Chapter 15 Health-Care Reform; Individual Health Insurance Coverages

Chapter 15

Health-Care Reform; Individual Health Insurance

Coverages

Copyright ©2014 Pearson Education, Inc. All rights reserved. 15-2

Agenda

• Health-Care Problems in the US• Health-Care Reform• Basic Provisions of the Affordable Care Act• Individual Medical Expense Insurance• Individual Medical Expense Insurance and

Managed Care Plans• Health Savings Accounts• Long-term Care Insurance• Disability-Income Insurance• Individual Health Insurance Contractual

Provisions


Health-Care Problems in the US

• The US Health-care delivery system has four major problems:– Rising health-care expenditures– Large number of uninsured in the population– Uneven quality of medical care– Considerable waste and inefficiency– Defects in financing health care– Abusive insurer practices



• Problem 1: Rising Health-Care Expenditures– Health-care expenditures in the US have

increased substantially over time and are growing faster than the national economy

– Estimated national health expenditures totaled just over $2.8 trillion in 2012, or 17.6 percent of the nation’s GDP.

More than one in six dollars of the nation’s income is spent on health care.


Insight 15.1 How Does U.S. Health Spending Compare with Other Countries?



• Reasons for the increase in spending include:– Increase in consumer demand– Advances in technology– Cost insulation because of third-party payers– Employment-based health insurance– State-mandated benefits– Increased spending on prescription drugs– Cost shifting by Medicare and Medicaid– Higher administrative costs– Rising prices in the health-care sector– Defensive medicine

• Aging of the population is not a major factor



• Problem 2: Many people do not have health insurance coverage– 49.9 million people, or 16.3% of the US

population had no health insurance coverage in 2010

– Groups with large number of uninsured include:• Foreign born• Hispanics, Blacks, and Asians • Young adults• Low income households

– Many people are uninsured because the coverage is not affordable

– Many low income people who are eligible for Medicaid are not aware they are eligible



• The consequences of being uninsured are severe:– The uninsured often delay or skip needed medical

care because of high costs– When the uninsured receive medical care, they

frequently pay more for that care– Uninsured adults are less likely to have a regular

source of medical care– The uninsured often do not have access to regular

screenings and preventive care– The uninsured are sicker an die earlier than people

with insurance


Insight 15.2 More Than Seventy Percent of the Uninsured Have Gone Without Health Coverage for More Than a Year



• Problem 3: Uneven Quality of Medical Care– The quality of care has improved over time– The quality of medical care varies widely

depending on geographic location, type of health insurance plan, and disease being treated



• Problem 4: Waste and Inefficiency– Experts estimate that the present system wastes

more than $800 billion each year• Sources of wasteful spending include:

– Duplication of tests– Medical errors that are largely preventable– Unnecessary tests due to fear of lawsuits– High administrative costs and excessive and

redundant paperwork– Readmissions into hospitals because of

inadequate or ineffective initial treatment– Hospitalizations for preventable conditions– Overuse of expensive medical technology



• Problem 5: Defects in Financing Health Care– Critics argue that the financing of the present

system aggravates many of the problems

• Defects of the current system include:– It is based on the ability to pay, not health needs– The fee-for-service method encourages

unnecessary tests and treatments– Distortions in medical care which result from a

limited supply of physicians in general practice and in rural areas



• Problem 6: Abusive Insurer Practices– Some insurer practices are harmful to both

policyholders and applicants for insurance

• Examples include:– Exclusions for preexisting conditions– Rescission of insurance contracts to limit benefits– Lifetime or annual limits on benefits


Health-Care Reform

• Health care reform has been proposed for many years, but most proposals have failed

• On March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care Act.– The Act was challenged on the basis that it was

unconstitutional.– The Supreme Court ruled that the Affordable

Care Act is constitutional.


