Chapter 9 Insuring Your Health Chapter Outline Learning Goals I. The Importance of Health Insurance Coverage *Concept Check* II. Health Insurance Plans A. Private Health Insurance Plans 1. Traditional Indemnity (Fee-for-Service) Plans 2. Managed Care Plans a. Health Maintenance Organizations (HMO) b. Preferred Provider Organizations (PPO) c. Other Managed Care Plans 3. Blue Cross/Blue Shield Plans B. Government Health Insurance Plans 1. Medicare 2. Medicaid 3. Workers' Compensation Insurance C. Rationale for Health Care Reform 1. Affordable Health Care Act of 2010 *Concept Check* III. Health Insurance Decisions A. Evaluate Your Health Care Cost Risk B. Determine Available Coverage and Resources C. Choose a Health Insurance Plan *Concept Check* IV. Medical Expense Coverage and Policy Provisions A. Types of Medical Expense Coverage 1. Hospitalization 2. Surgical Expenses 3. Physician Expenses 4. Major Medical Insurance 5. Comprehensive Major Medical Insurance 6. Dental Services B. Policy Provisions of Medical Expense Plans 1. Terms of Payment a. Deductibles b. Participation (Co-insurance) c. Internal Limits d. Major Medical Policy: An Example e. Coordination of Benefits 2. Terms of Coverage a. Persons and Places Covered b. Cancellation c. Pre-existing Conditions d. Pregnancy and Abortion e. Mental Illness f. Rehabilitation Coverage g. Continuation of Group Coverage C. Cost Containment Provisions for Medical Expense Plans *Concept Check* V. Long-Term Care Insurance A. Do You Need Long-Term Care Insurance? B. Long-Term Care Insurance Provisions and Costs C. How to Buy Long-Term Care Insurance *Concept Check* VI. Disability Income Insurance A. Estimating Your Disability Insurance Needs B. Disability Income Insurance Provisions and Costs 1. Definition of Disability 2. Benefit Amount and Duration 3. Probationary Period 4. Waiting Period 5. Renewability 6. Other Provisions *Concept Check* Summary Financial Planning Exercises Applying Personal Finance Insure Your Health! Critical Thinking Cases 9.1 Evaluating Zach’s Health Care Coverage 9.2 Roberto and Juanita Get a Handle on Their Disability Income Needs Money Online! Major Topics A sound personal financial plan includes adequate protection against the potentially devastating financial consequences associated with a serious illness or accident. Provisions must be made to meet doctor and hospital bills as well as to replace income lost during periods of extended illness and recuperation. Health care insurance provides a way to meet such costs. It is a vital component of an effective financial plan, because without adequate health care insurance everything that one has accomplished, as well as the likelihood of goal achievement, could quickly be wiped out. Health care insurance is therefore an essential component of financial plans. The major topics covered in this chapter include: 1. The effect of rising health care delivery costs on the need for adequate health care insurance and the importance of including health insurance as a fundamental component of a strong personal financial plan. 2. Types and sources of health care coverage available for covering medical and hospitalization expenses, including indemnity and managed care plans, such as health maintenance organizations, individual practice associations, and preferred provider organizations. 3. The providers of health care coverage, ranging from the federal government's Social Security program to group health insurance policies and individual health coverages. 4. Review of the most important health insurance policy provisions as they relate to terms of payment and terms of coverage. 5. Cost containment provisions commonly found in health insurance plans. 6. Long-term care insurance, including policy provisions and costs. 7. The importance of disability insurance to replace lost wages during periods of extended illness. Key Concepts Recognizing and meeting the need for adequate health care protection is fundamental to effective personal financial planning. Because health care costs are rising faster than the costs of most other consumer products and services, insuring one's health is both necessary and difficult. It is therefore important to be acquainted with the major concepts of health insurance. The following phrases represent the key concepts stressed in this chapter. 1. The need for health care insurance coverage 2. Indemnity (fee-for-service) plans 3. Managed care plans, including HMOs, IPAs, and PPOs 4. Blue Cross/Blue Shield plans 5. Group health insurance 6. Social Security, Medicare, Medicaid and disability income coverages 7. Workers' compensation insurance 8. Types of coverage: hospital insurance, surgical insurance, and physicians expense insurance 9. Major medical insurance and comprehensive major medical insurance 10. Dental insurance 11. Policy provisions for payment, coverage (including COBRA provisions), and cost containment 12. Long-term care insurance 13. Disability income insurance 14. Managed care network 15. Deductibles 16. Co-insurance 17. Coordination of benefits provision 18. Preexisting condition clause 19. Health Insurance Portability and Accountability Act (HIPPA) 20. Cost-of-living adjustment (COLA) and Guaranteed Insurability Option (GIO) 21. Medicare Advantage Plans (Plan C) 22. The Patient Protection and Affordable Care Act and the Reconciliation Act of 2010 (ACA) Answers to Concept Check Questions 9-1. Health insurance protects your financial future against potential economic loss due to illness or injury. With the high cost of health care today, a serious illness could wipe out a family's savings, and a disability could severely lower their standard of living. 