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Health And Accident Insurance

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Health-care costs and health insurance are always in the news. These expenditures have become more evident as medical treatments and drug therapies improve and as health care becomes a bigger part of the U. S. gross domestic product.

The cost of health-care accounts for an increasingly larger part of the U. S. economy. Each year, health-related spending escalates, often outpacing spending on other goods and services. These cost increases have a considerable effect on the way households, businesses, and government agencies operate. Among other things, inflation associated with health-care costs places extreme pressure on businesses that offer insurance benefits to their employees. It also discourages individuals from purchasing their own coverage, can be an immense financial burden to families, and consumes an ever-increasing share of taxpayer dollars and government budgets.

Consider these startling facts about the cost of health care:

  • In 2010, the U.S. spent $2.6 trillion on health care, an average of $8,402 per person.1
  • The share of economic activity (gross domestic product, or GDP) devoted to health care rose to 17.9 percent in 2010.
  • Health-care costs have grown on average 2.4 percentage points faster than the U.S. gross domestic product since 1970.2
  • In 1970, total health-care spending was about $75 billion, or only about $356 per person.3

Many industry experts believe that new technologies and the spread of existing technologies account for a large portion of medical spending and its growth. The Centers for Medicare and Medicaid Services (CMS) projects that health spending will be nearly one-fifth of the gross domestic product (19.8 percent) by the year 2020.4


Course Objectives

This course reviews the ways in which health and accident insurance can be used to meet the costs of health care. The purpose of this course is to provide a thorough understanding of the sources from which most people obtain their health insurance—from employers, by individually contracting with insurance companies, by securing coverage through groups, and from the government. We will study the regulation of health insurance and some of the tax aspects pertaining to paying for and receiving benefits. We will focus on the features of private insurance plans as well as the benefits of social programs. We will examine the concept of managed care as a means of containing health-care costs. The course also explores disability insurance and long-term care coverage. Also included is an overview of the 2010 Patient Protection and Affordable Care Act (PPACA), as well as specific provisions of this act.

Upon conclusion of this course, you should

  • understand private medical insurance and the ways in which traditional fee-for-service arrangements have been used to pay for health care;
  • be able to characterize the managed care model as a means delivering health care more efficiently;
  • be familiar with disability policies and be able to distinguish between types of coverages;
  • understand the concept of long-term care and how partnership policies can reduce Medicaid’s burden of paying LTC costs;
  • describe accidental death and dismemberment insurance coverage;
  • know some of the state and federal rules that govern health insurance;
  • understand the four parts of Medicare and their roles in providing health-care benefits for participants; understand the scope of coverage of other government insurance programs such as Medicaid, Social Security, and workers’ compensation; and
  • understand how the implementation of health-care reforms passed with the PPACA alter health insurance benefits and the financing and administration of health insurance going forward.

Also, the following icon is used throughout the course and represents a note. Notes help to clarify information or help to further illustrate a particular concept or point:


1Heath Care Costs: A Primer. Key Information on Health Care Costs and Their Impact, by the Henry J. Kaiser Family Foundation, May 2010.

2 Ibid.

3 Ibid.

4 U.S. Department of Health and Human Services, Centers for Medicare and Medicaid Services, “National Health Expenditure Projections 2010 – 2020.”


1.1 - Sources of Health Insurance

An individual may receive health insurance coverage from a number of sources:

  • through employment, where the employer or a union provides the coverage;
  • through a group or organization;
  • by individually contracting with an insurance company; and
  • from the federal or state government in the form of Medicare, Medicaid, Social Security disability benefits, and workers’ compensation.

This chapter describes employer-provided, group, and individually contracted insurance. Government-provided disability benefits are discussed in Chapter 6.

Upon conclusion of this chapter, you should be able to

  • explain how employer-provided health insurance benefits both employers and employees;
  • describe the characteristics of group health insurance plans;
  • explain self-insurance and multiple insurance trusts as alternatives to traditional health insurance plans; and
  • describe individual health insurance policies.
  • 1.2 - Employer-Provided Health Insurance

    Although a few employers offered some form of health care before World War II, often in the form of the company infirmary, only after the United States entered this war did employers begin to systematically offer health insurance as an employment benefit. The federal government had imposed a wartime freeze on salaries, so employers could not court workers by offering them higher wages. However, employers could and did promise better benefit packages. At that time, health insurance was reasonably inexpensive. Employees also received a tax break. They did not have to treat the health insurance benefits as taxable wages, either at the time a premium was paid on their behalf or when they received benefits under the plan.

    The addition of health insurance as an employee benefit offered the following advantages:

    • The benefits were not counted as wages for purposes of the freeze.
    • Coverage was relatively inexpensive, less than individual coverage.
    • Benefits paid on behalf of employees were tax-deductible to the employer.
    • Employees suffered no tax consequences.