Health-Care Reform

• The Affordable Care Act: – Extends health-care coverage to 30 million

uninsured Americans– Provides substantial subsidies to uninsured

individuals and small businesses to make insurance more affordable

– Contains provisions to lower health-care costs in the long run

– Prohibits insurers from engaging in certain abusive practices


Health-Care Reform

• The full law does not become effective until January 1, 2014– Some provisions are now in effect

• Many provisions affect individuals and families, employers, insurers, and health-care providers


Health-Care Reform

• Individual mandate– Beginning in 2014, most citizens and legal

residents must have qualifying health insurance or pay a financial penalty.

– The new law also provides premium tax credits so that eligible individuals can purchase affordable health insurance and comply with the law

– Certain groups are exempted


Basic Provisions of the Affordable Care Act

• Provisions that apply to health insurers include:– Retention of coverage until age 26– Lifetime limits and annual limits prohibited.– Preexisting conditions prohibited– Rescission of insurance policies prohibited– Guaranteed access to health insurance– Grandfathered plans– Minimum medical loss ratio– Limited waiting periods



• The Act requires insurers to cover essential health benefits:– Ambulatory patient services– Emergency services– Hospitalization– Maternity and newborn care– Mental health and substance use disorder services– Prescription drugs– Rehabilitative services and devices– Laboratory services– Preventive and wellness services and chronic disease

management– Pediatric services, including oral and vision care



• Each plan provides essential benefits• Applicants will have a choice of four benefit

categories:– The bronze plan covers 60 percent of the benefit costs– The silver plan covers 70 percent of the benefit costs– The gold plan covers 80 percent of the benefit costs– The platinum plan covers 90 percent of the benefit costs

• Each plan has annual out-of-pocket limits that limit the amount insureds must pay in the form of deductibles, coinsurance, copayments, etc.



• The new law creates an Affordable Insurance Exchange in each state– The exchange is a new transparent and

competitive insurance marketplace where individuals and small firms can purchase affordable and qualified health insurance plans



• The new law provides premium credits to eligible individuals to make coverage more affordable– Eligibility is limited to U.S. citizens and legal

immigrants who meet the income limits– Employees who have access to health insurance

through an employer’s plan are not eligible– Premium tax credits and cost-sharing subsidies are

available to certain eligible low-income individuals and families

– Larger employers must pay a fine for each employee that obtains subsidized insurance through an exchange



• Eligible small employers can receive significant tax credits under the new law– For 2010-2013, a tax credit of up to 35 percent

of the employer’s contribution is available if the employer contributes at least 50 percent of total premiums

– Beginning in 2014, the tax credit for eligible small employers that purchase health insurance through a state exchange will be increased up to 50 percent of the employer’s contribution if the employee contributes at least 50 percent of the total premium costs



• The new law creates a temporary reinsurance program to help employers provide health insurance to early retirees over age 55 who are ineligible for Medicare– This provision applies until January 2014, when

the state exchanges become fully operational– Funds for this provision ran out after 14 months;

new applications are not being accepted



• Beginning in 2014, the Act expands Medicaid to include adults with incomes up to 138 percent of the federal poverty level– Millions of uninsured persons will be eligible for

Medicaid coverage– The Supreme Court ruled that a state cannot be

coerced into expanding its Medicaid program under the Act

– Many state governors have indicated they will not expand their Medicaid programs because of funding concerns



• The new law created a temporary high-risk program, the Preexisting Condition Insurance Plan (PCIP), which provides affordable health insurance to individuals with preexisting conditions until the Affordable Insurance Exchanges begin operating in 2014– Most states had high-risk pools before the new

law was enacted– Participation by states is optional



• The new law contains many provisions that will improve the quality of health care and lower costs, including:– New incentives to rebuild the primary care

workforce– A Prevention and Public Health Fund that will

invest in programs designed to keep Americans healthy

– Establishing a patient-centered outcomes research institute



– Strengthening community health centers– Enhanced screening procedures for health-care

providers to eliminate fraud and abuse– Incentives for physicians to join together to form