9-2. In general, the costs of health care have been increasing at a rate that exceeds the rise in the consumer price index (CPI). Probably, the chief cause of rapidly rising health care costs stems from the increased demand for health care services resulting from the aging U.S. population. In turn, this increased demand has been stimulated by the government's Medicare and Medicaid programs, as well as the rapid growth in the broad base of private health care plans. Also, the acquisition of expensive new health care equipment and facilities by hospitals and clinics has pushed costs upward. A poor distribution of demand for and supply of health care facilities and services resulting in an inefficient allocation of health care resources also contributes to today's high cost of health care. 9-3. The primary health insurance providers are private insurers, including Blue Cross/Blue Shield, group insurance plans, and managed care organizations, and government programs like Medicare, Medicaid, and workers' compensation. 9-4. Group health care insurance consists of health care contracts that are written between a group (usually an employer, union, credit union, college or university, or other organization) and an insurance company. The coverages of each specific plan are subject to negotiation between the group and the insurer. With the exception of disability coverage, most health care coverages are available through group health insurance plans. In most group plans, the employer will pay all or part of the premiums. Unlike group plans, individual health insurance coverages provide protection directly to the policyholders and/or their families. While under a group plan the individual is entitled only to the benefits that are available in the master plan, individuals with individual health insurance coverages can tailor the coverage to their needs. 9-5. With traditional indemnity (fee-for-service) plans, the insurer is separate from the health care provider. The insurer pays the provider or reimburses the patient. There are no limitations on the doctors and hospitals an insured can choose. These plans generally have an annual deductible, after which the insured is reimbursed for a percentage (usually 80%) of usual, customary, and reasonable charges. Managed care plans combine the insurer and the provider, with the insured paying fixed monthly payments to that organization. Members receive medical services from a designated provider group. Managed care providers stress cost controls and preventive health care. Co-payments are low, and most services are covered by the monthly fee. 9-6. HMOs attempt to reduce the costs of health care to families and individuals through more efficient utilization of resources and by practicing "preventive medicine." Health maintenance organizations (HMOs) consist of hospitals, physicians, and other health care personnel who have joined together in a central facility to provide necessary health services to its subscribers. Most HMOs provide physical exams and sponsor pro-health activities in an effort to keep their members healthier. Members are charged a monthly fee based upon the number of persons in the family. The fee entitles them to receive preventive and corrective health care services. Members may also have to pay a $5 to $20 fee each time they use an outpatient service or need a prescribed drug. Members may have little choice of their physician and may not be able to get medical care outside of a given geographic location except in the case of emergencies. An individual practice association (IPA) is often considered to be little more than a variation on a standard HMO because the financial and service arrangements are similar, with only the physical facility being different. As a member of an IPA, one would prepay monthly and be entitled to the health care services offered. However, the services are not provided from a central facility. Instead physicians operate out of their own offices and from community hospitals that provide services to IPA members as well as others. A preferred provider organization (PPO) has characteristics of both an HMO and an insurance plan and can be administered by an insurance company or a provider group. A PPO offers comprehensive health care services to its subscribers within a network of physicians and hospitals who have agreed to accept a negotiated fee schedule. In addition, it provides insurance coverage for medical services not provided by the PPO network. 9-7. Blue Cross/Blue Shield plans are not insurance policies, but rather prepaid hospital expense plans. Blue Cross contracts with hospitals, who in exchange for a specified fee or payment, agree to provide specified hospital services to members of groups protected by Blue Cross. Similarly, Blue Shield plans are contracts providing for surgical and medical services. These plans serve as intermediaries between groups who want these services and physicians who contractually agree to provide them. Until 1994, Blue Cross/Blue Shield organizations were nonprofit. Since that time, the 38 independent local member companies operate as for-profit corporations. They compete for business with private insurance companies. Their income is used to lower premiums and/or expand coverage. 