Health insurance is one way people protect themselves against economic losses due to illness, accident, or disability. Health coverage is available through private insurance companies, service plans, health maintenance organizations, and government programs.
Employers often offer health insurance as part of an employee benefit package, called group health insurance, and health care providers sell it to individuals.
U.S. health care costs were estimated at $1.2 trillion in 1999, a 5.6
percent increase over 1998. In the next five years, health care costs
are expected to increase 6.5 percent annually. Since 1993, health care
spending as a percentage of gross domestic product (GDP) has remained
relatively constant at 13.6 percent, except in 1997, when it fell to 13.4
percent. During the next five years, health care spending as a percentage
of GDP will range from 13.4 to 13.5 percent.
In the United States, administrative costs consume nearly 26 percent
of health care dollars compared to 1 percent under Canada's socialized
system. These costs include activities such as enrolling beneficiaries
in a health plan, paying health insurance premiums, checking eligibility,
obtaining authorizations for specialist referrals, and filing reimbursement
claims.
Why Does Health Care Cost So Much? The high and rising costs of health care are attributable to many factors, including
The use of sophisticated, expensive technologies.
Duplication of tests and sometimes duplication of technologies that yield similar results.
Increases in the variety and frequency of treatments, including allegedly unnecessary tests.
The increasing number and longevity of elderly people.
Regulations that result in cost shifting rather than cost reduction.
The increasing number of accidents and crimes that require emergency medical services.
Limited competition and restrictive work rules in the health care delivery system.
Labor intensiveness and rapid average earnings growth for health care professionals and executives.
Using more expensive medical care than necessary, such as going to an emergency room with a bad cold.
Built-in inflation in the health care delivery system.
What Is Being Done about the High Costs of Health Care? In the private sector, concerned groups such as employers, labor unions, health insurers, health care professionals, and consumers have undertaken a wide range of innovative activities to contain the costs of health care. These activities include
Programs to carefully review health care fees and charges and the use of health care services.
The establishment of incentives to encourage preventive care and provide more services out of hospitals where this is medically acceptable.
Involvement in community health planning to help achieve a better balance between health needs and health care resources.
The encouragement of prepaid group practices and other alternatives to fee-for-service arrangements.
Health insurance is a form of protection to alleviate the financial burdens individuals suffer from illness or injury.
Health insurance, like other forms of insurance, reduces the financial burden of risk by dividing losses among many individuals. It works in the same way as life insurance, homeowner's insurance, and automobile insurance.
You pay the insurance company a specified premium, and the company guarantees you some degree of financial protection. Like the premiums and benefits of other types of insurance, the premiums and benefits of health insurance are figured on the basis of average experience.
Medical expense insurance and disability income insurance are an important part of your financial planning.
Group plans comprise more than 85 percent of all the health insurance issued by health and life insurance companies.
Most of these plans are employer sponsored, and the employer often pays part or most of their cost. Group insurance will cover you and your immediate family. Group insurance seldom requires evidence that you are insurable if you enroll when you first become eligible for coverage.
The Health Insurance Portability and Accountability Act of 1996 (HIPA) legislates new federal standards for health insurance portability, nondiscrimination in health insurance, and guaranteed renewability.
Individual Health Insurance
Individual health insurance covers either one person or a family.
If the kind of health insurance you need is not available through a group or if you need coverage in addition to the coverage a group provides, you should obtain an individual policy-a policy tailored to your particular needs-from the company of your choice.
This requires careful shopping, because coverage and cost vary from company to company.
Disability income insurance protects your most valuable asset: your ability to earn income.
Disability income insurance provides regular cash income lost by employees as the result of an accident, illness, or pregnancy.
Disability income insurance is probably the most neglected form of available insurance protection. Many people who insure their houses, cars, and other property fail to insure their most valuable resource: their earning power. Disability can cause even greater financial problems than death. In fact, disability is often called "the living death."
Disabled persons lose their earning power while continuing to incur normal family expenses. In addition, they often face huge expenses for the medical treatment and special care their disabilities require.
Disability has several definitions. Some policies define it simply as the inability to do your regular work. Others have stricter definitions. For example, a dentist who is unable to do his or her regular work because of a hand injury but can earn income through related duties such as teaching dentistry would not be considered permanently disabled under certain policies.
