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, doctors' visits, tests and drugs. It pays expenses, which is what separates it from disability income insurance, which replaces lost wages. The exam tests two families of medical expense coverage: basic plans and major medical plans.

Basic medical expense insurance

Basic coverage is the older design. It is sold as separate, narrow coverages, each with its own limits:

• Basic hospital expense pays room and board up to a daily dollar limit for a maximum number of days, plus miscellaneous hospital expenses (lab work, X-rays, drugs, operating room) up to a set amount, often stated as a multiple of the daily room rate.
• Basic surgical expense pays surgeons' fees, usually from a surgical schedule that lists a maximum for each procedure. Schedules are often built on a relative value system: each procedure gets a number of points, and the policy pays a set dollar amount per point.
• Basic medical expense (also called physicians' or regular medical expense) pays for nonsurgical doctor visits in the hospital, office or home, typically a fixed amount per visit up to a maximum number of visits.

Basic plans usually pay first-dollar coverage: little or no deductible and no coinsurance. Their weakness is the low ceiling. Each coverage stops at its own internal limit, so a long or catastrophic illness quickly outruns them.

Major medical expense insurance

Major medical was designed for exactly that catastrophic exposure. It covers a broad range of hospital, surgical, physician and other medically necessary services under one policy, with high overall benefit limits, and it typically pays usual, customary and reasonable (UCR) charges rather than a fixed schedule. The trade-off is that the insured shares the cost:

• Deductible: the amount the insured pays alone each benefit period before the plan starts paying the covered charges it applies to. Some benefits, such as preventive care, can be paid before the deductible is met.
• Coinsurance: after the deductible, the insured and insurer split covered charges by percentage, commonly 80 percent insurer and 20 percent insured.
• Out-of-pocket maximum (the stop-loss limit): once the insured's deductible and coinsurance reach this cap, the plan pays 100 percent of covered charges for the rest of the period.

Worked example. A $10,000 covered claim, a $1,000 deductible, 80/20 coinsurance and a $3,000 out-of-pocket maximum. The insured pays the $1,000 deductible plus 20 percent of the remaining $9,000 ($1,800), for $2,800 in all. The insurer pays $7,200. Had the bill been larger, the insured's share would have stopped at $3,000.

Supplemental versus comprehensive major medical

• Supplemental major medical sits on top of a basic plan. The basic plan pays first; a corridor deductible then applies before major medical picks up the remaining covered costs, subject to coinsurance.
• Comprehensive major medical combines basic and major medical into a single plan with one deductible, one coinsurance arrangement and one out-of-pocket maximum. It is the dominant design today.

Under the Affordable Care Act, non-grandfathered individual and group health plans may not impose lifetime or annual dollar limits on essential health benefits, and their out-of-pocket maximum is capped each year. Grandfathered plans are exempt from some of these rules. Older "maximum lifetime benefit" figures now appear mainly in exam history questions.

Remember the contrast: basic plans give first-dollar coverage with low limits; major medical gives broad, high-limit coverage with cost sharing.