    Employers provided health benefits primarily in one of two ways:

    1. by contributing to a health plan maintained by a union covering the employer’s workers; or
    2. by contracting with a commercial insurer to provide group coverage to employees.
    Union Benefit Plans

    Union benefit plans are generally provided by a fund that the union maintains and administers. The benefits are often portable in that a worker maintains eligibility so long as he or she continues in a job covered by a collective bargaining agreement, even if the worker moves from one employer to another. Benefits are also often continued into retirement.

    Group Insurance Plans


    Where the employer contracts with a commercial insurer to provide health benefits, the coverage is usually provided under a group contract. Group policies, whether maintained by an employer or by an organization, are sold in the form of a singlemaster policy. The employer or group is the policyholder and exercises the rights of a policyholder, such as the right to receive notices and to switch to another plan of coverage. The individual participants in the plan are certificate holders. Certificate holders receive a certificate informing them of the terms of their coverage.


    What constitutes a group is defined by state insurance law, but it generally means at least two persons who have a common association that is not formed just for the purpose of obtaining insurance. So in addition to employees of a given employer, this definition can also include members of a union, professional association, alumni association, etc.

    While state law may grant group status to as few as two persons, insurers tend to differentiate among these groups depending upon their size, using different standards for groups from 2 to 10 members, 11 to 50 members, and so on. The larger the group, the more favorable the terms tend to be for underwriting, coverage limits, and premium rates. For example, an individual who wants to purchase medical insurance coverage may be required to provide detailed evidence of insurability, or even to submit to a physical examination, whereas a member of a small group may only have to complete a short medical questionnaire. Members of large groups are eligible simply by virtue of their membership in the group—no questions asked.

    As to premiums, the rate for a larger group can be determined on an experience-rated basis, which means that the premiums are based on the anticipated claims experience just for that group as estimated from past claims experience. Individual and small group premiums are calculated in whole or in part on a manual or pooled rate, which takes into account the insurer’s entire pool of business. If a particular large employee group has anticipated claims experience that is better than the insurer’s coverage pool as a whole, then the group will be charged a lower premium based on the pooled rate.

    Other Methods of Providing Insurance

    In addition to providing coverage under a group contract, an employer has other ways to provide benefits to its employees without contracting directly with an insurance company, such as

    1. bearing the coverage risk itself by self-insuring; or
    2. joining a multiple employer trust.

    These methods are discussed in the following sections.


    For business and individuals, an alternative to a commercial or service health insurance plan is self-insurance. Large corporations frequently self-insure their sick-leave plans for their employees. Labor unions, fraternal associations, and other groups often self-insure their medical expense plans, funded through dues or contributions from members. Others may self-insure part of a plan and use stop-loss insurance from a commercial carrier to protect against large, unpredictable losses above a specified threshold amount. For example, an employer may establish a fund that anticipates paying out $200,000 in claims. In a year when claims are unusually heavy, say $500,000, the stop-loss coverage picks up the amounts in excess of $200,000.

    Many of these self-insured plans are administered by insurance companies under an administrative services only (ASO) arrangement, or by other third-party administrators (TPAs) that are paid a fee for handling the paperwork and processing the claims.

    Multiple Employer Trusts

    The multiple employer trust (MET) is a method that can be used to provide group benefits to employers who have a very small number of employees. A MET can be sponsored by a bank, an insurance company, or a third-party administrator. METs can provide a single type of insurance or a wide range of coverages. To obtain coverage for employees from a MET, an employer must first become a member of the trust by subscribing to it. After that, the employer is issued a joiner agreement, which describes the relationship between the trust and the employer and specifies the coverages to which the employer has subscribed.

    The MET provides benefits in one of two ways: on a self-funded basis or with a contract. This contract is usually purchased from an insurance company. In this case and with the self-funded basis, the trust rather than the subscribing employers are provided with benefit descriptions in a way that is similar to the usual group insurance agreement.

    (For the most part, self-funded plans and METs are untethered by the Patient Protection and Affordable Care Act. Multiple employer plans are subject to some reporting requirements to stem problems concerning fraudulent activity.)


    1.3 - Individual Insurance




    If employer-provided or group health insurance is not a viable alternative, an individual can apply directly to an insurance company for an individually issued policy. The advantage of individual coverage is that an individual can more or less dictate the type of benefits he or she wants.

    There are also disadvantages, however:

    • The individual has to bear the full expense alone.
    • The individual must shop for coverage that is often more expensive and less comprehensive than that offered through group arrangements.
    • The policy must be underwritten, which means that the level of coverage, premium, and willingness of an insurer to issue the policy at all depends on the individual’s risk category—a function of the applicant’s health and medical history.
    • Individual policies are subject to regular premium increases that may make the cost prohibitive.

