Chapter 9

1. 9 Health and Disability Income
Insurance
• Eases the financial burden people may experience as a result of
illness or injury (pay a premium to transfer risk of loss)
– Medical expense insurance- pays actual medical costs
– Disability income insurance- provides replacement income
• Group and individual health insurance coverage available
• 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
• The Health Insurance Portability and Accountability Act
– Established federal portability standards
– If you change jobs, you need not lose your health insurance
9-1

2. Sources of Health Care Plans
• Health Care Plan- generic name for any
program that pays or provides reimbursement
for health care expenses
• Group Health Care Plan – health coverage
sold collectively to an entire group of persons
rather than to individuals
• Open Enrollment Period – during this time,
you can begin or make changes in coverage or
switch among alternative plans
– Requirements are generally waived for family
changes (e.g., birth of a child, adoption, marriage)

3. • Group Plans:
– Covers most individuals
– Usually employer sponsored (also unions, trade groups)
– Employer pays part or most of cost
• Coordination of Benefits: combine benefits from >1
plan
– Benefits received from all sources limited to 100% of
allowable medical expenses
– Married couples/partners need to consider
Objective 1
Recognize the Importance of Health
Insurance in Financial Planning
9-3

4. Objective 2
Analyze the Costs and Benefits of
Various Types of Health Insurance as
well as Major Provisions in Health
Insurance Policies
Types of Health Insurance Coverage
Basic
Major medical
Both
• Basic Health Insurance
– Hospital Expense Insurance
• Hospital room, board, and other charges (usually with a cap)
– Surgical Expense Insurance
• Surgeon's fee for an operation (often specify amount per service)
– Physician Expense (Medical Expense) Insurance
• Pays for physician’s care that does not include surgery, such as
office visits, lab tests, X-rays (often specify amount per service) 9-4

5. Types of Health Insurance
Coverage
• Major Medical Expense Insurance
– Covers expenses for serious injury or long-term illness
– Goes beyond what basic health insurance pays
– May include a deductible (initial amount paid before
insurance co. pays), coinsurance (e.g., 20% to 25% of
expenses after deductible), and a stop-loss provision
– Policy limits of $1 million are common
– Stop-loss: policyholder pays coinsurance up to a
certain amount, after which insurance company pays
100% (typically $3,000 and $5,000)
– Comprehensive Health Insurance- combines basic
health insurance and major medical into a single policy
9-5

6. 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
• Vision Care
– Exams, contact lenses, and glasses
• Dread Disease Policies
– Pays out for very specific conditions (e.g., cancer)
– Illegal in many states
• Long-Term Care Insurance
– Virtually unknown 25 years ago
– Covers daily help if seriously ill or disabled
– Nursing home or in-home care
9-6

7. 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
• Copayment
– Cost sharing in the form of a flat dollar amount
you pay, such as $15 per office visit or $10 per
prescription
– NOT the same as co-insurance, which is a
percentage of expenses 9-7

8. Major Provisions in a Health
Insurance Policy
• Service Benefits
– Entitlement to specific services
• Benefit Limits
– Maximum dollar amount or maximum number of days
in the hospital
• Exclusions and Limitations
– Pre-existing conditions
– Cosmetic surgery
• Guaranteed Renewable (can’t cancel policy
unless fail to pay premiums; insurer can’t raise
premiums for one person unless raised for an entire
group)
• Cancellation and Termination
– Explains the circumstances under which policy can be
canceled and/ or converted 9-8

9. 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 (regardless of expenses)
• Internal (fixed amount per expense) vs. aggregate limits
• Deductibles and coinsurance
• Out-of-pocket limits (after reach limit, get 100% coverage)
• Benefits based on reasonable and customary
charges (policy won’t pay more than that amount)
9-9

10. Health Insurance Must-Haves
9-10

11. 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
9-11

12. 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
– Usually pay small copayment to see doctor 9-12

13. 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
– Example: NJ Direct for state of NJ employees
• Point-of-Service (POS)
– Combines features of HMOs and PPOs
• 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 9-13

14. New Health Care Accounts
• Health Spending Accounts (HSA)
– Money contributed to pre-tax dollar account
– Must have a high-deductible policy
• Health Reimbursement Accounts (HRA)
– Also tied to high-deductible policies
– Funded solely by employer
– Unused funds carried over to next year
• Flexible Spending Accounts (FSA)
– Workers contribute pre-tax dollars
– Funds managed by employer
– Unused funds forfeited at year end 9-14

15. 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 the difference in costs
– Program in financial trouble; needs changes
– 4 parts: A, B, C, D
• Medicaid- health care program for the poor that is
jointly administered and funded by the federal and
state governments
9-15

16. 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 (paid for by workers’ payroll deductions)
• Part B:
– Medical insurance helps pay for doctors’ services and many other
medical services and supplies not covered by hospital insurance
– Beneficiaries pay a monthly premium (varies according to income)
• 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
9-16

17. Government Consumer
Health Information
Websites
• Healthfinder: www.hhs.gov
• Medline Plus:
www.nlm.nih.gov/medlineplus
• NIH Health Information Page:
www.nih.gov
• FDA: www.fda.gov
• Medicare: www.medicare.gov
9-17

18. Objective 5
Explain the Importance of
Disability Income Insurance in
Financial Planning and Identify its
Sources
Disability Income Insurance
• Designed to protect against loss of income;
protects your “earning power”
• Most overlooked type of insurance
• 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
9-18

19. 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 6th
month
– Strict definition of disability to qualify
• Private Income Insurance Programs
– Supplements other disability income sources
– Normally provides 40-60% of income (up to 75%)
9-19

20. Disability Income Insurance
Trade-Offs
• Policy’s definition of disability
– Own Occupation- can no longer perform previous job
– Any Occupation- can’t work at any job
• Waiting or elimination Period
• Duration of benefits
• Amount of benefits
• Accident and sickness coverage (want payment for both; accidents are
not the only cause of disability!)
• Guaranteed renewable (guarantees coverage as long as you pay your
premium, but premiums can change for you within a class of insureds)
• Noncancellable- Better but more expensive; no future change in premium
• Cost-of-Living Adjustments (adjusts benefit for inflation)
• Partial benefits (pays benefit if person can only work part-time)
9-20

21. • 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
– Administration = 26% of costs
Objective 6
Explain Why the Costs of Health
Insurance and Health Care have
been Increasing
9-21

22. 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
9-22

23. 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
• Carefully review health care fees
• Community health education programs 9-23

24. Wrap Up
• Chapter Quiz
• Concept Check 9-1- True or False?
• Concept Check 9-2- Health Insurance
Terminology
• Concept Check 9-3- What Trade-offs
Would You Consider?
• Concept Check 9-5- Disability Insurance
Terminology