“accountable care organizations”– Standardization of billing and rules for secure

electronic exchange of data– Increasing Medicaid payments for primary care

physicians– Paying physicians based on value and not

volume



• In 2012, the CBO projected the Affordable Care Act will cost more than $1.7 trillion over the period 2012-2022– The amount will be partly offset by penalties and

tax increases related to coverage

• Funding for the new law comes from:– Savings in the Medicare and Medicaid programs– Reduced payments to Medicare Advantage plans– New fees on pharmaceutical firms and health

insurers– Other taxes and penalties


Individual Health Insurance Coverages

• Individual medical expense insurance protects an individual or family for covered medical expenses because of sickness or injury– Plans are purchased by people who are not

employed, retired workers, and students

• Most policies sold today have:– Major medical benefits– A broad range of benefits– A calendar-year deductible, coinsurance,

copayments, and annual out-of-pocket limits– Exclusions



• Major medical insurance is designed to pay a high percentage of covered medical expenses incurred by an insured who has a catastrophic illness or injury

• Most individual expense plans provide a broad range of benefits, including– Inpatient hospital benefits– Outpatient benefits– Physician benefits– Preventive services– Outpatient prescription drugs



• Medical expense policies contain a deductible provision– The purpose of the deductible is to eliminate

small claims and the high administrative cost of processing them

– A calendar-year deductible is an aggregate deductible that has to be satisfied only once during the calendar year



• A coinsurance provision states a percentage of the bill in excess of the deductible, which the insured must pay out-of-pocket up to some maximum annual dollar limit– Purpose is to reduce premiums and prevent

overutilization of plan benefits

• A copayment is a flat amount the insured must pay for certain benefits, such as an office visit or generic drug



• The insured’s total out-of-pocket spending is limited by an annual out-of-pocket limit (also called a stop-loss limit), after which the insurer pays 100% of eligible expenses

• Common exclusions to a major medical policy include cosmetic surgery and expenses covered by workers compensation


Individual Medical Expense Insurance and Managed Care Plans

• Most individual medical expense plans sold today are managed care plans– A managed care plan provides covered medical

services to the members in a cost effective manner, with heavy emphasis on cost control

• The most popular plan today is a preferred provider organization (PPO)– A PPO contracts with physicians, hospitals, and

other health-care providers to provide covered medical services to policyholders at discounted fees


Health Savings Accounts

• A health savings account (HSA) is a tax exempt account established exclusively for the purpose of paying qualified medical expenses– The beneficiary must be covered under a high-

deductible health plan to cover catastrophic medical bills

– Contributions can be made by individuals, their employers, and family members

– Contributions and annual out-of-pocket expenses are subject to maximum limits


Health Savings Accounts

– The account holder can withdraw money from the HSA tax-free for medical costs

– An HSA investment account in a qualified plan receives favorable tax treatment

– Proponents argue that HSAs can help keep health care costs down because consumers will be more sensitive to costs, will avoid unnecessary services, and will shop around

– Critics argue that HSAs will encourage insureds to forego preventative care


Long-Term Care Insurance

• Long-term care insurance pays a daily or monthly benefit for medical or custodial care received in a nursing facility, in a hospital, or at home– People who reach age 65 will likely have a 40%

chance of entering a nursing home, and about 10% of them will stay there five years or more

• LTC Plans come in three main forms:– A facility-only policy – A home health care policy– A comprehensive policy



• Common features of LTC policies include:– Daily benefits range from $50 - $300 or more– Most policies are reimbursement policies, which

reimburse for actual charges up to a daily limit– Some policies reimburse on a per diem basis– Many insurers offer policies with pooled benefits,

which provide a total dollar amount that can be used to pay for the deferent types of long-term care services

– An elimination period is a waiting period during which time benefits are not paid



• In a qualified LTC plan, a benefit trigger must be met to receive benefits. Either,– The insured is unable to perform a certain

number of activities of daily living (ADLs), or– The insured needs substantial supervision to be

protected against threats to health and safety because of a severe cognitive impairment

• Nontax-qualified policies often have more liberal eligibility requirements and make benefits available if a medical necessity trigger is met



• Some plans offer automatic benefit increases to keep up with inflation

• Policies are guaranteed renewable• Coverage is expensive, especially at older

ages• Most insurers offer optional nonforfeiture

benefits, which provide benefits if the insured lapses the policy

• Long-term care insurance that meets certain requirements receives favorable income tax treatment