9-8. The formal name for what is commonly referred to as Social Security is old-age, survivor's, disability, and health insurance (OASDHI). Health care benefits are provided under two separate programs: Medicare and disability income. Medicare is a health care plan designed primarily to help persons over age 65 meet their health care costs. It also covers a number of persons under age 65 who are current recipients of monthly Social Security disability benefits. The two primary components of Medicare are: (1) basic hospital insurance covering the first 90 days of illness, with deductibles varying according to the number of days of hospitalization, and (2) supplementary medical insurance, a voluntary coverage that reimburses 80% of approved charges after the $100 deductible is met. Under the basic hospital insurance coverage of Medicare (commonly called Part A), inpatient hospital services are included for the first 90 days of illness. A A deductible is applied during the first 60 days of illness. Co-insurance provisions, applicable to days 61–90 of the hospital stay, can further reduce benefits. . Medicare also covers all or part of the cost of up to 100 days in post-hospital extended-care facilities. Medicare contributes not only to hospital room and board, but also to all hospital inpatient services, limited stays in extended-care facilities, and some post-hospital services such as therapy, rehabilitation, and home health care. Supplementary Medical Insurance (SMI) is Medicare's voluntary supplemental plan (commonly called Part B) providing payment for (1) physicians' and surgeons' services provided at home or in a health care facility; (2) home health service (visits by a registered nurse); (3) medical and health services such as X-rays, diagnostics, laboratory tests, rental of necessary durable medical equipment, prosthetic devices, and ambulance trips; and (4) limited psychiatric care. It is financed by charging premiums ($66.60 per month in 2004) to those people who elect to participate in the plan. Anyone age 65 or over is eligible to participate in this program. The program has deductibles, coinsurance, and internal limits. For up-to-date information on changes in the Medicare program, pull up their Web site at www.medicare.gov. Medicaid is a state-run public assistance program that provides health insurance benefits to those of low economic means. Each state has its own regulations regarding eligibility and services covered. The states primarily fund their own Medicaid programs, although the federal government also contributes to funding. 9-9. Worker's compensation insurance statutes have been enacted in every state and by the federal government to provide compensation to workers for job-related illnesses or injuries. In most cases, compensation provides benefits covering medical expenses, rehabilitation, disability income, and scheduled lump-sum amounts for death and certain injuries, such as dismemberment. Employees receive worker's compensation coverage regardless of whether they have other health care insurance or not. Several important benefits are lump-sum payments and second-injury funds. Lump-sum payments are lump sum amounts normally paid to employees who suffer dismemberment in work-related accidents or to their beneficiaries in the case of death. A schedule of lump-sum payment benefits for various injuries is normally provided for the insured. Second-injury funds are established as part of the worker's compensation statutes in order to relieve employers of the additional worker's compensation premium burden they might incur if an already handicapped worker sustained further injury on the job. These funds protect the employer from developing an adverse claims experience (that would result in increased premiums) merely because they hired an already partially handicapped worker. 9-10. The key provisions of ACA (usually called the Affordable Health Care Act) include: • The individual mandate, which requires all Americans to have or buy health insurance by 2014 or pay a penalty • The coverage of young adults or children of those insured by insurance companies, up to the age 26. • The coverage of individuals with pre-existing health conditions without limiting or setting unrealistically high insurance rates. • Health care insurance exchanges, which provide a marketplace for individuals and businesses for more transparency in the comparison of policy features and premiums. • Small firm coverage, whereby a law requires small firms with more than 50 full-time employees to provide health insurance coverage or pay extensive fines. The Affordable Care Act requires students to have a level of coverage that exceeds the plans historically offered by most colleges. Consequently, premiums are rising by several hundred dollars a year to around $2,000 per student. Indeed, some colleges are dropping student health-insurance plans due to their higher costs. If a student is not covered under a parent’s health care plan, he/she must consider an individual health insurance plan. If a parent’s policy is relied on, be careful if the college is in another state. Make sure that your plan's network of preferred doctors and hospitals extends there. If not, the highest level of coverage may not be available. For some family plans, out-of-state coverage is limited, so a high-deductible student health plan might be the way to go, because it makes sense for students to return home for all routine care and prescriptions. The Affordable Care Act may make some student health plans more appealing. It prohibits all plans from having “lifetime coverage limits” that could limit maximum coverage in the case of a serious illness or accident. The new law also prohibits insurers from excluding students under 19 for pre-existing conditions. Thus, answers about how the ACA will affect students can include some or all of the following: (1) the ability to extend coverage under a parent’s health care policy for students under 26; (2) the potential to have less take-home pay due to the higher Medicare taxes proposed; (3) the ability for some students with pre-existing medical conditions to get better health care policies; (4) health care coverage for all students that do not currently have health care insurance, or face the prospect of a fine. 9-11. Four methods for controlling the risks associated with healthcare expenses include: 1. Risk avoidance—trying to avoid exposure to a particular risk so that loss will not occur. Not driving a car would be a way to avoid having an auto accident. 