Jan 21, 2009

Determination of Benefits: Some Complexities

In actual practice, the determination of benefits payable may be much more complex than the previous simple example. While many of these complexities are beyond, a few issues are addressed. These include the following:

  • Determination of benefits payable by each plan

  • Benefit banks

  • Coordination of benefits with self-funded plans

    Before proceeding farther, however, one important point needs to be made: Coordination of benefits is between two (or more) specific plans, each of which has its own rules. While generalizations can be made, the ultimate benefits paid depend on the specific rules of each plan.

    Determination of Benefits Payable by Each Plan
    The earlier example lumped expenses together into three broad categories and assumed that they were fully covered by each plan, except for any deductibles and percentage participation by the insured. An actual benefit calculation looks at every charge billed by the hospital and surgeon and determines to what extent that charge is covered. It is possible that some charges will not be paid in full because they exceed reasonable and customary charges or because of exclusions. In addition, some managed care plans limit benefits for nonnetwork services to what is paid to network providers. It is common for this to be significantly below billed charges.

    Benefit Banks
    Some medical expense plans have benefit banks (also called benefit reserves) in which COB savings from being a secondary payer accumulate for future claims when the plan is also the secondary payer. Assume, for example, that a plan is secondary and pays $1,000 of a claim for which the plan would have paid $15,000 if it had been primary. The $14,000 savings is credited to an account for the insured and can be withdrawn for reimbursement of future allowable medical expenses to the extent they that are not 100 percent reimbursed. Assume further that $4,000 of allowable expenses result from a future claim, and for some reason the primary and secondary payers pay only a total of $3,500. This $500 shortfall will be withdrawn from the $14,000 balance in the benefit bank so that the insured has a 100 percent reimbursement. Balances in the benefit bank usually revert to zero at the end of a specified period, most commonly a calendar year.

    Coordination of Benefits with Self-Funded Plans
    Self-funded plans are not bound by the state COB rules that apply to insurance contracts and HMO plans, but as a rule they use provisions that are identical or very similar. However, they are free to use any type of COB provision.

    Some self-funded plans use a provision so that their payment as a secondary payer is limited to the amount that would reach the limits of their own plan. For example, assume that two self-funded plans would each cover only 80 percent of an insured's medical expenses after a $250 deductible. The secondary payer would pay nothing because the limits of its own plan had already been reached by the primary plan. If the secondary plan had a lower deductible, such as $200, the secondary plan would pay $50. This type of provision, which in effect preserves deductible and coinsurance in the COB process, is not allowed under the NAIC model regulation previously discussed.

    A few self-funded plans coordinate benefits with plans under which an individual is eligible for coverage, even if the individual is not covered under that plan. For example, the self-funded plan might provide coverage for an employee's dependents. If a dependent spouse works outside the home and is eligible for his or her own employer-provided coverage, the self-funded plan would pay on a secondary basis, whether or not the spouse signed up for his or her employer's plan.

    Finally, self-funded plans have been designed so that they are excess or "always secondary" to any other medical expense plan. The most extreme situation occurs if a person is covered under two self-funded plans, each of which takes an always-secondary approach. Each plan pays as if it were secondary. In the earlier example where the insured has $10,500 of covered expenses, this means that plan A pays $2,200 and plan B pays nothing. This total of $2,200 is less than either plan would pay if it were primary. This issue has been the subject of several court cases, and some (but not all) courts have stated that the always-secondary position cannot prevail. While these courts have ordered an equitable payment of benefits to the covered person, that person has been forced to take the matter to court.