Good disability plans pay when you are unable to work at your regular job; poor disability plans pay only when you are unable to work at any job. A good disability plan will also make partial disability payments when you return to work on a part-time basis.
Disability Insurance Trade-offs-following are some important trade-offs you should consider in purchasing disability income insurance:
Waiting or Elimination Period. Benefits don't begin on the first day you become disabled. Usually there is a waiting or elimination period of between 30 and 90 days. Some waiting periods may be as long as 180 days.
Duration of Benefits. The maximum time a disability income policy will pay benefits may be a few years, to age 65, or for life. You should seek a policy that pays benefits for life. If you became permanently disabled, it would be financially disastrous if your benefits ended at age 55 or 65.
Amount of Benefits. You should aim for a benefit amount that, when added to your other income, will equal 60 to 70 percent of your gross pay. Of course, the greater the benefits, the greater the cost.
Accident and Sickness Coverage. Consider both accident and sickness coverage. Some disability income policies will pay only for accidents, but you want to be insured for illness, too.
Guaranteed Renewability. Ask for noncancelable and guaranteed renewable coverage. Either coverage will protect you against your insurance company dropping you if your health becomes poor. The premium for these coverages is higher, but the coverages are well worth the extra cost.
Before you buy disability income insurance, remember that you may already have some form of such insurance. This coverage may come to you through your employer, Social Security, or worker's compensation.
Many, but not all, employers provide disability income protection for their employees through group insurance plans. Your employer may have some form of wage continuation policy that lasts a few months or an employee group disability plan that provides long-term protection. In most cases, your employer will pay part or all of the cost of this plan.
Most salaried workers in the United States participate in the Social Security program. In this program, your benefits are determined by your salary and by the number of years you have been covered under Social Security. Your dependents also qualify for certain benefits, however, Social Security has very strict rules. You must be totally disabled for 12 months or more, and you must be unable to do any work.
If your accident or illness occurred at your place of work or resulted from your type of employment, you could be entitled to worker's compensation benefits in your state. Like Social Security benefits, these benefits are determined by your earnings and work history.
Other possible sources of disability income include Veterans Administration pension disability benefits, civil service disability benefits for government workers, state vocational rehabilitation benefits, state welfare benefits for low-income people, Aid to Families with Dependent Children, group union disability benefits, automobile insurance that provides benefits for disability from an auto accident, and private insurance programs such as credit disability insurance, which covers loan payments when you are disabled.
Determining Your Disability Income Insurance Requirements
Once you have found out what your benefits from the numerous public and private disability income sources would be, you should determine whether those benefits are sufficient to meet your disability income needs.
If the sum of your disability benefits approaches your after-tax income, you can safely assume that should disability strike, you'll be in good shape to pay your day-to-day bills while recuperating.
You should know how long you would have to wait before the benefits begin (the waiting or elimination period) and how long they would be paid (the benefit period).
What if, as is often the case, Social Security and other disability benefits are not sufficient to support your family? In that case, you may want to consider buying disability income insurance to make up the difference.
With today's high cost of health care, it makes sense to be as fully insured as you can afford. Combining the group plan available where you work with the individual policies insurance companies offer will enable you to put together enough coverage to give you peace of mind.
A good health insurance plan should
Offer basic coverage for hospital and doctor bills.
Provide at least 120 days' hospital room and board in full.
Provide at least a $1 million lifetime maximum for each family member.
Pay at least 80 percent for out-of-hospital expenses after a yearly deductible of $500 per person or $1,000 per family.
Hospital expense insurance pays part or the full amount of hospital bills for room, board, and other charges.
Frequently a maximum amount is allowed for each day in the hospital, up to a maximum number of days. More people have hospital insurance than any other kind of health insurance.
Surgical Expense Insurance
Surgical expense insurance pays part or the full amount of the surgeon's fees for an operation.
A policy of this kind usually lists a number of specific operations and the maximum fee allowed for each.
Physician Expense Insurance
Physician expense insurance helps pay for physician's care that does not involve surgery.
Like surgical expense insurance, it lists maximum benefits for specific services. Its coverage may include visits to the doctor's office, X rays, and lab tests.
This type of insurance is usually bought in combination with hospital and surgical insurance.
Major Medical Expense Insurance
Major medical expense insurance protects against the large expenses of a serious injury or a long illness.