2. Loss prevention—taking preventive measure to try to keep a loss from occurring. Not driving over the speed limit and never driving after drinking would be examples of loss prevention. 3. Loss control—taking measures to control the amount of loss in case it actually occurs. Wearing a seat belt when riding in an auto helps keep your head from going through the windshield or you being thrown out of the car should an accident occur. 4. Risk assumption—you pay for the loss yourself. It is not economically feasible to insure against every small loss, so you simply pay out of pocket for the loss or do without. You back into a light post and knock out your taillight. The amount of loss is less than your deductible on your auto insurance, so you pay for the taillight yourself. Not fixing it is not a good option in this instance, as your car would not pass inspection, or you might get a ticket. 9-12. Employees should consider numerous factors in evaluating their employer-sponsored health insurance plan. If their employer offers a flexible-benefit plan, the employee must decide which benefits to choose for the amount of money allotted by the employer toward benefits. If the employee needs more coverage, he or she must decide whether to purchase the extra from the employer's plan or from another source. If the employer offers a medical reimbursement account to which the employer contributes, the employee can decide whether to use that money or allow it to build up against some unknown future expenses. If the employee's spouse also receives benefits from his or her employer, then the couple must decide how to best coordinate the coverages of the two plans. If the employee loses his or her job, then he or she must decide whether to continue health insurance coverage through COBRA or not. 9-13. Several sources of health insurance are available to supplement employer-sponsored health insurance plans. These include private insurance companies as well as Blue Cross/Blue Shield. Some amount of healthcare coverage is available on homeowner's and automobile insurance policies, but the coverage is limited and applies only in certain circumstances. Several government programs are available, such as Medicare for those 65 or older, Medicaid for those of low economic means, medical care for military or retired military personnel, and public health programs to treat communicable diseases, handicapped children, and mental health disorders. 9-14. The five questions appear on the same page as this concept check question. Student answers will vary depending on their current needs and situations. 9-15. Hospitalization insurance policies offer reimbursement plans which generally pay for (1) a portion of the per day hospital room (semi-private) and board charges. This typically includes floor nursing and other routine services. These policies also cover (2) ancillary expenses, such as the use of the operating room, laboratory tests, X-ray examinations, and medicine received by the patient while hospitalized. Surgical expense insurance provides coverage for the cost of surgery in or out of the hospital. Payment is based on either service benefits, which pay expenses that are considered "reasonable and customary" for that procedure, or on a schedule of benefits that prescribes the maximum amount the insurer pays for listed surgical procedures. Usually, surgical expense coverage is quite extensive and will pay for almost any type of surgery that is required to maintain the health of the insured. Surgical expense coverage is typically sold in conjunction with a hospital insurance policy either as an integral part of that policy or as a rider. 9-16. Major medical coverage is designed to finance medical costs of a more catastrophic nature and provides benefits for nearly all types of medical expenses resulting from either illnesses or accidents. The amounts that can be collected under this coverage are relatively large. Major medical coverage is typically written with provisions to limit payments, including deductibles, participation or coinsurance, and internal limits. Most policies now cap the insured's out-of-pocket payment through deductibles and coinsurance; after a certain dollar amount is paid by the insured, the company pays 100% of covered costs. Someone who must purchase insurance as an individual on a limited budget needs this protection the most. A comprehensive major medical insurance plan combines the basic hospital, surgical, and physician’s expense coverages with major medical protection to form a single policy and is usually the most desirable type of coverage to have. Usually the deductible is low, often $100 to $500. There may be no coinsurance feature. Comprehensive major medical is frequently written as a group policy, although individual policies are available. 9-17. a. Deductibles, which require the insured to pay the first so many dollars, are typically relatively large, usually ranging from $500 to $1,000 per illness or accident. Some plans have annual deductibles or else specify the initial amount of the cost of each illness or accident for which the insured is responsible. The insurance policy will reimburse only amounts above the deductible. A greater deductible usually results in less being paid by the health care plan for any particular illness or accident, but it usually results in lower premium payments by the insured as well. The deductible reduces the insurer's administrative costs and the frequency of small claims. b. Coinsurance, or participation, provisions stipulate that the company will pay only some portion, normally 80 or 90%, of the amount of the covered loss in excess of the deductible. The insured participates by "coinsuring" or paying the remainder. It is used to discourage feigning illness or unnecessary medical expenses. c. Sometimes individuals are covered under several health care policies—for example, both spouses work and each is provided with family health coverage. Because health insurance policies are not contracts of indemnity, it may be possible for the insured individuals to collect multiple payments for the same illness or accident. However, many health care policies will have a coordination of benefits provision (also called "nonduplication procedure" or “other insurance”) which reduces multiple benefit payments. The insurance companies involved will coordinate their payments so that the reimbursement amount is not greater than the actual charges incurred. The presence of these clauses should help to lower policy premiums as well as prevent “moral hazard,” the temptation to file a claim or even injure oneself in order to profit. 