Long Term Care Insurance

• Some states have long-term care partnership programs designed to reduce Medicaid expenditures by eliminating or reducing incentives of some people to rely on Medicaid to pay for long-term care

• To encourage people to purchase private partnership policies, part or all of their assets are protected from the Medicaid spend-down requirements


Disability-Income Insurance

• The financial impact of total disability on present savings, assets, and ability to earn an income can be devastating

• Disability-income insurance provides income payments when the insured is unable to work because of sickness or injury– Income payments are typically limited to 60-80%

of gross earnings



• The most common definitions of total disability are:– Inability to perform the material and substantial

duties of your regular occupation– Inability to perform the material and substantial

duties of your occupation, and are not engaged in any other occupation

– Inability to perform the duties of any occupation for which you are reasonably fitted by education, training, and experience

– Inability to perform the duties of any gainful occupation

– Loss-of-income test, i.e., your income is reduced as a result of sickness or accident



• Partial disability means that you can perform some but not all of the duties of your occupation

• Some policies offer partial disability benefits– Usually, partial disability benefits must follow

total disability– The partial disability benefits are paid at a

reduced rate for a shorter period



• Residual disability applies when you are gainfully employed and not totally disabled but, solely because of sickness or injury, our loss of income is at least 15 percent of your prior income– a pro rata disability benefit is paid to an insured

whose earned income is reduced because of an accident or sickness



• The benefit period is the length of time that disability payments are payable after the elimination period is met

• Individual policies normally contain an elimination period (waiting period), during which time benefits are not paid

• Most policies automatically include a waiver-of-premium provision– If the insured is totally disabled for 90 days,

future premiums will be waived as long as the insured remains disabled

• Policies typically include a rehabilitation provision



• Some policies pay accidental death, dismemberment and loss-of-sight benefits

• Optional benefits include:– Under a cost-of-living rider, the insurer

periodically adjust benefits for increases in the cost of living

– Some insurers provide an option to purchase additional insurance in the future

– A Social Security rider pays an additional amount if the policyholder is turned down for SS disability benefits

– A return of premiums rider refunds part or all of the premiums if the policyholder’s claim experience is favorable


Individual Health Insurance Contractual Provisions

• A guaranteed renewable policy is one in which the insurer guarantees to renew the policy at each anniversary date– Premiums can be increased for the underwriting

class

• Under a noncancellable policy, the insurer cannot change, cancel, or refuse to renew the policy as long as premiums are paid on time– The insurer cannot change the premiums or the

rate structure specified in the policy



• Under a conditionally renewable policy, the policyholder can renew the policy until a specified age– The insurer has the right to decline renewal under

conditions specified in the contract

• Some policies are nonrenewable and expire at the end of the protection period– The policyholder does not have the contractual right to

renew the policy

• Beginning in 2014, applicants for medical expense insurance have guaranteed issue of coverage and renewal



• The Affordable Care Act prohibits the use of preexisting conditions to deny or limit coverage for claims– Health insurers will no longer be able to deny

coverage to applicants because of their medical history

• Policyholders have 10 days to examine a policy– The policyholder may return the policy; the

policy will be void and the entire premium will be refunded



• Some contractual provisions address claims: – Under a notice of claim provision, the insured

must give written notice to the insurer within 20 days after a covered loss occurs

– Under a claim forms provision, the insurer is required to send the insured a claim form within 15 days after notice is received

– Under the proof-of-loss provision, the insured must send written proof of loss to the insurer within 90 days after a covered loss occurs


Individual Medical Expense Contractual Provisions

• The grace period is a 31-day period after the premium due date to pay an overdue premium

• The reinstatement provision permits the insured to reinstate a lapsed policy

• The time limit on certain defenses states that after the policy has been in force for two years, the insurer cannot void the policy or deny a claim on the basis of misstatements in the application, except for fraudulent misstatements

Chapter 15 Health-Care Reform; Individual Health Insurance Coverages

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