Characteristics of Major Medical Coverage

The distinguishing features of major medical expense plans—either supplemental or comprehensive—include a broad range of covered expenses, deductibles, coinsurance, and high overall maximum benefits.

Covered Expenses
Major medical plans give broad coverage for necessary expenses incurred for medical services and supplies that a physician has ordered or prescribed. These services and supplies, which are specified in the contract, generally include the following:

Hospital room and board. Traditionally, coverage has not been provided either for confinements in extended-care facilities or for home health care. However, major medical plans now often include such coverage. Some plans also provide benefits for room and board in alternative facilities, such as birthing centers.

Other hospital charges.

Charges of outpatient surgical centers.

Anesthetics and their administration.

Services of doctors of medicine or osteopathy.

Professional services of a registered nurse. The services of a nurse midwife, nurse practitioner and nurse anesthetist may also be covered.

Services of certain other types of providers. Most states mandate that the services of certain types of providers other than physicians and nurses must be covered as long as the service is a covered benefit and the provider is operating within the scope of his or her license. The list of providers varies from state to state and may include one or more of the following: acupuncturists, audiologists, chiropractors, dentists, marriage and family therapists, dietitians, optometrists, physical therapists, physicians' assistants, podiatrists, psychologists, social workers, and speech pathologists.

Prescription drugs. This benefit is often carved out and provided through a separate prescription drug program.

Physical and speech therapy.

Diagnostic X-ray and laboratory services.

Radiation therapy.

Blood and blood plasma.

Artificial limbs and organs.

Pacemakers.

Casts, splints, trusses, braces, and crutches.

Rental of wheelchairs, hospital beds, and iron lungs.

Ambulance services.

The expenses of dental care may also be included as a major medical benefit. However, dental benefits are usually provided under a separate dental expense plan.

Even though coverage is broad, major medical contracts contain certain exclusions and limitations.

Exclusions. This list of exclusions varies, but exclusions found in most major medical contracts include charges arising from the following:

Occupational injuries or diseases, to the extent that benefits are provided by workers' compensation laws or similar legislation.

Services furnished by or on behalf of government agencies, unless there is a requirement for the patient or the patient's medical expense plan to pay.

Care provided by family members or when no charge would be made for the care received in the absence of the insurance contract.

Cosmetic surgery, except as required by the Women's Health and Cancer Rights Act, unless such surgery is to correct a condition resulting from either an accidental injury or a birth defect (if the parent has dependent coverage when the child is born).

Most physical examinations, unless such examinations are necessary for the treatment of an injury or illness. While most major medical plans contain this exclusion, it should be noted that some plans do provide coverage for some forms of preventive medicine, which might involve specific types of physical examinations.

Experimental or investigational drugs and treatment.

Convalescent, custodial, or rest care.

Dental care except for (1) treatment required because of injury to natural teeth and (2) hospital and surgical charges associated with hospital confinement for dental surgery. This exclusion is not included if dental coverage is provided under the major medical contract.

Eye refraction, or the purchase or fitting of eyeglasses or hearing aids. Like the dental care exclusion, this exclusion is not included if the major medical coverage provides benefits for vision and hearing care. These benefits, however, are most likely to be provided under a separate plan.

Expenses either paid or eligible for payment under Medicare or other federal, state, or local medical expense programs.

Benefits provided by any other benefit program to which the employer makes a contribution. This includes any benefits provided under basic medical expense plans if a supplementary major medical plan is used.

To minimize the problem of adverse selection, most major medical plans also contain an exclusion for preexisting conditions. However, this exclusion applies only for a limited time, after which the condition is no longer considered preexisting and is covered in full, subject to any other contract limitations or exclusions. It is interesting to note that a preexisting-conditions clause is common in major medical contracts, but it is rarely found in basic medical expense contracts.

A preexisting condition is typically defined as any illness or injury for which a covered person received medical care during the three-month period prior to the person's effective date of coverage. Usually, the condition is no longer considered preexisting after the earlier of (1) a period of three consecutive months during which no medical care is received for the condition or (2) 12 months of coverage under the contract by the individual.