9-18. When employees voluntarily or involuntarily (except in the case of gross misconduct) leave their jobs and therefore give up membership in the insurance group, they can lose their health insurance. In 1986, Congress passed the Consolidated Omnibus Budget Reconciliation Act (COBRA) to allow employees to elect to continue coverage for themselves and eligible family members through the group for up to 18 months. Exercising the COBRA conversion involves timely payment of premiums by the former employee (up to 102% of the company cost) to the former employer. Retirees and their families are also eligible. Most states provide for conversion of the group coverage to an individual policy without evidence of insurability. 9-19. Typical cost containment provisions include the following: • Pre-admission certification: Insurance company must approve scheduled hospitalization and an estimated length of stay. • Continued stay review: Insurer must approve extensions of hospital stay beyond the number of days set in pre-admission certification. • Second surgical opinion: Many group policies require second opinions on specific nonemergency procedures to confirm the surgical need and, in their absence, may reduce the surgical benefits paid. • Waiver of coinsurance: Provides waiver of co-payment and/or deductible (pays 100%) for certain cost-saving procedures, such as outpatient surgery and use of generic pharmaceuticals. • Limitation of Insurer's Responsibility: Many policies limit the amount of costs the insurer must pay to those considered "reasonable and usual." This provision sometimes limits the type and place of medical care for which the insurer will pay. Requiring a second surgical opinion reduces the number of unnecessary nonelective and/or elective surgeries, thereby holding down the insurer's costs. Many conditions can now be treated without surgery or with surgery that is not so invasive and requires less hospital and recovery time for the patient. This provision obviously benefits patients as well in that they are not subjected to the trauma and recovery from unnecessary surgery as well as possibly wages lost due to not being able to work. 9-20. Most regular health care policies do not cover the cost of long-term care. As more of the population lives longer, there is a greater likelihood that many people will at some point in their lives be unable to care for themselves for an extended time period. Long-term care insurance covers the cost of medical, personal, and social services provided at home, in a community program such as an adult day-care center, or in a nursing home for those who require long-term care as a result of a catastrophic illness such as Alzheimer's disease, heart disease, and stroke. This care can be very expensive, and it is therefore important to consider adding long-term care coverage when developing financial plans. 9-21. a. Type of care: Policies will cover care in either a nursing home or in the home of the insured, or both. Obviously, a better policy will cover both situations. b. Eligibility requirements: These are used to determine whether a person qualifies for payment and use "gatekeeper provisions" that may vary considerably. Some policies pay if a physician orders long-term care; others base their determination on the number of activities of daily living (ADLs) the insured cannot perform. c. Services covered: Policies may differ in the levels of care that they will cover (skilled, intermediate, or custodial care). The broader the coverage, the better, because even custodial care at a nursing home can be very expensive over a long period of time. Other long-term care policy provisions include: • Daily benefits—sets a daily maximum for reimbursement. • Benefit duration—how long the benefits will be paid; ranges from one year to the insured's lifetime. • Waiting period—period after eligibility begins during which no benefit payments are made; the longer the waiting period, the lower the premium. • Renewability—guaranteed renewability assures continued coverage as long as premiums are paid; an optional renewability provision means that the insurer can terminate coverage and should obviously be avoided. • Preexisting conditions—excludes coverage for conditions that exist when the policy is issued, usually for 6 to 12 months. • Inflation protection—provides for increased coverage to keep up with inflation; an additional premium is charged for this rider. • Premium levels—the age of the individual when the policy is initiated determines the premium; premiums go up dramatically with age. 9-22. Before spending money for long-term care insurance for yourself or an elderly relative, you must consider such factors as whether there are significant assets to protect, your ability to pay the expensive premiums, likelihood that you will become disabled due to advanced age or family history of disease, and availability of family members to provide care. If you decide to purchase a long-term care policy, you should do so while you are healthy and middle aged because once you have a serious disease or become “older,” you either aren't