    (The above describes the individual health insurance market that was in place prior to passage of the PPACA. As part of the PPACA, pre-existing condition exclusions have been eliminated for children aged 18 and younger for plans renewing after September 23, 2010. For adults, pre-existing condition exclusions will no longer be allowed after January 1, 2014. See below.)

    Unfortunately, individual insurance policies are most readily available for the healthy. Many states have laws that ensure individuals who are undesirable risks from a health standpoint of the right to obtain some form of individual coverage. This coverage may be available through the state’s special risk pool, which provides coverage for those who cannot afford coverage or who may have a pre-existing condition precluding coverage. States find various ways to fund their risk pools, such as tax on hospital revenues. Still, the cost is likely to exceed that of a policy issued to a normal or preferred risk. Some states may phase out operation of their high-risk pools as individuals gain access to health insurance through the health insurance exchanges beginning in 2014.


    1.4 - Patient Protection and Affordable Care Act of 2010

    In March 2010, the Patient Protection and Affordable Care Act (PPACA) was signed into law, marking significant and comprehensive changes in health-care delivery and health-care coverage. The intent of the law is to create a framework for expanded coverage, cost controls, and improved health-care delivery. The changes the PPACA brings about are many; some have already been put into effect, while others will become effective over the next few years. Though an in-depth discussion and analysis of these changes are beyond the scope of this course (and some provisions of the act remain in question as to whether they will be implemented), the most significant are covered here. To provide an orientation to the scope and extent of the PPACA, the major changes are summarized in the following chart. (This information derives from a 2011 Kaiser Foundation “Focus on Health Reform” summary report.5 ) Subsequent chapters also include discussion of the PPACA provisions as they pertain to specific topics or areas.

    Effective dates for these provisions (and others not included in this summary) range from 2010 to 2018. Many of the changes become effective in 2014. A table showing the dates for implementation of specific provisions of the act is included in the Appendix.

    Overall Approach to Expanding Access to Coverage


    • Require most U.S. citizens and legal residents to have health insurance.
    • Create state-based health insurance benefit exchanges through which individuals can purchase coverage, with premium and cost-sharing credits available to low-income earners and families.
    • Create separate exchanges through which small businesses can purchase coverage for their employees.
    • Impose new regulations on health plans in the exchanges and in the individual and small group markets.
    • Require employers to pay penalties for employees who receive tax credits for health insurance through an exchange (with some exceptions).
    • Impose new regulations on health plans in the exchanges and in the individual and small group markets.
    • Expand Medicaid coverage to 133 percent of the federal poverty level.


    Requirement to have coverage

    • Require most U.S. citizens and legal residents to have health coverage; those without coverage will pay a penalty (the amount of which will be phased in over three years, beginning in 2014).
    • Exemptions will be granted for certain circumstances, including financial hardship and religious objections.


    Requirements for coverage

    • Create different sets of rules, requirements, and obligations for employer-provided health insurance, based on employer size: small employers (fewer than 50 full-time workers); mid-size employers (50 to 100 workers); large employers (more than 100 workers).
    • Provide financial assistance (i.e., tax credits) to small employers to maintain or begin offering health coverage to their employees.
    • Impose financial obligations on mid-size and large employers to maintain or offer minimum essential coverage to their employees by assessing penalties if one or more of their workers obtain subsidized coverage through the health insurance benefit exchanges.
    • Allow employers with 50 to 100 workers to have the option to purchase coverage for their workers (and their dependents) through the new health insurance exchanges. These employers may retain the health insurance coverage they currently provide, under the act’s grandfather provisions, as long as the coverage meets certain minimum requirements.
    • Large employers that offer group health insurance plans must automatically enroll new full-time employees in a plan and provide information about how the employee may opt out and receive coverage through an exchange.


    Creation of health insurance exchanges

    • Create state-based health insurance exchanges, administered by a governmental agency or nonprofit organization, through which individuals and small businesses with up to 100 employees can purchase qualified coverage.
    • Restrict access to coverage through the exchanges to U.S. citizens and legal immigrants.
    • Create four benefit categories of plans (Bronze, Silver, Gold, Platinum) plus a separate catastrophic plan to be offered through the exchanges, for individuals and small groups.

    Insurance market and rating rules

    • Require guarantee issue and renewability.
    • Allow rating based only on age, premium rating area (geographic area), family composition, and tobacco use. Disallow rating based on medical and health history.
    • Require qualified plans participating in an exchange to meet marketing requirements, have adequate provider networks, contract with essential community providers, and be accredited with respect to performance on quality measures.

