Insurance Academy

I’m Trying to Figure out my Health Coverage. Rant ahead.

By Patrick Wraight | November 14, 2018

It’s time for another departure from what I normally write about. Or maybe I should just realize that I don’t “normally” write about anything consistent. I finished my annual trip down open enrollment lane. Oh yes. I finally did it. What an adventure! I’m guessing that you’re like me. I start by opening Excel, comparing premiums and out of pocket expenses. Then I dig into the details of how much/procedure I’m going to have to pay. Oh yes. It’s a labor of love.

Wait. You don’t look at your health care options and run a spreadsheet and compare policies? Wait. You don’t look at every possible procedure that you might have next year? You don’t… Sorry. I get a little carried away sometimes.

Since we’re talking about health care benefits, it’s time for my rant about “health insurance” the terms that consumers need to know, and how we can help people to understand how different their health coverage is to their other insurances (and since you asked, how I don’t think we should call it health insurance…)

Why we buy insurance…

In most cases, we buy insurance because we can’t afford the financial impact of a loss. We don’t have the money in the bank to replace the house if it burns down. We don’t have the resources to pay for someone’s medical expenses after an auto accident. In short, we pay a little in advance to secure financing of those possible losses that might occur later.

Health coverage works differently. Rather than financial those possible events, many people buy health coverage to finance events that we are sure will happen. That’s part of why I have health coverage. I can’t afford the expenses that I plan to incur over the next year. When I buy health coverage, I agree to pay the premiums and use the doctors that accept my coverage. In return, the company agrees to pay (subject to my share) the expenses for my health care. However, they don’t pay for what the doctor might bill me for her services, they pay what the doctor agrees to accept for those same services.

Take a look at a recent explanation of benefits and you’ll see that the doctor sent an invoice to the company for $700. The company looked up the transaction code and found that the doctor agreed to receive $250 for that service. They also found that $100 remains on my deductible. So they sent the doctor a check for $120. The doctor will send me a bill for $130, which reflects my deductible and my co-insurance payment.

Fee for services: $700

Agreed upon payment: $250

Deductible remaining: $100

Co-insurance payment: $30

I pay: $130

Company pays: $120

Doctor writes off: $450

“Deductible”

Most property policies have a deductible provision. One homeowners’ policy (based on the ISO HO-3 policy) has the following deductible provision.

Unless otherwise noted in this policy, the following deductible provision applies:

Subject to the policy limits that apply, we will pay only that part of the total of all loss payable under Section I that exceeds the deductible amount shown in the Declaration.

Put simply, any payments that are made because of a claim will be reduced by the deductible amount. The principle is that the insured is made whole, less their share of the loss (the deductible), which they will be required to spend in order to make the contractor whole for the work that they do.

When it comes to medical coverage, if you have a deductible, it works similarly, but differently. On your health coverage, the company will not pay anything toward the bills until your deductible is met. That means that you’re responsible for every dollar the is due until you have spent up to the deductible limit. For example, a family of four has health coverage with an individual deductible of $2,000 and a family deductible of $4,000. That means that for any one person, the payable portion of all medical bills come to the family until $2,000 is paid out.

The family deductible works just a little differently than the individual deductible. The family deductible is always a multiple of the individual deductible and it’s often twice the individual deductible. Every bill that comes in where the deductible applies will reduce both an individual deductible and the family deductible. That means that once the family of four pays out $4,000 toward the family deductible, there is no deductible anymore that policy year. Here’s an example.

James has bills totaling $2,000.

Emily has bills totaling $1,200.

Frank has bills totaling $400.

Indiana hasn’t seen the doctor yet this year.

James has met his individual deductible.

Even though no other family member has met their individual deductible, the remaining family deductible is $400, which could be met by any family member, except for James.

“Coinsurance”

On your commercial property policy, the coinsurance provision requires that you insured your building to a percentage of its value, often the replacement cost. If you fail to insure your building to the proper percentage of value, you will share in the claim because the claim payment will be reduced proportionately.

When it comes to medical coverage, the coinsurance provision means that once the deductible has been met, both you and the company will share in the payment of expenses until you reach your out of pocket limit. Depending on the policy that you have and the type of expense, the coinsurance can be 50%, 60%, 70%, 75%, 80%, 90%, or 100%. All of these numbers represent how much of the fee the company will pay. Many policies include an 80% coinsurance provision for many services. Pay attention to individual services, because some services have a different coinsurance provision. Look at coverage for durable medical equipment (which is often 50% coinsurance and can have expenses capped at a specific dollar amount).

All of that means that once you’ve met your deductible, you still haven’t met your obligations in the policy. You’ll still have to pay a share of the costs until you reach your out of pocket limit.

Is it really insurance?

No.

Is that too short an answer? Fine. Let me explain.

We buy insurance to handle the financial consequences of unforeseen moments in our lives. As I mentioned earlier; I don’t have enough money in the bank to replace my house if it burns down. That’s why I have insurance. We buy our health coverage because we know that we are going to have health expenses in the coming year.

Rather than calling it insurance, it’s a medical service agreement. The doctor agrees to receive a specific payment based on a published schedule of services. The company makes payments based on their agreement with the doctor and with me. They agree not to pay until I generate a specific amount in expenses. Once that threshold is reached, the company and I share in the payments until I reach the agreed upon stop loss (out of pocket maximum). Then they pick up the entire agreed upon cost. The agreement lets the company decide which services are covered and which require an extra look or should be declined.

Of course, I know that it’ll never be called what it really is, but that won’t stop me from trying to remind everyone that it doesn’t work like insurance so it’s not insurance.

About Patrick Wraight

Patrick Wraight, CIC, CRM, AU, is director of Insurance Journal's Academy of Insurance. He can be reached at pwraight@ijacademy.com.

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