eligible for a policy or the premiums will be exorbitant. Before you buy a policy, it's important to find the right types of coverage for your needs and to understand what the policy covers and when benefits start. Good long-term care policies include several levels of care. 9-23. Disability income insurance provides a family with weekly or monthly payments to replace income when the insured person is unable to work as a result of a covered illness, injury, or disease. Some companies also offer disability income protection for an unemployed spouse. Such insurance helps pay for the services that the spouse would normally provide. Waiting period provisions require that the insured wait a specified length of time after inception of the disability before the payment begins. Its purpose is to omit coverage for frequent small losses that are very expensive to administer. A family can save a substantial amount in premiums by purchasing a policy that has a relatively long waiting period. Insured individuals can generally trade off increased waiting periods for an increased duration of benefits. This is advisable since the primary need is generally for prolonged long-term disability coverage. However, families must make sure to provide for themselves an adequate cushion account or some means to see them through this period. 9-24. Disability or nondisability of an insured is defined in various ways. The more restrictive and less desirable definition states that individuals are disabled if they no longer have the capacity to undertake employment for which they are reasonably suited based on their education, training, or experience. Under this any occupation definition, a person who could pursue a related or different career and still be gainfully employed would not qualify for benefits. Hence, a family’s standard of living could decline considerably. More liberal policies classify insured individuals as disabled if they simply cannot pursue at least one primary duty of the occupation for which they have been trained, called the own occupation definition. This is a much more desirable and usually a more expensive coverage, but the family’s standard of living will not suffer nearly as much. An insured who suffers a presumptive disability—dismemberment, total loss of eyesight or hearing—is considered totally disabled, and no employment test applies. 9-25 The benefit duration determines whether the disability coverage will be for a specific time period or for a lifetime. The choice depends on whether or not the insured has good pension benefits that start at age 65 so that disability coverage would no longer be necessary. Financial Planning Exercises 1. The Blakes have many things to consider in choosing their health insurance. If they select the indemnity plan, they will be able to choose the best doctors and hospitals available for their son's future surgeries. However, this plan will cost them $85 more per month in premiums, or $1,020 per year. Additionally, each family member will have a $500 deductible, potentially another $2,000 out of pocket for them. Then after the deductible is met, the Blakes will still have to pay 20% of the covered costs. While that may not sound like much, 20% on a $100,000 operation is $20,000, and it's quite possible that their son's expenses may go even higher. Some indemnity policies require only 3 family members to meet their deductibles (the 4th and subsequent family members would not have to meet their deductibles) before coverage kicks in, and some indemnity plans also have a stop-loss provision which limits the family's total out-of-pocket amount. The Blakes should definitely check to see if this plan has these provisions. The group HMO would definitely be cheaper for the Blakes. Not only are the monthly premiums less, but also there are no deductibles to meet, just $20 co-pays for doctor visits and prescription drugs. The tradeoff would be their lack of ability to choose the doctors and hospitals to treat their son. They should thoroughly research the quality of the doctors and hospitals available through the HMO as well as the HMO's reputation for servicing its clients. Will the HMO be easily convinced to go out of their network to find a specialist if they do not currently one have that would meet the Blakes ‘needs? If the HMO does have the appropriate specialists, are they of the highest caliber? If the Blakes ‘are not pleased with their findings concerning the HMO, they should go with the indemnity plan if they possibly can. It could literally mean the difference between life and death for their son. Concerning other options open to the Blakes, Ken probably makes too much money for their family to qualify for any public assistance programs for their son's surgeries and treatment. However, they should still check to see what is available in their state. Also, they should see if there are any nonprofit organizations that would help with some of the cost of their son's care. Finally, they should research other insurance companies, both for full coverage and for a supplemental policy to help defray some of the costs. It's likely that other insurance will not be as cost effective as their employer's, but they won't know their options unless they check. 2. David Chen’s total costs: In this example, the HMO is the more cost-effective coverage. Other things to be considered are the level of care received, the competence of the available physicians and the quality of the hospital facilities. 