Chapter 9 Health and Disability Income Insurance Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Health and Disability Income Insurance Chapter Objectives 1. Recognize the importance of health insurance in financial planning. 2. Analyze the costs and benefits of various types of health insurance coverage as well as major provisions in health insurance policies. 3. Assess the trade-offs of different health insurance plans. 4. Evaluate the differences among health care plans offered by private companies and by the government. 5. Explain the importance of disability income insurance in financial planning and identify its sources. 6. Explain why the costs of health insurance and health care have been increasing. 9-2

Objective 1 Recognize the Importance of Health I nsurance 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

Group Plans: –Covers most individuals –Usually employer sponsored –Employer pays part or most of cost The Health Insurance Portability and Accountability Act of 1996 : –Federal portability standards –If you changes jobs you need not lose your health insurance. Health Insurance 9-4

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 Health Insurance 9-5

Objective 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 long- term illness. –May include a deductible, coinsurance, and a stop-loss provision 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 –AFLAC Cancer Coverage Long term care insurance –Virtually unknown 25 years ago –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 –Cosmetic surgery Guaranteed renewable Cancellation and termination –Explains the circumstances under which policy can be canceled 9-13

Objective 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

Objective 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 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

Government Consumer Health Information Websites Healthfinder Medline Plus NIH Health Information Page FDA Medicare

Objective 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 9-26

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 6 th month Private Income Insurance Programs –Supplement other income sources –Normally provide 40-60% of the income 9-27

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 9-28

2009 Health care costs ≈ $2.56 trillion U.S. has highest per capita health care cost of any country in the world. Rapid increase in medical expenditures –16.9% of GDP in 2009 High administrative costs –Admin = 26% of health care costs Objective 6 Explain Why the Costs of Health Insurance and Health Care have been Increasing 9-29

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 9-30

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 9-31

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 9-32