The use of preexisting-conditions provisions in group medical expense plans was affected by the passage of the Health Insurance Portability and Accountability Act (HIPAA), but the traditional time periods that apply to such conditions are within the act's guidelines. However, the act does limit the use of preexisting-conditions provisions with respect to newborn or adopted children. In addition, preexisting-conditions provisions cannot apply to pregnancy.

Some insurance companies provide limited coverage rather than excluding coverage for preexisting conditions. During the time a condition is considered preexisting, benefits may be paid subject to limitations, such as a 50 percent coinsurance provision or a calendar-year maximum of $1,000. It is also not unusual, particularly with large employers, for the preexisting-conditions clause to be waived for persons who are eligible for coverage on the date a master contract becomes effective. However, future employees will be subject to the provision.

Finally, there are certain types of medical expenses that may or may not be excluded. While these exclusions are not found in most major medical contracts, they are found in many. Examples include charges arising from the following:

Treatment for weight reduction and morbid obesity

Treatment of injuries resulting from attempted suicide or self-inflicted injury

Sexual transformation or sexual dysfunction

Procedures to restore or enhance fertility, reversal of sterilizations, artificial insemination, or in vitro fertilization

Treatment of injuries incurred while committing a felony

Limitations. Major medical plans also contain "internal limits" for certain types of medical expenses. Although the expenses are covered, the amounts that are paid under the contract are limited. Benefits are very rarely paid for charges that exceed what is reasonable and customary. In addition, limitations are often placed on the following expenses:

Hospital room and board. Benefits are generally limited to the charge for semiprivate accommodations, unless other accommodations are medically necessary. In some cases a flat-dollar maximum is placed on the daily semiprivate accommodation rate.

Extended-care facilities, home health care benefits, and hospice benefits (if provided). Benefits for extended-care facilities are often subject to a dollar limit per day for room-and-board charges as well as a time limit on the number of days that coverage is provided. Similarly, home health care benefits are often subject to a maximum daily benefit and limited to a certain number of visits within a specific time period. Hospice benefits are usually limited to a specified maximum amount.

Dental care, vision and hearing care, and physical examinations. When these are covered under major medical contracts, benefits are frequently subject to schedules and annual limitations.

Ambulance service, such as $250 per trip.

Rental or purchase of durable equipment, such as $5,000.

Some plans also have limits on outpatient prescription drugs, such as $2,500 per year per person.

Treatment of Mental Illness, Alcoholism, and Drug Addiction. It is common for major medical plans to provide limited benefits for treatment of mental and nervous disorders, alcoholism, and drug addiction. Unless state laws require that such conditions be treated like any other medical condition, inpatient coverage is often limited to a specific number of days each year (commonly 30 or 60). Outpatient benefits, which are even more limited, are usually subject to 50 percent coinsurance and to a specific dollar limit per visit. One unfortunate effect of more stringent limitations on outpatient care is that it encourages many persons to seek inpatient treatment, which is significantly more expensive but no more effective in the eyes of many medical experts. As a result, some plans have started to carve out coverage from the major medical plan. Benefits are then coordinated by a managed care plan that specializes in mental health and/or substance abuse problems.

It has been common for major medical plans to impose an annual maximum (such as $1,000) and/or an overall maximum lifetime limit (such as $25,000) on benefits for mental and nervous disorders, alcoholism, and drug addiction. Under federal legislation, such limitations are no longer allowed for mental health benefits in many employee benefit plans.

At the time of the 1996 debate over HIPAA, there was considerable disagreement over the issue of requiring mental illness to be treated as any other illness for purposes of medical expense coverage. With estimates that complete parity would raise the cost of providing medical expense benefits by 4 to 10 percent (depending on whose estimate one believed), Congress left the issue unresolved. The debate continued after the passage of the previously mentioned act and resulted in the passage of another act the following month—the Mental Health Parity Act. Because of cost considerations, however, its provisions are limited, and the use of the term parity is probably a misnomer.

The provisions of the act apply only to employers that have more than 50 employees. The act prohibits a group health plan, insurance company, or HMO from setting annual or lifetime dollar limits on mental health benefits that are less than the limits applying to other medical and surgical benefits. If there are no such dollar limitations for substantially all other (meaning two thirds or more) medical and surgical benefits under a plan, there can be none for mental health benefits. If substantially all benefits are subject to an annual or lifetime limit, the parity requirements can be satisfied by either having separate dollar limits that are equal for mental health benefits and other medical and surgical benefits or applying a uniform dollar limit to all benefits in the aggregate. If a plan has different limits for different categories of benefits, the act calls for the use of a weighted average of all the limits to be used for the mental health limitations.