The costs of a serious illness can easily exceed the benefits under hospital, surgical, and physician expense policies. Major medical pays the bulk of the additional costs. The maximum benefits payable under major medical insurance are high-up to $1 million.
One of these features is a deductible provision that requires the policyholder to pay a basic amount before the policy benefits begin-for example, the first $500 per year under an individual plan and a lesser amount under a group plan. (Sometimes part or all of the deductible amount is covered by the benefits of a basic hospital and surgical plan.)
The other feature is a coinsurance provision that requires the policyholder to share expenses beyond the deductible amount. Many policies pay 75 or 80 percent of expenses above the deductible amount; the policyholder pays the rest.
Some major medical policies contain a stop-loss provision. This requires the policyholder to pay up to a certain amount, after which the insurance company pays 100 percent of all remaining covered expenses. Typically, the out-of-pocket payment is between $3,000 and $5,000.
Comprehensive major medical insurance is a type of major medical insurance that has a very low deductible amount, often $200 or $300, and is offered without a separate basic plan.
This all-inclusive health insurance helps pay hospital, surgical, medical, and other bills.
Hospital Indemnity Policies
A hospital indemnity policy pays benefits only when you are hospitalized, but these benefits, stipulated in the policy, are paid to you in cash and you can use the money for medical, nonmedical, or supplementary expenses.
While such policies have limited coverage, their benefits can have wide use. The hospital indemnity policy is not a substitute for basic or major medical protection but a supplement to it.
Many people buy hospital indemnity policies in the hope that they will make money if they get sick, but the average benefit return does not justify the premium cost.
Dental expense insurance provides reimbursement for the expenses of dental services and supplies and encourages preventive dental care.
The coverage normally provides for oral examinations (including X rays and cleanings), fillings, extractions, inlays, bridgework, and dentures, as well as oral surgery, root canal therapy, and orthodontics.
Vision Care Insurance
A recent development in health insurance coverage is vision care insurance.
An increasing number of insurance companies and prepayment plans are offering this insurance, usually to groups.
Long-term care insurance (LTC) is growing faster than any other form of insurance in the country.
Long-term care is day-in, day-out assistance that you might need if you ever have an illness or a disability that lasts a long time and leaves you unable to care for yourself.
Long-term care can be very expensive. As a national average, a year in a nursing home can cost $40,000.
Explore services available in your community to help meet long-term care needs. Care given by family members can be supplemented by visiting nurses, home health aides, friendly visitor programs, home-delivered meals, chore services, adult day care centers, and respite services for caregivers who need a break from daily responsibilities.
These services are becoming more widely available. Some or all of them may be found in your community. Your local Area Agency on Aging or Office on Aging can help you locate the services you need. Call the Eldercare Locator at 1-800-677-1116 to locate your local office.
All health insurance policies have certain provisions in common. Be sure you understand what your policy covers. Even the most comprehensive policy may be of little value if a provision in small print limits or denies benefits.
The eligibility provision defines who is entitled to benefits under the policy. Age, marital status, and dependency requirements are usually specified in this provision. For example, foster children usually are not automatically covered under the family contract, but stepchildren may be. Check with your insurance company to be sure.
When you assign benefits, you sign a paper allowing your insurance company to make payments to your hospital or doctor. Otherwise, the payments will be made to you when you turn in your bills and claim forms to the company.
A policy with internal limits will pay only a fixed amount for your hospital room no matter what the actual rate is, or it will cover your surgical expenses only to a fixed limit no matter what the actual charges are.
Copayment is a type of cost sharing. Most major medical plans define copayment as the amount the patient must pay for medical services after the deductible has been met. You pay a flat dollar amount each time you receive a covered medical service. Copayments of $3 to $10 for prescriptions and $5 to $15 for doctors' office visits are common.
In a service benefits provision, insurance benefits are expressed in terms of entitlement to receive specified hospital or medical care rather than entitlement to receive a fixed dollar amount for each procedure. Service benefits are always preferable to a coverage stated in dollar amounts.
The benefit limits provision defines the maximum benefits possible, in terms of either a dollar amount or a number of days in the hospital. Many policies today have benefit limits ranging from $250,000 to unlimited payments.
The exclusions and limitations provision specifies the conditions or circumstances for which the policy does not provide benefits. For example, the policy may exclude coverage for pre-existing conditions, cosmetic surgery, or routine checkups.
