INSURANCE 101: Major Medical Insurance

Unlike the limited coverage provided by basic medical expense plans, Major Medical Insurance, commonly referred to as ‘major medical,’ covers a wider range of medical expenses with generally higher individual benefits and policy maximums.  Benefits can reach a specified amount per year, such as $100,000, or provide unlimited yearly amounts up to a certain lifetime maximum, such as $3 million, for example.

In comparison to ‘first-dollar’ coverage provided by basic medical expense insurance, major medical insurance includes two key features:  ‘deductibles’ and ‘coinsurance.’  Insurers require policyholders to absorb and pay these initial expenses before the insurer begins to pay benefits on a policy.  This greatly reduces the insurer’s costs and allows it to promote a smaller premium payment to maintain the policy.

A Deductible is the amount of medical expense that the policyholder must ‘absorb,’ or pay before benefits are covered by the insurance company.  In a major medical insurance policy, the deductible is covered 100% by the policyholder and is usually based on a calendar year medical expense basis.  Generally speaking, the higher a policy’s deductible, the lower the monthly premium, so insurers offer consumers a variety of choices in deductible amounts in order to remain within the consumer’s budget.

Some policies provide for ‘first-dollar,’ or up-front benefit payments before the deductible is required, while other policies require the deductible to be met before any benefits are payable by the insurer.

Three general types of deductibles exist in major medical insurance including ‘corridor,’ ‘integrated’ and ‘flat’ deductibles.

This amount is covered 100% by the policyholder and is usually based on a calendar year medical expense basis, meaning that each new calendar year (January 1st – December 31st) the policyholder is responsible for satisfying a new deductible if medical expenses occur within the year.

Deductible ‘Carry-Over’
A clause added to a major medical policy that provides for expenses incurred in the final 3 months of the calendar year (October – December) to be carried or ‘rolled over’ and applied toward the next year’s deductible.  Essentially, this clause eliminates the risk of paying multiple deductibles within a short period of time.

Supplementary Major Medical
When basic medical expense benefits are unable to provide complete coverage for a medical cost, supplementary major medical insurance can be used to absorb the additional costs.  An example of coverage under a supplementary major medical plan would be its ability to cover hospital room and board once a basic medical expense runs out.  So in the event that a basic medical expense plan provides 30 days of coverage for room and board, supplementary major medical would kick in on day 31.

Corridor Deductible
Used in a supplementary major medical policy, a corridor deductible works in conjunction with a basic medical expense policy by ‘bridging’ both policies together.

A policyholder’s initial medical expenses, prior to payment of the corridor deductible, are covered 100% by the insurance company on a ‘first-dollar’ basis through the policyholder’s basic medical expense policy.  After the basic policy’s benefits are exhausted, the policyholder then pays the full ‘corridor’ deductible amount for any expenses exceeding the coverage provided by the basic policy.

The policyholder is responsible for paying 100% of the policy’s stated corridor deductible amount.  Any remaining or additional medical expenses incurred by the policyholder beyond the corridor deductible for the remainder of the calendar year are shared through the policy’s stated coinsurance percentage between the insurer and policyholder.

In comparison to a flat deductible that requires payment of the flat deductible by the policyholder before any benefits are payable, a corridor deductible is only payable after basic benefits are first paid and exhausted by the insurance company.

Integrated Deductible
Although not as common as a corridor deductible, an integrated deductible is considered to be ‘integrated’ into a policyholder’s basic and major medical benefits and can be partially or completely satisfied by the basic plan’s first-dollar benefit amount.  This depends on both the integrated deductible amount and the amount of first-dollar coverage provided based on the type and duration of expense incurred by the policyholder under the basic plan.

Examples:
Ed is covered under a supplementary plan that contains a $500 integrated deductible during which time he incurs $600 in medical expenses, all of which is covered first-dollar under his basic policy. As a result, Ed has satisfied his integrated deductible required by his supplemental policy.

Ben is also covered under a supplementary plan containing the same $500 integrated deductible; however his basic plan only covered $300 of his medical expenses due to the type and duration of medical assistance provided.  As a result, Ben is responsible for paying $200 before his major medical benefits begin.

In short, if the basic plan’s benefits cover more than the integrated deductible amount, the policyholder has satisfied the deductible; if not, the policyholder pays the difference up to the deductible amount.

Comprehensive Major Medical
Comprehensive major medical is the most common type of coverage in the health insurance industry because it combines basic and major medical expense coverage to provide extensive health care under a single policy.  Services include, but are not limited to hospital expenses, physician expenses, surgical expenses, diagnostic X-rays, and other medical services and supplies, thus making coverage ‘comprehensive’ for the policyholder.



Flat Deductible
Used in a comprehensive major medical plan, a flat deductible is a fixed annual amount that must be satisfied before an insurance company will begin to provide any benefits, except as prescribed in the policy regarding doctor’s visits or generic prescription coverage.  This amount varies based on the policy chosen, with common deductible amounts of $500, $1000, $2500, $5000, up to a less common $10,000 deductible.  The higher the deductible of a policy, the lower the monthly premium, so consumers are able to choose a deductible amount within their monthly budget.

In comparison to a corridor deductible that is only payable after basic benefits are first paid and exhausted by the insurance company, a flat deductible requires payment by the policyholder before any benefits are payable.

A Family Deductible is usually equal to three times the individual deductible amount in a health policy.