    A similar situation exists if a person is covered under a self-funded plan that is always secondary (but would be primary if the state's rules applied) and an insured plan that is legitimately secondary because of the state's COB rules. However, the results are usually somewhat different. In most states, the insured plan must pay the covered person two amounts—the first, what the insured plan is obligated to pay as the secondary plan, and the second, the difference between what the self-funded plan pays on a secondary basis and what it would have paid if it had settled the claim as the primary payer of benefits. This second amount is considered an advance to the covered person, and the insured plan receives a right of subrogation. In other words, the insured plan has the right to take legal action to recover the amount of the advance from the self-funded plan. If the amount is recovered, the advance is, in effect, repaid. If there is no recovery, the covered person has no obligation to repay the insured plan.
  • Jan 12, 2009

    Determination of Benefits Payable: A Simple Example

    The actual mechanics of the previously described COB provision are demonstrated in the following example, which assumes that a person has coverage under the plans of two employers:

    Plan A has PPO coverage that pays allowable expenses in full as long as network preferred providers are used. If nonnetwork providers are used, there is (1) a $500 annual deductible, (2) 80 percent coinsurance subject to a $3,000 out-of-pocket limit and (3) a $1 million lifetime maximum.

    Plan B has traditional comprehensive major medical expense coverage with (1) a $200 calendar-year deductible, (2) 80 percent coinsurance subject to a $1,000 out-of-pocket limit and (3) a $2 million lifetime maximum.

    Assume also that this person incurs the following expenses for a surgical procedure:

    Semiprivate room for 5 days at $800 per day

    Other hospital charges

    Surgeon's fees

    Total expenses

    Assume that (1) neither plan contains a COB provision, (2) plan A is primary, and (3) network providers were used. In this case, plan A would pay the full $10,500, and plan B would pay $9,300 after deductions for the $200 deductible and the $1,000 out-of-pocket limit that applies to the coinsurance provision. Consequently, the insured would collect a total of $19,800, or $9,300 in excess of his or actual expenses.

    If the example is changed so that plan B is primary and nonnetwork providers are used for plan A, plan B will still pay $9,300. However, plan A only will pay $8,000, which is 80 percent of the expenses above the nonnetwork deductible. In this case, the insured would collect $17,300, still significantly more than his or her actual expenses.

    Before the COB provision is used, it must first be determined whether the provision applies to a given claim. It applies only if the sum of the benefits under the plans involved (assuming there is no provision) exceeds an individual's allowable expenses. Allowable expenses are defined as any necessary, reasonable, and customary items of expense, all or a portion of which are covered under at least one of the plans that provides benefits to the person for whom the claim is made. However, under a primary plan, the amount of any benefit reductions resulting from a covered person's failure to comply with the plan's provisions (such as second opinions or precertification) is not considered an allowable expense. In addition, the difference between the cost of a private hospital room and the cost of a semiprivate hospital room is not considered an allowable expense unless the patient's stay in a private room is medically necessary. When the allowable expenses are determined, any deductibles, percentage participation from coinsurance, and plan maximum are ignored.

    In the previous example, the entire $10,500 is considered allowable expenses. Because the sum of the benefits otherwise payable under the two plans (either $19,800 or $17,300, depending on which plan is primary) exceeds this amount, the COB provision applies. If the sum of the benefits did not exceed the allowable expenses, the COB provision would not apply and each plan would pay its benefits as if it were the only existing plan.

    When the COB provision applies, a person receives benefits equal to 100 percent of his or her allowable expenses and no more. The primary plan pays its benefits as if no other coverage exists, and the secondary plan (or plans) pays the remaining benefits. If plan A in this example is primary, it will pay $10,500, and plan B will pay nothing because 100 percent of the insured expenses have been paid. If plan B is primary, it will pay $9,300 and plan A will pay the remaining $2,200 of the insured's expenses.

    Jan 5, 2009

    COORDINATION OF BENEFITS | Plan Provisions and Taxation

    In recent years, the percentage of individuals having duplicate group medical expense coverage has increased substantially and is estimated to be about 10 percent. Probably the most common situation is the one in which a husband and wife both work and have coverage under their respective employers' noncontributory plans. If the employer of either spouse also provides dependent coverage on a noncontributory basis, the other spouse (and other dependents if both employers provide such coverage) is covered under both plans. If dependent coverage is contributory, it is necessary for a couple with children to elect such coverage under one of their plans. However, because a spouse is considered a dependent, he or she also has duplicate coverage when the election is made. Note that this duplicate coverage can be avoided if dependent coverage can be elected for children only. This option exists under many but not all plans. Duplicate coverage may also arise under the following circumstances:

  • An employee has two jobs.

