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 The $14,000 savings is credited to an account for the insured and can be withdrawn for reimbursement of future allowable medical expenses to the extent they that are not 100 percent reimbursed.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 This $500 shortfall will be withdrawn from the $14,000 balance in the benefit bank so that the insured has a 100 percent reimbursement.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.
