasons for High Health Care Costs
•
•
•
•
•
•
•
•
•
•
•
•
Sophisticated technologies
Duplicate tests
Variety and frequency of treatments
Increasing number and longevity of elderly
Regulations
Increase in emergency treatments
Limited competition
Rapid earnings growth for health care
professionals
Using more unnecessary medical care
Built-in inflation in the health care system
Aging baby boomers
Other major factors: fraud, waste, malpractice
9-31
What is Being Done About the High
Costs of Health Care?
•
•
•
•
•
•
Carefully review health care fees
Incentives to encourage preventive care
Community health planning
Pre-paid group practices
Community health education programs
Paying cash
9-32
What Can You Do to Reduce
Personal Health Care Costs ?
•
•
•
•
•
Eat a balanced diet
Keep weight under control
Avoid smoking
Don’t drink excessively
Get sufficient rest, relaxation and
exercise
• Drive carefully
• Protect yourself from medical ID theft
9-33
Chapter Summary
Learning Objective LO9.1
• Health insurance is protection that provides
payments of benefits for a covered sickness or
injury
• Health insurance should be a part of your
overall insurance program to safeguard your
family’s economic security
• Health insurance plans can be purchased
through group health insurance, individual
health insurance, and COBRA
9-34
Chapter Summary
Learning Objective LO9.2
• Four basic types of health insurance available:
–
–
–
–
Hospital expense insurance
Surgical expense insurance
Physician’s expense insurance
Major medical expense insurance.
• Major provisions of a health insurance policy include:
–
–
–
–
–
–
–
–
–
Eligibility requirements
Assigned benefits
Internal limits
Copayment
Service benefits
Benefit limits
Exclusions and limitations
Guaranteed renewability
Cancellation and termination
9-35
Chapter Summary
Learning Objective LO9.3
Health insurance policy tradeoffs
include:
– Reimbursement versus indemnity
– Internal limits versus aggregate limits
– Deductibles and coinsurance
– Out-of-pocket limits
– Benefits based on reasonable and
customary charges
9-36
Chapter Summary
Learning Objective LO9.4
Health insurance and health care are
available from:
–
–
–
–
–
–
–
Private insurance companies
Hospital and medical service plans such as Blue
Cross/Blue Shield
Health maintenance organizations (HMOs)
Preferred provider organizations (PPOs)
Point-of-service plans (POSs)
Home health care agencies
Employer self-funded health plans
9-37