9.2 Medical Expense Insurance (Basic and Major Medical)

Two Generations of Medical Expense Coverage

The national exam tests the historical structure of medical expense insurance because the terminology survives in modern plans. Coverage evolved from narrow basic benefits to broad major medical plans, and finally to today's comprehensive ACA-compliant plans.

Basic Medical Expense Plans

Basic plans pay first-dollar coverage - usually no deductible - but only up to low, fixed limits for specific services. Each benefit stands alone.

Trap: Basic plans have NO deductible but LOW limits. When the limit is exhausted, the insured pays everything else. They were designed to be supplemented by a major medical plan.

Major Medical Plans

Major medical introduced broad coverage with a deductible, coinsurance, and high or unlimited maximums. Two designs:

• Supplementary major medical - layered on top of a basic plan; begins paying after the basic limits are exhausted, often with a corridor deductible bridging the gap.
• Comprehensive major medical - a single plan combining basic and major medical features under one deductible and coinsurance structure. This is the ancestor of modern plans.

Common Major Medical Provisions

Worked Numeric: Corridor Deductible

A supplementary major medical plan layers over a basic plan that pays $5,000 of a $9,000 hospital bill. A $300 corridor deductible applies before major medical pays, then 80/20 coinsurance.

Basic plan pays:          $5,000
Remaining charges:        $9,000 - $5,000 = $4,000
Corridor deductible:      insured pays $300
Subject to coinsurance:   $4,000 - $300 = $3,700
Major medical (80%):      pays $2,960
Insured coinsurance (20%):pays $740
Total insured cost:       $300 + $740 = $1,040

ACA Comprehensive Coverage

Modern individual and small-group plans must cover the ten Essential Health Benefits (ambulatory, emergency, hospitalization, maternity/newborn, mental health/substance use, prescription drugs, rehabilitative, lab, preventive/chronic, and pediatric services including dental and vision). The ACA bans annual and lifetime dollar limits on essential benefits and requires preventive care at no cost-sharing.

• Metal tiers describe actuarial value (the share of costs the plan pays): Bronze ~60%, Silver ~70%, Gold ~80%, Platinum ~90%.
• Lower-metal plans have lower premiums but higher deductibles and cost-sharing.

Surgical Schedules and the Relative Value Scale

Basic surgical coverage pays per a surgical schedule that assigns a dollar amount to each procedure, or per a relative value scale that assigns unit points to each procedure multiplied by a conversion factor. Both cap the surgeon's reimbursement. Under a relative value approach, an appendectomy worth 30 units at a $50 conversion factor pays $1,500. The exam tests that surgical schedules and relative value scales are basic-plan reimbursement methods, distinct from the deductible-and-coinsurance design of major medical.

Hospital Indemnity vs. Hospital Expense

Do not confuse two similarly named coverages. Hospital expense is a basic medical plan that reimburses actual room/board and miscellaneous charges up to limits. Hospital indemnity (a supplemental policy) pays a fixed daily, weekly, or per-event cash benefit (e.g., $300 per day of confinement) regardless of actual charges, and the cash goes to the insured, not the provider.

Limited and Supplemental Policies

The national exam also recognizes limited medical policies that pay only for narrowly defined risks. Examples include dread-disease/critical-illness policies (lump sum on diagnosis of a covered illness such as cancer or stroke), accident-only policies (no sickness coverage), and dental/vision plans. These supplement, but cannot substitute for, comprehensive ACA coverage; producers must disclose their limited nature so a client does not believe they are fully insured.

Annual and Lifetime Maximums

Legacy major medical plans capped total benefits with annual and lifetime maximums (e.g., $1,000,000 lifetime). The ACA prohibits dollar limits on Essential Health Benefits, so a compliant comprehensive plan has no annual or lifetime cap on essential care. The out-of-pocket maximum still applies to the insured's cost-sharing. Limited supplemental policies, which do not cover essential benefits, may still carry benefit maximums.

Preventive Care at No Cost-Sharing

ACA-compliant plans must cover a list of preventive services with no deductible, copay, or coinsurance when delivered in-network. These include routine immunizations, many cancer screenings (mammograms, colonoscopies), blood pressure and cholesterol checks, and well-child visits. The exam tests that preventive care is exempt from cost-sharing - the insured pays $0 even before meeting the deductible - which is a deliberate cost-containment design to catch disease early.

Coinsurance and the Stop-Loss Feature

In a comprehensive major medical plan, the stop-loss (out-of-pocket maximum) protects the insured from catastrophic coinsurance. Consider an 80/20 plan with a $2,000 deductible and a $7,000 stop-loss on a $60,000 bill.

Deductible:            insured pays $2,000
Remaining $58,000 x 20%: insured share $11,600
Running total:         $13,600 -> exceeds $7,000 stop-loss
Insured pays:          $7,000
Insurer pays:          $53,000

After the stop-loss is reached, the plan pays 100% of additional covered in-network charges for the rest of the year, and premiums continue regardless.

Common Exclusions in Medical Expense Plans

Even comprehensive plans exclude certain items, and the exam expects recognition of typical exclusions: cosmetic surgery (unless reconstructive), experimental treatment, services covered by workers' compensation, care received outside the network without authorization (HMO), and expenses arising from war or while committing a felony. Producers disclose these so clients understand the limits of coverage.