  • Children are covered under both a parent's and a stepparent's plans.

  • An employee elects coverage under a contributory plan, even though he or she is covered as a dependent under another plan. This could result from ignorance or from an attempt to collect double the amount if a claim should occur. In many cases, this coverage is elected because it is broader, even though it still results in an element of duplicate coverage.

    Duplicate coverage can also occur if an individual has coverage under a group plan that is not provided by an employer. A common example involves children whose parents have purchased accident coverage for them through their schools.

    In the absence of any provisions to the contrary, group medical expense plans are obligated to provide benefits in cases of duplicate coverage as if no other coverage exists. However, to prevent individuals from receiving benefits that exceed their actual expenses, group medical expense plans contain a coordination-of-benefits (COB) provision, under which priorities are established for the payment of benefits by each plan covering an individual.

    Most states do not require medical expense products of insurance companies, the Blues, HMOs, or PPOs to have a COB provision. If one is used, however, it must comply with the appropriate state rules. Most COB provisions are based on the Group Coordination of Benefits Model Regulation promulgated by the NAIC. This regulation, which applies to traditional insurance products and other products subject to insurance regulation, is periodically revised, and all or portions of one of the versions have now been adopted by almost all states. As with all NAIC model legislation and regulations, some states have adopted the COB provisions with variations. Most states also have adopted a virtually identical COB provision for use by HMOs.

    Although some flexibility is allowed, virtually all COB provisions apply when other coverage exists through the group insurance plans or other group benefit arrangements (such as the Blues, HMOs, or self-funded plans) of another employer. They may also apply to no-fault automobile insurance benefits and to student coverage that is either sponsored or provided by educational institutions. However, these provisions virtually never apply (and cannot in most states) to any other coverages provided under contracts purchased on an individual basis outside the employment relationship.

    Determination of Primary Coverage
    The usual COB provision stipulates that any other plan without the COB provision is primary and that any plan with it is secondary. If more than one plan has a COB provision, the following priorities are established:

  • Coverage as an employee is usually primary to coverage as a dependent. The exception to this rule occurs if a retired person is covered (1) by Medicare, (2) under a retiree plan of a former employer, and (3) as a dependent of a spouse who is an active employee. In this case, coverage as a dependent is primary, Medicare is secondary, and the retiree plan pays last.

  • Coverage as an active employee (or as that person's dependent) is primary to coverage as a retired or laid-off employee (or as that person's dependent). This rule is ignored unless both plans contain the rule.

  • Coverage as an active employee (or that person's dependent) is primary to a plan that provides COBRA continuation benefits. This rule is also ignored unless both plans contain the rule.

  • If the specific rules of a court decree state that one parent must assume responsibility for his or her child's health care expenses and the plan of that parent has actual knowledge of the terms of the court decree, then that plan is primary.

  • If the parents of dependent children are married or are not separated (regardless of whether they have ever been married) or if a court awards joint custody without specifying that one parent has the responsibility to provide health care coverage, the plan of the parent whose birthday falls earlier in the calendar year is primary and the plan of the parent with the later birthday is secondary.

  • If the parents of dependent children are not married, are separated (regardless of whether they have ever been married), or are divorced and if there is no court decree allocating responsibility for the child's health care expenses, the following priorities apply:

  • The plan of the parent with custody is primary.

  • The plan of the stepparent who is the spouse of the parent with custody is secondary.

  • The plan of the parent without custody is tertiary.

  • The plan of the stepparent who is the spouse of the parent without custody pays last.

  • If none of the previous rules establishes a priority, the plan covering the person for the longest period of time is primary. If this rule also fails to determine the primary plan, then allowable expenses are shared equally among the plans.
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