9.2 Medical Expense Insurance (Basic and Major Medical)
Key Takeaways
- Basic plans (hospital, surgical, physicians') pay first-dollar up to low caps; major medical layers deductibles and coinsurance for broad coverage.
- Cost-sharing sequence: deductible first, then coinsurance, all subject to the out-of-pocket (stop-loss) maximum.
- The out-of-pocket maximum is the all-in ceiling and includes the deductible and coinsurance—do not add them on top.
- ACA bans lifetime/annual dollar limits on essential health benefits and caps annual out-of-pocket costs.
- Know deductible variants: calendar-year, per-occurrence, family, carryover, common accident, and corridor.
The Evolution to Major Medical
Medical expense insurance pays the costs of treating sickness and injury—hospital, surgical, and physician charges. Historically these came as separate basic policies, each with its own first-dollar (no-deductible) but limited benefit. Today the dominant form is major medical, a comprehensive plan layered with deductibles, coinsurance, and an out-of-pocket maximum. The exam expects you to recognize both the legacy basic plans and the modern major medical structure.
The Three Basic Medical Plans
Basic plans pay on a first-dollar basis up to a stated limit, then stop. The three classic types are:
- Basic Hospital Expense — pays room-and-board (a daily limit for a set number of days) plus miscellaneous hospital charges (lab, drugs) up to a maximum.
- Basic Surgical Expense — pays the surgeon's fee, often per a relative value or surgical schedule that assigns dollar amounts to procedures.
- Basic Medical (Physicians') Expense — pays non-surgical doctor visits, often limited per day and excluding the first in-hospital visit.
Because basic plans have low caps, they were commonly paired with a supplementary major medical plan that picked up where basic coverage ran out.
Major Medical Cost-Sharing Features
Major medical introduces shared cost mechanisms. Know each term and its sequence:
| Feature | Definition |
|---|---|
| Deductible | Amount the insured pays before the insurer pays |
| Coinsurance | Percentage split after the deductible (e.g., 80/20) |
| Out-of-pocket (stop-loss) max | Annual cap on insured cost-sharing; insurer pays 100% after |
| Copayment | Flat fee per service (e.g., $25 office visit) |
| Lifetime/annual max | Total benefit ceiling (ACA bans these on essential benefits) |
Under the ACA, lifetime and annual dollar limits on essential health benefits are prohibited, and the out-of-pocket maximum is capped each year.
Worked Claim: Deductible, Coinsurance, and Stop-Loss
Assume a major medical plan with a $2,000 deductible, 80/20 coinsurance, and a $6,000 out-of-pocket maximum. The insured incurs a $40,000 covered bill.
- Insured pays the first $2,000 (deductible). Remaining = $38,000.
- Coinsurance 20% of $38,000 = $7,600 owed by insured—but capped.
- Insured cost so far would be $2,000 + $7,600 = $9,600, which exceeds the $6,000 stop-loss.
- Therefore the insured pays only $6,000 total; the insurer pays $34,000.
The trap: candidates forget the out-of-pocket maximum includes the deductible and coinsurance, so they incorrectly total $2,000 + $6,000 = $8,000. The cap is the all-in ceiling.
Deductible Types and Common Provisions
Deductibles come in several flavors the exam tests:
- Per-occurrence (per-cause) — applies to each separate claim.
- Calendar-year (all-cause) — one deductible per year across all claims; most common today.
- Family deductible — once a set number of members meet individual deductibles, the family deductible is satisfied for all.
- Carryover provision — expenses incurred in the last 3 months of the year may apply to next year's deductible.
- Common accident provision — if several family members are injured in one accident, only one deductible applies.
A corridor deductible is a flat amount applied between basic coverage and a supplementary major medical layer.
Eligible Expenses, Exclusions, and the UCR Standard
Major medical pays only eligible charges that are reasonable and customary (also called usual, customary, and reasonable, or UCR)—the prevailing fee for a service in a geographic area. If a provider bills above UCR, the insured may owe the excess (a balance bill) on top of normal cost-sharing. Common exclusions include cosmetic surgery, experimental treatment, on-the-job injuries (covered by workers' compensation), war, and care furnished by a government facility free of charge.
Under the ACA, plans must cover ten categories of essential health benefits: ambulatory care, emergency services, hospitalization, maternity and newborn care, mental health and substance-use services, prescription drugs, rehabilitative services, laboratory services, preventive/wellness care, and pediatric services.
Tax Treatment of Medical Expense Insurance
Taxation rules generate steady exam questions. For employer-paid group medical coverage, premiums paid by the employer are deductible to the business and are not taxable income to the employee; benefits received are received tax-free. For individually purchased coverage, premiums are generally paid with after-tax dollars, though a self-employed individual may deduct premiums above the line and any taxpayer may deduct medical costs exceeding the IRS adjusted-gross-income threshold when itemizing.
The guiding principle: medical-expense benefits reimburse a cost and are not taxable, because the insured is merely made whole. Contrast this with disability income, where benefits may be taxable depending on who paid the premium. Keep the medical-expense rule—benefits tax-free—firmly in mind.
A major medical plan has a $1,000 deductible, 80/20 coinsurance, and a $5,000 out-of-pocket maximum. The insured incurs $60,000 in covered charges. How much does the insured pay in total?
Which provision allows medical expenses incurred in the final three months of the year to count toward the next year's deductible?
Basic vs. Major Medical and the Coverage Gaps
Older basic medical plans paid first-dollar benefits with no deductible but had low, separate limits for hospital, surgical, and physician expenses — leaving large gaps. Major medical was layered on top to cover catastrophic costs with a deductible and coinsurance. The exam tests two combined designs:
- Supplementary major medical — basic plans pay first up to their limits, then a corridor deductible applies before major medical takes over.
- Comprehensive major medical — a single policy combining basic and major medical under one deductible and coinsurance, the dominant modern form.
Deductible Types
| Deductible | How it works |
|---|---|
| Flat/initial | Fixed amount per claim or per year before benefits |
| Corridor | Applies between basic benefits and major medical |
| Carryover | Expenses in the last 3 months of the year count toward next year's deductible |
| Family/common-accident | One deductible if several family members are hurt in the same accident |
Worked Carryover Example
An insured with a $500 calendar-year deductible incurs $400 of covered expenses in October-December. Under the carryover provision, that $400 carries into the next year and is applied toward the new $500 deductible, so only $100 more must be met before the new year's benefits begin — preventing the insured from satisfying two deductibles in a short span.
Common Exclusions and Limits
Medical-expense plans commonly exclude cosmetic surgery, experimental treatment, war, self-inflicted injury, and care covered by workers' compensation. Pre-existing condition limitations were largely eliminated for ACA-compliant major medical, but still appear on short-term and excepted-benefit plans. The stop-loss/out-of-pocket maximum caps the insured's coinsurance exposure, after which the plan pays 100% — the safety valve distinguishing modern comprehensive major medical from old basic plans with hard internal limits.