9.2 Medical Expense Insurance (Basic and Major Medical)

Basic Medical Expense Coverage

Historically, medical-expense insurance was sold as separate basic policies, each covering a narrow slice of care. Basic plans pay first-dollar benefits — they have no deductible — but they are limited by low internal dollar caps. The exam still tests the three classic basic coverages:

• Basic Hospital Expense — pays room and board up to a daily maximum for a set number of days, plus miscellaneous hospital charges (lab, drugs, operating room) up to a separate limit.
• Basic Surgical Expense — pays surgeons' fees, traditionally on a surgical schedule (a fixed dollar amount per listed procedure) or a relative value scale (points multiplied by a conversion factor).
• Basic Medical (Physicians') Expense — pays non-surgical doctor visits, often capped per visit and per number of visits.

Because these caps are low, basic plans leave large gaps. That gap drove the development of major medical.

Closely related are limited-benefit plans the exam may list: hospital indemnity (a flat dollar amount per day of confinement, paid regardless of actual charges), accident-only, dread-disease/critical-illness (a lump sum on diagnosis of a named disease), and vision or prescription-drug riders. These pay defined amounts, not actual expenses, and are supplements, not comprehensive coverage. Selling a limited plan as if it were major medical is a serious market-conduct violation.

Major Medical Insurance

Major medical provides broad, high-limit coverage for nearly all medical services, subject to cost-sharing. Two structures appear on the exam:

1. Comprehensive major medical — a single policy with one deductible covering both basic and catastrophic expenses.
2. Supplementary (superimposed) major medical — sits on top of a basic plan; once the basic plan's limits are exhausted, the major medical picks up, often after a corridor deductible (a deductible applied in the 'corridor' between the basic benefits and the major medical benefits).

Key cost-sharing features:

Deductible Types

• Flat/initial deductible — a fixed amount per claim or per year.
• Calendar-year deductible — satisfied once per calendar year by accumulated expenses, then resets January 1.
• Family deductible (aggregate) — total the whole family must meet; often satisfied when, say, 2 or 3 individual deductibles are met.
• Carryover provision — expenses incurred in the last 3 months of a year that count toward both that year's and the next year's deductible.
• Common accident provision — when multiple family members are injured in one accident, only one deductible applies.

Worked Numeric: Coinsurance and Stop-Loss

A comprehensive major medical plan has a $2,000 calendar-year deductible, 80/20 coinsurance, and a $6,000 out-of-pocket maximum (the OOP max includes the deductible). Covered charges for the year total $50,000.

Step 1 — Insured pays the deductible: $2,000. Remaining eligible: $50,000 − $2,000 = $48,000.

Step 2 — Apply 20% coinsurance to the $48,000: 20% × $48,000 = $9,600 — but this would push the insured past the OOP max.

Step 3 — Apply the stop-loss. The insured has already paid $2,000 of the $6,000 OOP max, leaving $4,000 of coinsurance room. After paying $4,000 in coinsurance, the insured hits $6,000 total and the plan pays 100% of the rest.

Insured's total cost = $6,000. Insurer pays $44,000. The $6,000 cap, not the raw 20%, governs once the stop-loss is reached.

Exclusions and Common Traps

Typical major medical exclusions: cosmetic surgery (unless reconstructive), experimental treatment, war, intentionally self-inflicted injury, dental/vision (unless added), and care covered by workers' compensation.

Trap 1: Coinsurance is the insured's share, not the insurer's — an "80/20" plan pays 80% and the insured pays 20%. Trap 2: A copay is a flat dollar amount per service (e.g., $30 per office visit); coinsurance is a percentage. Trap 3: The out-of-pocket maximum caps cost-sharing, but premiums never count toward it, and charges above usual-and-customary limits or for non-covered services usually do not count either.

Benefit Periods and Restoration

Older major medical contracts express limits as a lifetime maximum or a per-cause (per-illness) maximum; the ACA eliminated lifetime and annual dollar limits on essential health benefits, but the exam still tests the older mechanics. A restoration of benefits provision restores a portion of the used-up lifetime maximum each year so a long claim does not permanently exhaust the policy.

A benefit period for a single cause may run, for example, until the insured has been treatment-free for 6 consecutive months, after which a new condition starts a fresh deductible and benefit period.

Pre-existing-condition rules also shape early payouts: a pre-existing condition is one for which the insured received treatment or advice within a stated look-back window before the effective date. The ACA now bars pre-existing-condition exclusions on most major medical, but the exam still tests the classic mechanics, including the probationary period for sickness and the disability income elimination period, both contrasted in Section 9.1.

Deductibles, Coinsurance, and Stop-Loss Worked

Major-medical cost-sharing stacks in a fixed order, and the exam loves the arithmetic. The insured pays the deductible first, then shares costs by coinsurance until the out-of-pocket maximum (stop-loss) caps the insured's spending, after which the plan pays 100%.

Worked example: a plan has a $1,000 deductible, 80/20 coinsurance, and a $5,000 out-of-pocket maximum, on a $50,000 covered bill.

Total insured cost = $5,000; insurer pays $45,000. Note whether the deductible counts toward the OOP max (it usually does). Distinguish a flat/per-occurrence deductible from a calendar-year (aggregate) deductible, and a family deductible (often 2-3x the individual). A corridor deductible sits between basic and major-medical layers in older supplemental major medical designs. Basic plans pay first-dollar but with low caps; major medical adds high limits with cost-sharing.