    Premium and cost subsidies

    • Provide premium credits to eligible individuals and families with incomes between 133 and 400 percent of the federal poverty level to purchase insurance through the exchanges.
    • Provide cost-sharing subsidies to eligible individuals and families.
    • Limit availability of premium credits and cost-sharing subsidies through the exchanges to U.S. citizens and legal immigrants who meet income limits.
    • Employees who are offered coverage by an employer are generally not eligible for premium credits unless certain exceptions apply.


    Essential benefits package

    • Create an essential health benefits package that provides a comprehensive set of services, limits annual cost sharing to the current HSA limits, and is not more extensive than the typical employer plan.
    • Require all qualified health benefit plans, including those offered through the exchanges and those offered in the individual and group markets outside the exchanges, to offer at least the essential health benefits package. Some exemptions for grandfathered plans apply.


    Insurance market rules

    • Establish a process for reviewing increases in health plan premiums and require plans to justify increases.
    • Require states to report on trends in premium increases and recommend whether certain plans should be excluded from exchanges based on unjustified premium increases.
    • Create a national, temporary high-risk pool to provide health coverage for individuals with pre-existing medical conditions and who have been uninsured for at least six months; provide for subsidized premiums for those who qualify.
    • Prohibit individual and group health plans from placing annual and lifetime limits on the dollar value of coverage.
    • Prohibit insurers from rescinding coverage except in cases of fraud.
    • Provide dependent coverage for children up to age 26 for all individual and group policies.
    • Grandfather existing individual and group plans with respect to new benefit standards, but require such plans to extend dependent coverage to age 26 and prohibit rescissions of coverage.
    • Require grandfathered group plans to eliminate annual and lifetime limits on coverage.
    • Require all new policies (except stand-alone dental, vision, and long-term care insurance) to comply with one of the four benefit categories.
    • Limit deductibles for small group health plans to certain amounts, unless contributions are offered that offset deductible amounts above these limits.
    • Limit any waiting period for coverage to 90 days.


    Treatment of Medicaid

    • Expand Medicaid to all non-Medicare-eligible individuals under age 65 with incomes up to 133 percent of the federal poverty level (FPL).
    • Guarantee all newly Medicaid-eligible individuals a benchmark benefits package that meets the essential health benefits available through the exchanges.


    Tax changes

    • Impose a penalty on individuals without qualifying coverage.
    • Exclude nonprescription drugs from reimbursement through an HRA, FSA, HSA, or Archer MSA.
    • Increase the tax on nonqualified distributions from an HSA or an Archer MSA to 20 percent.
    • Limit contributions to an FSA for medical expenses to $2,500 a year, COLA-adjusted annually.
    • Increase the threshold for the itemized medical expense income tax deduction from 7.5 percent of AGI to 10 percent of AGI (increase waived for seniors through 2016).
    • Increase Medicare Part A wage tax for upper income earners

    “Focus on Health Reform: Summary of New Health Reform Law,” The Kaiser Foundation, April 2011.

    Perhaps the most momentous change the act brings about is the individual mandate. The PPACA intends that most people will have health insurance, whether through their employers, through private insurance coverage, or through a health insurance exchange. As the law now stands, individuals who do not purchase or have health insurance will be subject to an annual penalty. The penalty is the greater of a dollar amount or a percent of taxable income, phased in according to the following schedule:

    Year Dollar Amount Percent of Taxable Income










    Beginning in 2017, the penalty will be increased annually by the cost-of-living adjustment factor. The penalty for a family choosing not to purchase health insurance will be no more than three times the individual penalty. As the law now stands, exemptions from the mandate will extend to certain persons and groups, based on income, religious objections, and the like.

    5 “Focus on Health Reform: Summary of New Health Reform Law,” The Kaiser Foundation, April 2011.


    1.5 - Chapter Summary

    Health insurance may be obtained individually or through employer-provided coverage, a group or organization, or state or federal government programs. Beginning in 2014, most individuals will be required to have health insurance or face a penalty. Individuals and small employer groups (those consisting of 100 or fewer employees) can obtain health insurance through new health insurance exchanges. Employer-provided coverage is a very lucrative benefit to workers and represents a tax deduction to employers. Eligible small employers (those with fewer than 25 full-time employees) may receive a credit for their employee health insurance expenses if coverage is purchased through an exchange. Groups, when they are not formed specifically for the purpose of obtaining insurance coverage, can provide their members with affordable coverages. These policies are written as a single master plan with members as certificate holders. Individual coverage is the most costly of these options and is currently underwritten based on the applicant’s health and medical history. However, the provisions of the PPACA stipulate that, as of 2014, pre-existing conditions cannot be used as underwriting criteria for individual policies. Also in 2014, individuals will be able to obtain health insurance coverage through a health insurance exchange.


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