The coordination of benefits provision prevents you from collecting benefits from two or more group policies that would in total exceed the actual charges. Under this provision, the benefits from your own and your spouse's policies are coordinated to allow you up to 100 percent payment of your covered charges.
Which Coverage Should You Choose?
The most important thing to understand is that the more money you can pay for health insurance, the more coverage you can get.
For medical insurance, you have three choices. You can buy (1) basic, (2) major medical, or (3) both basic and major medical.
If your budget is very limited, it is a toss-up between choosing a basic plan or a major medical plan. In many cases, either plan will handle a major share of your hospital and doctor bills.
In the event of an illness involving catastrophic costs, however, you will need the protection a major medical policy offers.
Ideally, you should get a basic plan and a major medical supplementary plan or a comprehensive major medical policy that combines the values of both these plans in a single policy.
The benefits of health insurance policies differ, and the differences can have a significant impact on your premiums. Consider the following trade-offs.
Reimbursement versus Indemnity. A reimbursement policy provides benefits based on the actual expenses you incur. An indemnity policy provides specified benefits, regardless of whether the actual expenses are greater or less than the benefits.
Internal Limits versus Aggregate Limits. A policy with internal limits stipulates maximum benefits for specific expenses, such as the maximum reimbursement for daily hospital room and board. Other policies may limit only the total amount of coverage, such as $1 million major expense benefits, or may have no limits.
Deductibles and Coinsurance. The cost of a health insurance policy can be greatly affected by the size of the deductible (the amount you must pay toward medical expenses before the insurance company pays), the degree of coinsurance, and the share of medical expenses you must pay (for example, 20 percent).
PRIVATE SOURCES OF HEALTH INSURANCE AND HEALTH CARE
Health insurance is available from more than 800 private insurance companies.
Service plans such as Blue Cross/Blue Shield, health maintenance organizations, preferred provider organizations, government programs such as Medicare, fraternal organizations, and trade unions provide health insurance.
Insurance companies sell health insurance through either group or individual policies.
Of these two types, group health insurance represents about 90 percent of all medical expense insurance and 80 percent of all disability income insurance.
Hospital and Medical Service Plans
Blue Cross and Blue Shield are statewide organizations similar to commercial health insurance companies. Each state has its own Blue Cross and Blue Shield. The Blues plans play an important role in providing private health insurance to millions of Americans.
Blue Cross plans provide hospital care benefits on essentially a "service type" basis. Through a separate contract with each member hospital, Blue Cross reimburses the hospital for covered services provided to the insured.
Blue Shield plans provide benefits for surgical and medical services performed by physicians. The typical Blue Shield plan provides benefits similar to those provided under the benefit provisions of hospital-surgical policies issued by insurance companies.
Prepaid managed care is designed to make the provision of health care services cost effective by controlling their use. Health maintenance organizations are an alternative to basic and major medical insurance plans.
A health maintenance organization (HMO) is a health insurance plan that directly employs or contracts with selected physicians, surgeons, dentists, and optometrists to provide health care services in exchange for a fixed, prepaid monthly premium. HMOs operate on the premise that maintaining health through preventive care will minimize future medical problems.
The preventive care HMOs provide includes periodic checkups, screening programs, diagnostic testing, and immunizations. HMOs also provide a comprehensive range of other health care services.
These services are divided into two categories: basic and supplemental. Basic health services include inpatient, outpatient, maternity, mental health, substance abuse, and emergency care. Supplemental services include vision, hearing, and pharmaceutical care, which are usually available for an additional fee.
Preferred Provider Organizations (PPOs)
A preferred provider organization (PPO) is a group of doctors and hospitals that agree to provide health care at rates approved by the insurer.
In return, PPOs expect prompt payment and the opportunity to serve an increased volume of patients. The premiums for PPOs are slightly higher than those for HMOs. An insurance company or your employer contracts with a PPO to provide specified services at predetermined fees to PPO members.
Preferred provider organizations combine the best elements of the fee-for-service and HMO systems. PPOs offer the services of doctors and hospitals at discount rates or give breaks in copayments and deductibles.
The exclusive provider organization (EPO) is the extreme form of the PPO. Services rendered by nonaffiliated providers are not reimbursed. Therefore, if you belong to an EPO, you must receive your care from affiliated providers or pay the entire cost yourself. Providers typically are reimbursed on a fee-for-service basis according to a negotiated discount or fee schedule.
