Basic and major medical expense insurance

Two generations of medical expense coverage

Medical expense insurance reimburses the actual cost of care: hospital bills, surgeons' fees, doctor visits, tests. That separates it from disability income, which replaces lost earnings, and from hospital indemnity, which pays a fixed amount per day regardless of the bill. The exam tests two families of medical expense coverage: the older basic plans and major medical, which grew out of their weaknesses.

Basic medical expense: first dollar, low ceilings

Basic medical expense insurance traditionally comes as three separate coverages, sold alone or together:

Hospital expense pays room and board up to a daily limit for a stated number of

days, plus miscellaneous hospital expenses (operating room, lab work, X-rays, drugs used in the hospital), often capped at a multiple of the daily room rate.

Surgical expense pays surgeons' fees, either from a surgical schedule that lists a

dollar amount for each procedure, or under a relative value scale, which assigns each procedure points multiplied by a dollar conversion factor. Some plans instead pay the usual, customary and reasonable (UCR) charge for the area.

Physician (medical) expense pays for non-surgical doctor visits, in or out of the

hospital, usually with a per-visit limit and a cap on the number of visits.

The defining traits: first-dollar coverage (little or no deductible), usually no coinsurance, and low, itemized benefit limits. Basic plans handle routine bills well and leave a person exposed when a serious illness produces a large bill.

Major medical: broad coverage with shared costs

Major medical expense insurance covers a broad range of hospital, surgical, physician and other medical expenses under one large benefit, in exchange for cost sharing:

Deductible: the insured pays the first dollars of covered expenses each year before the

plan pays.

Coinsurance: after the deductible, the plan and insured split covered expenses, most

often 80/20.

Stop-loss (out-of-pocket maximum): once the insured's share reaches a stated amount, the

plan pays 100% of covered expenses for the rest of the period. This cap is what protects against catastrophic cost.

Florida's conversion statute shows the pattern in statutory language: a converted major medical policy has a deductible of $500, $1,000 or $2,000, pays 80% of covered expenses above it until the insured's 20% share reaches $2,000, then pays 90%. Traditional major medical also carried a lifetime maximum; the Affordable Care Act now bars lifetime and annual dollar limits on essential health benefits, and major medical plans must cover at least one service in each of the 10 essential health benefit categories.

A horizontal bar represents thirty thousand dollars of covered medical bills under a major medical plan with a one thousand dollar deductible, eighty-twenty coinsurance and a five thousand dollar out-of-pocket maximum. The bar is split into three stages from left to right. Stage one is a thin slice: the first one thousand dollars, the deductible, paid entirely by the insured. Stage two is the next twenty thousand dollars, shared: the plan pays eighty percent, sixteen thousand dollars, and the insured pays twenty percent, four thousand dollars. At the end of stage two a dashed line marks the point where the insured's deductible plus coinsurance reach the five thousand dollar out-of-pocket maximum. Stage three is the remaining nine thousand dollars, which the plan pays in full. The totals: the insured pays five thousand dollars and the plan pays twenty-five thousand. A footnote contrasts this with basic medical plans, which pay from the first dollar but stop at low, itemized limits. — Deductible, then 80/20 coinsurance, then 100% once the out-of-pocket maximum is reached.

Supplemental versus comprehensive

Supplemental major medical sits on top of a basic plan. Basic pays first; then the

insured pays a corridor deductible; then major medical pays with coinsurance.

Comprehensive major medical combines basic and major medical in a single policy with

one deductible, one coinsurance percentage and one out-of-pocket maximum. It is the modern norm.

Worked example: $1,000 deductible, 80/20 coinsurance, $5,000 out-of-pocket maximum, $30,000 of covered bills. The insured pays $1,000, then 20% of the next $20,000 ($4,000), reaching $5,000. The plan pays $16,000 of that band and all remaining $9,000: $25,000 in total.

Related rules

When a person is covered by two group medical plans, a coordination of benefits provision decides which pays first. Benefits may be reduced for other coverage only if, together, the plans pay 100% of the reasonable expenses. Supplemental products such as accident-only, specified disease and hospital indemnity policies are not health benefit plans and do not substitute for major medical coverage.