Besides imposing no limitations on benefits for alcoholism or drug addiction, the act is noteworthy for other things it does not do. It does not require that employers make any benefits available for mental illness, and it does not impose any other restrictions on mental health benefits. Employers can still impose limitations, such as an annual maximum on number of visits or days of coverage and different cost-sharing provisions for mental health benefits than those that apply to other medical and surgical benefits.

Congressional advocates of the act estimate that overall medical costs to employers should not increase by more than .4 percent. Any employer who can prove that the act's provisions increase its group health plan costs by more than 1 percent is exempt from the act. This exemption is available only if the employer has complied with the act for six months and uses a prescribed formula for measuring the cost increase.

The act is subject to a sunset provision of September 30, 2001. As of that date, any benefits required by the act can be eliminated unless Congress extends the date or removes the sunset provision prior to that time.

MAJOR MEDICAL COVERAGE : Maximum Benefits

The maximum benefits that will be paid for any covered person under a major medical contract may be determined in one of two ways. Although the use of a lifetime maximum is most common, a few contracts contain a per-cause maximum. In both instances, the benefit maximum applies separately to each employee and each dependent covered under the contract.

Lifetime Maximum. When a lifetime maximum is used, the specified overall maximum applies to all medical expenses paid (after the application of deductibles and coinsurance) during the entire period an individual is covered under the contract. It is no longer common to find benefit maximums of less than $1 million, and most benefit maximums fall within the range of $1 million to $2 million. Higher maximum benefits (such as $5 million) or even an unlimited maximum benefit are sometimes available, but their availability is much less common with traditional major medical contracts than it is with PPO products.

The lifetime maximum is reduced by the amount of any benefits paid. For example, an individual with a $200 calendar-year deductible, an 80 percent coinsurance provision, and a $100,000 lifetime maximum who incurs $4,000 of medical expenses in his or her first year of coverage (assuming it corresponds with the calendar year) receives benefits of $3,040 (that is, 80 percent of $3,800). This reduces the remaining lifetime benefit to $96,960.

Until recently, it was common to have one or more provisions in major medical contracts that restored (either partially or totally) the lifetime maximum to its original level. In some cases, this restoration required showing evidence of insurability or having no claims for a period of time. This type of provision has largely been dropped because it appears to be in conflict with state and federal regulations that prohibit the basing of benefits on health status.

A few plans still have an automatic annual restoration of a small amount of benefits, varying from $1,000 to $5,000 per year. Such a restoration was of significant value a few years ago when lifetime maximums were much lower. However, there is little practical value in such a restoration with today's maximum lifetime benefits of $1 million or more. As a result, this type of provision has also been dropped by the majority of plans.

In addition to the overall lifetime maximum, internal maximums are sometimes found in major medical contracts. For example, a plan may have a $1 million overall lifetime maximum, but a $10,000 lifetime maximum for benefits relating to alcoholism and drug addiction. In other words, only $10,000 of the $1 million will be paid for expenses relating to these conditions. Such a limitation was once also common for mental and nervous disorders, but the provisions of the Mental Health Parity Act prohibit this type of maximum for many employee benefit plans. A few plans do contain calendar-year or per-disability internal maximums.

Per-Cause Maximum. A few plans contain maximum limits for each cause of medical expenses, but in general this type of maximum limit is used only when the deductible is also applied on a per-cause basis. While coverage terminates for any cause for which the maximum benefits have been paid, it remains in force for medical expenses arising from other causes

MAJOR MEDICAL COVERAGE : Supplemental versus Comprehensive

At first glance, it might appear that the simplicity of a comprehensive major medical plan makes it preferable to a supplemental plan. However, supplemental plans continue to cover a large percentage of employees insured under traditional medical expense plans, even though most newly written plans are of the comprehensive type. The reasons for choosing separate coverages include the employer's desire to (1) use more than one provider of coverage, (2) offer first-dollar coverage, or (3) use different contribution rates for the basic and supplemental coverages. There are also disadvantages to using supplemental plans, including more difficult administration and communication.