3. Students should submit Worksheet 9.1 for each of the three policies. Answers will vary, depending upon the Internet information that they gather. Service Policy #1 Policy #2 Policy #3 Hospital care Surgery (inpatient and outpatient) Office visits to your doctor Maternity care Well-baby care Immunizations Mammograms Medical tests, x-rays Mental health care Dental care, braces and cleaning Vision care, eyeglasses and exams Prescription drugs Home health care Nursing home care Services you need that are excluded Choice of doctors Location of doctors and hospitals Ease of getting an appointment Minimal paperwork Waiting period for coverage 4. Pros of long-term care insurance include: protection of assets should a covered family member need lengthy nursing home care and the security of arranging in advance for coverage for lengthy nursing home care. The disadvantages are: 1) the high cost of this coverage; 2) by the time a person needs this coverage, inflation and rising health care costs may have rendered the benefits inadequate; and 3) if the covered person never needs these services, the premiums paid may be lost. Student assessment of their family's needs will differ, but they should consider if there is a history of debilitating disease in their family, if a family member currently has a health problem, who would be available to care for their family members, and if they can afford the premiums. 5. a. Worksheet 9.2 for Bruce Kaplan: b. Bruce needs to supplement his employer's disability insurance with an individual policy. The minimum he currently needs is $1,500 per month, and he will need $3,750 per month once his employer's plan coverage ends. He should decide how long his own assets would cover immediate needs so that he can choose a policy with a longer waiting period. Own-occupation coverage is more expensive than any-occupation, but the cost would be lessened if he purchases one with a 6-month waiting period which would kick in when his employer’s plan is exhausted. If Bruce feels he cannot afford own-occupation coverage, he should evaluate what other occupations he would consider if he were disabled. A noncancellable policy is preferable because the premiums will not go up, but a guaranteed renewable policy would be more affordable. Other factors to assess include the length of the waiting period, the age at which benefits expire, and the availability of residual benefits if he is able to work part-time. 6. Student answers will vary based on individual circumstances. Students should submit Worksheet 9.2 to support their answers. Before purchasing disability coverage, you should determine how much you need using some of the following factors: • Evaluate existing and available resources, such as employer and government plans. Understand the eligibility requirements, waiting periods, etc. • Decide the type of plan—own-occupation or any-occupation—you will accept. • Choose the benefit amount and duration, taking into account probationary and waiting periods, and other features. • Get quotes from several companies, choosing the lowest-cost option with the desired features provided by a highly-rated carrier. 7. Answers will vary. Students should discuss the following factors: • Quality of network, physicians, hospitals, and services • Freedom of choice and its importance • Ability to see out-of-network providers • Coverages required • Personal health considerations • Cost considerations The type of plan the student selects should be appropriate given the individual's analysis. Steps that reduce health care costs include: • Good health practices, such as proper nutrition, exercise, etc. • Avoidance of unnecessary risks • Self-insurance for a portion of health care costs (through a higher deductible) Solutions to Critical Thinking Cases 9.1 Evaluating Zach’s Health Care Coverage 1. The $3,000 deductible feature means that the insurance will not cover the first $3,000 of eligible expenses for the year (or possibly for each illness or accident in which Zach is involved, depending on the policy terms). The 80% coinsurance clause indicates that the insurer will pay only 80% of the amount of covered losses in excess of the deductible. The internal limit of $180 per day on hospital room and board indicates that the maximum the insurer will pay for hospital room and board is $180 per day. The internal limit of $1,500 on surgical fees indicates that the insurer will pay no more than $1,500 for such expenses. Because Zach’s medical expenses exceed $3,000, it appears that his policy will pay 80% of the costs above this amount. However, Zach’s hospital room and board charges exceed the $180 per day internal limit, so this constraint will increase the portion of the costs that he must pay. The same is true for the surgical fee, because his policy's internal limit for a maximum surgical fee reimbursement is $1,500. 2. The total expenses of the accident, as well as the division of these expenses between the insurer and Zach, are shown on the table below. Looking at this table, we can see that the total expenses of the accident were $20,900. Of this amount, Zach will recover $12,620 (about 60%) from the insurance company and will have to pay the remaining $8,280—40%—out of his own pocket. 3. Zach would have had additional protection had he purchased a policy with any or all of the following: a smaller, or no, deductible; a larger, or no, coinsurance clause; and higher, or no, internal limits. However, in order to get these less restrictive coverages Zach would have to pay higher premiums, and as he is self-employed, he would have to bear this entire cost himself. In most cases, the additional premiums required to increase these "short-term" coverages are not justified. People are better off devoting more money toward meeting prolonged types of illnesses and disabilities. However, Zach should look at his personal financial situation to find the right level of deductible for him; $3,000 is probably too high, and he could probably shop around for less restrictive internal limits. In addition to his major medical coverage, Zach should have some type of disability income insurance—particularly given the risk of his occupation. Such coverage