In a family of four, for example, if three members each satisfied the individual deductible in one year, no deductible would be applied to medical expenses incurred by the fourth member.

Deductibles are commonly considered All-Cause, meaning that all medical expenses fall under a single annual deductible.  A less often used Per-Cause deductible must be satisfied for each new medical occurrence in a given year.

Coinsurance
Also referred to as ‘percentage participation,’ Coinsurance is defined as a percentage of additional medical expenses that a policyholder must pay in addition to the deductible.  The insurer and the policyholder split medical costs, with the insurer covering 80% of the cost while the insured covers 20%, also known as 80/20 coinsurance.  Some policies have a 100/0, 90/10, or 70/30 split where the insurance company is always responsible for the higher percentage amount.

Coinsurance can become a costly expense in the event of multiple medical claims, or even as a result of one large claim.  For this reason, comprehensive major medical policies include a ‘stop-loss’ provision that places a limit on the amount of covered medical expenses that a policyholder can be responsible for paying within the calendar year.

Stop-Loss Provision
Stop-loss is defined as the policyholder’s annual financial limit upon satisfying the policy’s deductible and coinsurance dollar amounts.  Also referred to as the policyholder’s ‘out-of-pocket maximum,’ once he or she has satisfied the policy’s deductible and coinsurance amount, any remaining medical expenses are covered 100% by the insurer for the remainder of the current calendar year.

Formula:
Deductible + Coinsurance dollar amount = Policy Stop-Loss (Out-of-Pocket Maximum)

However, an insurer may require a separate prescription drug deductible and copay amounts.  If required, this expense is generally separate from the policy’s stop-loss limit, although an insurer may also include prescription drug costs within the policy’s stop-loss limit.  Therefore, the policyholder’s true financial limit for the calendar year is the sum of his or her premium payments, deductible and coinsurance amounts and any additional prescription drug deductible and copay amounts, if required by the insurer.

Insurance contracts can also vary in how the deductible and coinsurance stop-loss is written into the policy.  For instance, the stop-loss can be stated as a total dollar amount which includes the deductible and coinsurance, such as $2,000 in total annual expenses.  It can also be written as a deductible amount and an additional amount determined by the coinsurance percentage, such as a $500 deductible and an additional 20% of the next $10,000 in medical expenses.  The following two examples show how a health policy’s stop-loss can vary based on how it is written into the contract.

Examples
Policy A has a $2,000 stop-loss (out-of-pocket maximum) which includes a $500 deductible and 20% coinsurance.  Since the policy’s stop-loss occurs at $2,000 and the deductible is $500, the policyholder pays 20% of covered medical expenses after satisfying the $500 deductible until he or she has paid a total of $1,500 in coinsurance.  Even if the coinsurance were 30% or 40%, the policyholder cannot exceed $1,500 in coinsurance expense after satisfying the policy’s $500 deductible, thus limiting the policyholder to a $2,000 stop-loss.

Policy B has a $500 deductible and an additional 20% coinsurance of the next $10,000 in medical expenses.  After satisfying the $500 deductible, the policyholder pays an additional $2,000 in coinsurance (10,000 x .20), thus limiting the policyholder to a $2,500 stop-loss.  If instead the coinsurance percentage is 30%, the policyholder would be responsible for paying $3,000 in coinsurance (10,000 x .30), and in addition to the $500 deductible, the policy’s stop-loss would limit the policyholder to $3,500 in medical expenses for the calendar year.


Again, the policy’s stop-loss depends on how it is written into the contract.  A health policy’s premium amount is largely determined by the deductible and coinsurance percentage chosen by the policyholder.  A higher deductible and coinsurance percentage equates to a lower monthly premium, while a lower deductible and coinsurance percentage equates to a higher monthly premium.

Major Medical Insurance Plan Riders
Most comprehensive major medical insurance plans include available riders from which a policyholder can choose to provide additional coverage.

Prescription Drug Rider
This rider allows a policyholder to purchase prescriptions either under a small co-payment, usually $3-25 dollars depending on the type of medication, or by being reimbursed by the insurer upon submitting a claim for the medication.  Under reimbursement, a policyholder pays for the entire medication at the time of the visit and is later reimbursed by the insurer.

Dental Care Rider
When added to a major medical policy, this rider provides an indemnity payment or a discount for specific services received by any dentist in which the policyholder receives care.

Vision Care Rider
Another added rider, vision care covers part or all of the cost associated with an eye exam on an annual basis, and eyeglasses on a bi-annual basis.

Accidental Supplement (Indemnity) Rider
This type of rider is especially useful in a family plan with active children.  Most comprehensive major medical policies offer additional coverage using the ‘first-dollar’ approach for accidents that might occur.

As an example, a policy holder can choose to include a $2,500 accidental supplement rider.  If any type of accident were to occur to any of the insured members listed on the policy, an indemnity amount up to a maximum of $2,500 (per incident) is paid towards the expense before any deductible amount is paid.

Maternity Rider
This type of rider helps manage the expenses associated with child birth.  It is typically limited to a percentage of the cost of birth, leaving the parents with some out-of-pocket expense.

Term-Life Rider
Some plans also offer a small term-life rider that is actually part of the health insurance policy, as opposed to a separate life insurance plan, thus it is a rider to the health plan, not an independent life policy.  As a term-life insurance rider on the policyholder, he or she names a designated beneficiary for the stated death benefit, should the policyholder die during the term of the life rider.