More than One Provider of Coverage
Sometimes the provider of a supplemental major medical plan is different from the provider of the underlying basic coverages. For example, Blue Cross or Blue Shield may provide the basic coverages and an insurance company may provide the supplemental coverage. In the past, only a few of the Blues offered major medical coverage because (1) some of them felt such coverage was not within the scope of their traditional benefit structure, (2) some states legally prohibited it and (3) some Blues experienced administrative difficulties with effectively and efficiently coordinating these broader benefits. Although most Blue Cross—Blue Shield plans now offer major medical coverage (sometimes referred to as extended benefits), insurance companies are still the largest providers of major medical benefits.

The most common type of supplemental plan is the one shown in Figure 10-1, but occasionally a major medical plan is designed to supplement only a basic Blue Cross plan.

First-Dollar Coverage
Under the traditional comprehensive major medical plan, a deductible and coinsurance apply to all covered expenses. However, because of competition or labor negotiations, employers frequently offer their employees first-dollar coverage for certain medical expenses. With first-dollar coverage, there is no deductible and usually no coinsurance provision, and the basic medical expense plan consists only of those benefits provided on a first-dollar basis. Because first-dollar coverage has been characteristic of the Blues, they are frequently used as the providers of basic coverages. Therefore, to compete with them, most insurance companies now offer comprehensive major medical plans that are modified to provide similar first-dollar coverage.

It should be emphasized that, all other things being equal, first-dollar coverage increases the cost of a medical expense plan. Employers have become increasingly concerned with the cost of providing medical expense coverage and are less likely than in the past to provide first-dollar coverage.

Different Contribution Rates
A few employers still maintain separate basic medical and major medical expense plans because different employer contributions are made for each plan. The most common arrangement under these circumstances has the employer paying the entire cost of the basic coverages for the employee (and possibly his or her dependents) and the employee paying a portion, if not all, of the costs of the major medical coverage. However, most employers have a single plan even when the contribution rates for the basic and major medical coverages differ.

Administration and Communication
Most employers want to have benefit plans that minimize administrative problems and that can be easily communicated to employees. In both respects, comprehensive plans have the advantage. With supplemental plans, the employer must often deal with two providers of coverage, so two plans must be properly coordinated so that no undesired gaps in coverage exist. In addition, the processing of claims becomes more burdensome for both the employer and the employees. The complexity of medical expense plans in general makes them difficult to communicate to employees, and the task becomes even more challenging when two plans are used.

Even when a single provider supplies both the basic medical expense plan and a supplemental major medical plan, the same problems may exist. The employer must often negotiate the plans with separate divisions of the provider's organization, and separate claims forms and claims departments are frequently used.

Types of Major Medical Coverage

Most employees have some type of major medical expense coverage that protects against catastrophic medical expenses, with few exclusions or limitations. However, employees must often pay part of the cost of these medical expenses because of deductibles and coinsurance provisions.

Types of Major Medical Coverage
There are two general types of plans for providing major medical coverage—supplemental (or superimposed) plans and comprehensive plans. Supplemental plans coordinate major medical coverage with various basic medical expense coverages. Figure 1 shows one example of such a plan.



Subject to its own limitations and exclusions, a supplemental major medical plan covers the following expenses:

Expenses not within the scope of the basic coverages. For example, benefits for office visits to a physician may be included if the basic coverages provide benefits only for in-hospital visits.

Expenses no longer covered under the basic coverages because those benefits have been exhausted. For example, if the basic coverages provide room-and-board benefits in full, but only for a maximum of 60 days, the major medical plan covers the cost of room and board beginning on the 61st day.

Expenses specifically excluded under the basic coverages. For example, if the basic coverages exclude hospital charges for the treatment of alcoholism, the major medical coverage may provide benefits. However, expenses that are excluded under the basic coverages are often excluded under the major medical plan.

In the comprehensive type of major medical coverage, a single major medical contract covers all medical expenses, as illustrated in Figure 2. In this example, once the deductible is satisfied, most medical expenses are covered subject to a coinsurance provision. Although Figure 2 shows a comprehensive major medical plan in its purest form, most comprehensive medical expense contracts contain modifications of the deductibles and/or coinsurance provisions for certain expenses, often resulting in payment of 100 percent of reasonable and customary charges.