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Nonduplication and coordination of benefits

Why nonduplication and coordination of benefits exist

Health insurance is a contract of indemnity: it is meant to restore an insured to the financial position he or she occupied before a loss, not to create a profit. When one person is covered by two or more plans -- say, a group plan through her own employer and a second group plan as a spouse's dependent -- the risk is overinsurance: the same hospital bill gets paid twice, and the insured collects more than the loss. Overinsurance encourages unnecessary utilization and drives premiums up for everyone, so plans build in language to prevent it.

Two tools do this work:

  • Coordination of benefits (COB) -- a provision that decides which plan pays first and how much the other plan contributes, so that combined payments do not exceed the allowable expense.
  • Nonduplication of benefits -- language stating that a plan will not pay for a benefit already paid by another source. Under a strict nonduplication provision, the secondary plan pays only what it would have paid on its own minus what the primary plan already paid, so if the primary plan paid as much or more than the secondary plan would have, the secondary plan pays nothing.

How coordination works in practice

One plan is designated primary and pays as if no other coverage existed, applying its own deductible, coinsurance, and limits. The remaining plan is secondary and considers the balance. Depending on the contract language, the secondary plan may bring the insured up to 100% of the allowable expense, or -- under nonduplication -- may owe nothing at all. Payments are coordinated against the allowable expense, not the provider's full billed charge, and total reimbursement from all sources is never intended to exceed that allowable amount.

A left-to-right flow chart titled Coordination of Benefits and Nonduplication. On the far left, a box labeled Covered claim, where the allowable expense is determined. An arrow points right to a green box labeled PRIMARY PLAN, which pays first as if no other coverage existed, applying its own deductible and coinsurance. Another arrow points right to an orange box labeled SECONDARY PLAN, which considers only the balance; under nonduplication it pays zero if the primary already paid what the secondary would have paid on its own. Arrows drop from both plan boxes into a wide dashed box beneath them labeled CAP: combined payments do not exceed the allowable expense, with a subtitle reading indemnity, not profit, no double payment for one loss. Below are two side-by-side panels. The left panel, Who is primary? Typical order rules, lists four items: one, employee or named insured before dependent; two, for children the birthday rule, meaning the parent whose birthday falls earlier in the year; three, active employee before retired or laid off; four, otherwise the plan in force longer. The right panel, Producer cautions, says never promise double benefits because that is misrepresentation under Texas Insurance Code chapter 541, and guaranty association benefits are reduced by other recoveries under Texas Insurance Code chapter 463.
Primary pays first, secondary pays only the balance, and total payments stop at the allowable expense.

Order-of-benefit-determination rules are set out in the policy itself. Commonly used rules include:

  • The plan that covers the person as an employee, member, or named insured is primary over a plan that covers the same person as a dependent.
  • For a dependent child whose parents are married or living together, many plans use the birthday rule: the plan of the parent whose birthday (month and day) falls earlier in the calendar year is primary.
  • Coverage as an active employee is generally primary over coverage as a laid-off or retired employee, and the plan in force the longer period of time is primary when no other rule applies.

Related concepts you should not confuse

Group medical plans coordinate; individual disability income and other valued or stated-benefit policies typically do not, because they pay a fixed amount rather than reimbursing an expense. A nonduplication of recovery idea also appears in guaranty association law: benefits available from the association are reduced by amounts recoverable from other coverage or from another state's association, so a claimant is not paid twice for the same obligation (Tex. Ins. Code ch. 463).

The producer's duty

Explain COB and nonduplication before the sale, not after the claim.

Telling an applicant that a second policy will "double your benefits" when a nonduplication clause makes that impossible is a misrepresentation of the benefits, advantages, or terms of a policy, and misapplying a coordination clause to underpay a valid claim can amount to an unfair claim settlement practice. Both fall within Texas's unfair methods of competition and unfair or deceptive acts statute (Tex. Ins. Code ch. 541).

Sample questions

Why do health plans include coordination of benefits and nonduplication provisions?

  • To guarantee that an insured with two plans receives double reimbursement for the same expense
  • To prevent overinsurance by keeping total payments from all sources within the allowable expense
  • To require an insured to choose one plan and drop all other coverage before a claim is paid
  • To shift the cost of every claim to the insured's deductible before any plan pays
Preview

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