would allow him to receive weekly or monthly income payments to replace the income he will not receive when he is unable to work as a result of a covered illness or accident. Since Zach has already been unable to work for two months and will likely be unable to work for another few months while recuperating at home, some form of disability income insurance is probably needed. In addition to Social Security benefits, which do not begin until a worker has been totally disabled for five months, and worker's compensation, if he is eligible, some type of long-term disability income coverage is needed. Since the really catastrophic events for which disability insurance is most important require long-term coverage, he would probably be better off purchasing a disability income policy with a longer waiting period and longer duration of benefits. In summary, Zach should evaluate his disability income coverage and fill in any gaps that may exist, particularly in the area of long-term disability income insurance. 4. Zach’s major medical insurance coverage seems inadequate. Based on Zach’s recent accident, he must pay about 40% of major medical costs. Zach should increase his major medical coverage. However, to get more attractive deductibles, coinsurance, and internal limits, he would have to pay additional premiums. The amount of increased coverage to be purchased should be analyzed from a needs approach and in view of a cost/benefit ratio. Furthermore, the amount of coverage purchased would have to be evaluated in light of Zach’s financial situation. In the area of disability income insurance Zach’s coverage is minimal. He may be eligible for Social Security benefits and may also qualify for certain worker's compensation benefits. However, he should probably purchase additional long-term disability income coverage in order to provide for adequate income replacement in the event of a prolonged or permanent disability—especially in view of his somewhat hazardous occupation of window washing. Better short-term disability coverage with a 60- or 90-day waiting period and a relatively long duration of benefits would also be useful. Such coverage would probably have been beneficial in light of Zach’s current injuries (for which he had been hospitalized sixty days and will probably be unable to work for a few additional months). The amount of coverage Zach ultimately buys will, of course, depend upon his available financial resources. However, Zach does need to analyze his health insurance plan(s) and increase his coverage appropriately. 9.2 Roberto and Juanita Get a Handle on Their Disability Needs 1. The amount of additional disability income insurance needed by Roberto in order to protect his family in the event he becomes completely disabled is calculated in a format similar to Worksheet 9.2 on the following page. These calculations are based upon the following four assumptions (1) Roberto and Juanita need 90% of their combined take-home pay in order to meet their bills and provide for a variety of necessity items; (2) if Roberto becomes completely disabled, Juanita will continue to work at her part-time job; (3) Roberto’s average monthly take home pay for the most recent year was $2,300; and (4) Roberto’s group health insurance policy provides coverage for his entire family. Based upon these calculations, it appears that Roberto needs an additional $840 of monthly disability income insurance coverage in order to provide his family with a subsistence level of income. 2. The question can be answered either "No" or "Yes," depending upon what assumptions are made with respect to Roberto’s ability to work. Two situations, of course, could exist: (1) Roberto can continue to work when Juanita is totally disabled; and (2) both Roberto and Juanita are totally disabled. In the first case, they would not necessarily need any disability income insurance for Juanita since their monthly income need of $2,700 (calculated in question 1) could be met from Roberto’s $2,300 take-home pay and Juanita’s $400 monthly Social Security benefit. If both Roberto and Juanita become totally disabled, they would need some disability income coverage on Juanita. In the question 1 calculations, Juanita was expected to provide $700 monthly. Clearly some alternate source for these funds must be arranged. Because Social Security disability income benefits for Juanita will provide $400, they need an additional $300 of disability income, which could be provided by either increasing Roberto’s monthly disability insurance need by $300 to $1,140 or by purchasing $300 of disability income insurance for Juanita. Either would provide adequate disability income insurance coverage should they both become totally disabled, but it might be cheaper to increase his policy benefit rather than get an additional policy on her. The ultimate decision should be based upon a cost analysis of these alternatives, choosing the one with the lower cost. 3. First of all, Roberto should make sure that his group health insurance coverage is adequate to cover the medical costs associated with the total disability of both Juanita and him, as well as their young son. The family is mostly dependent on Roberto’s ability to work, so increasing his coverage is very important. However, it may not be cost effective to obtain a policy on Juanita, and as it is unlikely that they both will be disabled at the same time; a better alternative might be to start a regular saving/investing program instead of paying premiums for Juanita. This would also serve as their cushion to see them through the waiting period before Roberto’s disability benefits begin, should he ever become disabled. Solution Manual for PFIN Personal Finance Lawrence J. Gitman, Michael D. Joehnk, Randall S. Billingsley 9781285082578
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