A point-of-service plan (POS), sometimes called an HMO-PPO hybrid or open-ended HMO, combines characteristics of both HMOs and PPOs. POSs use a network of selected contracted, participating providers. Employees select a primary care physician who controls referrals for medical specialists.
The distinction among HMOs, PPOs, EPOs, and POSs is becoming blurred. As cost reduction pressures mount and these alternative delivery systems try to increase their market share, each tries to make its system more attractive.
Home Health Care Agencies
Home health care providers furnish and are responsible for the supervision and management of preventive medical care in a home setting in accordance with a medical order.
Rising hospital care costs, new medical technology, and the increasing number of elderly and infirm people have helped make home care one of the fastest-growing areas of the health care industry.
Employer Self-Funded Health Plans
Certain types of health insurance coverage are made available by plans that employers, labor unions, fraternal societies, or communities administer. Usually these groups provide the amount of protection a specific group of people desires and can afford.
Federal and state governments offer health coverage in accordance
with laws that define the premiums and benefits they can offer.
Specific requirements as to age, occupation, length of service,
and family income may be used to determine eligibility for
coverage. Two sources of government health insurance are Medicare
and Medicaid.
Medicare, established in 1965, is a federal health insurance
program for people 65 or older, people of any age with permanent
kidney failure, and people with certain disabilities.
Medicare has two parts: hospital insurance (Part
A) and medical insurance (Part B).
Medicare hospital insurance helps pay for inpatient hospital
care, inpatient care in a skilled nursing facility, home
health care, and hospice care. Hospital insurance is financed
from a portion of the Social Security tax. Part A pays for
all covered services for inpatient hospital care after you
pay a single annual deductible ($768 in 1999).
Medicare medical insurance helps pay for doctors' services
and a variety of other medical services and supplies not
covered by hospital insurance. Each year, as soon as you
meet the annual medical insurance deductible, medical insurance
will pay 80 percent of the approved charges for the covered
services that you receive during the rest of the year. In
1999, the annual deductible was $100. Voluntary medical
insurance is financed from the monthly premiums paid by
people who have enrolled in it and from general federal
revenues.
What Is Not Covered by Medicare?
Although Medicare is very helpful for meeting medical costs,
it does not cover everything. In addition to the deductibles
and coinsurance mentioned earlier, Medicare does not cover
some medical expenses at all, including
Care in a skilled nursing facility (SNF) beyond 100 days
per benefit period.
Skilled nursing care in facilities not approved by Medicare.
Intermediate and custodial nursing care (the kind many
nursing home residents need).
Out-of-hospital prescription drugs.
Private-duty nursing.
Routine checkups, dental care, most immunizations, cosmetic
surgery, routine foot care, eyeglasses, and hearing aids.
Care received outside the United States except in Canada
and Mexico, and then only in limited circumstances.
Services Medicare does not consider medically necessary.
Physician charges above Medicare's approved amount. The
government has a fee schedule for physician charges and
places limits on charges in excess of the Medicare-approved
amount when the physician does not accept Medicare's approved
amount as payment in full.
Medigap Medicare was never intended to pay all
medical costs. To fill the gap between Medicare payments and
medical costs not covered by Medicare, many companies sell
medigap insurance policies.
Medigap or MedSup insurance is not sold
or serviced by the federal government or state governments.
Contrary to the claims made by advertising and insurance
agents, Medicare supplement insurance is not a government-sponsored
program.
Most states now have 10 standardized Medicare supplement
policies designated by the letters A through J. These newly
standardized policies make it much easier to compare the
costs of policies issued by different insurers.
All Medicare policies must cover certain gaps in Medicare
coverage, such as the daily coinsurance amount for hospitalization.
Medicaid
Title XIX of the Social Security Act provides for a program
of medical assistance to certain low-income individuals and
families. In 1965 the program, known as Medicaid, became federal
law.
Medicaid is administered by each state within certain broad
federal requirements and guidelines. Financed by both state
and federal funds, it is designed to provide medical assistance
to groups or categories of persons who are eligible to receive
payments under one of the cash assistance programs such as
Aid to Families with Dependent Children and Supplemental Security
Income.
The states may also provide Medicaid to medically needy
individuals, that is, to persons who fit into one of the categories
eligible for public assistance.
