9.2 Medical Expense Insurance (Basic and Major Medical)
Key Takeaways
- Basic medical expense plans pay first-dollar with no deductible but have low scheduled limits across hospital, surgical, and physician coverages.
- Major medical adds a deductible, coinsurance, and high (now no lifetime) limits for catastrophic, comprehensive coverage.
- Supplementary major medical stacks on a basic plan behind a corridor deductible; comprehensive major medical integrates both into one plan.
- Coordination of benefits caps total recovery at 100% of the loss; the secondary plan pays only the unpaid balance.
- The birthday rule makes primary the plan of the parent whose birthday falls earlier in the calendar year.
Medical expense insurance reimburses the cost of treating illness and injury. Historically it came in two layers that the exam still tests: basic medical expense plans and major medical plans. Understanding how they differ in deductibles, limits, and coordination explains why modern comprehensive plans are structured the way they are.
Basic Medical Expense Plans
Basic plans are 'first-dollar' coverage: they pay from the first dollar of a covered loss with no deductible, but they impose relatively low scheduled limits and cover only specific categories. The three classic basic coverages are:
- Hospital expense room and board (often a per-day limit for a maximum number of days) plus miscellaneous hospital charges (a multiple of the daily room rate, e.g., 10x or 20x).
- Surgical expense pays surgeon fees by a schedule (a dollar amount per procedure) or by relative value/usual-customary-reasonable methods.
- Physician (medical) expense non-surgical doctor visits, often capped per visit and per number of visits.
Because limits are low and gaps are common, basic plans were typically paired with a major medical plan stacked on top.
Major Medical Plans
Major medical provides broad, high-limit catastrophic protection. Its defining features:
| Feature | Major Medical |
|---|---|
| Deductible | Yes (often substantial; may be per-cause or calendar-year) |
| Coinsurance | Yes (e.g., 80/20) |
| Maximum benefit | Historically high lifetime cap; ACA bans lifetime/annual limits on essential health benefits |
| Coverage scope | Comprehensive: hospital, surgical, physician, drugs, lab |
| Stop-loss | Out-of-pocket maximum limits insured exposure |
Two structures appear on the exam:
- Supplementary major medical sits on top of a basic plan; the basic plan pays first to its limits, then a corridor deductible applies before major medical begins.
- Comprehensive major medical a single plan combining basic and major medical with one deductible and coinsurance, which is the modern standard.
Deductible types to recognize: flat/calendar-year (one deductible per year regardless of cause), per-cause (a new deductible for each separate illness/accident), carryover (expenses in the last three months of the year credited to next year's deductible), and family (deductible satisfied once the family's combined expenses reach an aggregate).
Coordination of Benefits and Common Provisions
When a person is covered by two plans, coordination of benefits (COB) prevents collecting more than 100% of the loss. One plan is primary (pays first as if no other coverage existed) and the other is secondary (pays the remaining eligible expense up to its own limits). For a child covered under both parents, the birthday rule makes the plan of the parent whose birthday falls earlier in the calendar year primary.
Worked COB example: Total bill $5,000. The primary plan pays $4,000. The secondary plan would have paid $4,500 on its own; it now pays only the $1,000 balance, never the difference up to its own number. The insured collects $5,000 total, not $8,500.
Know these companion concepts: usual, customary, and reasonable (UCR) caps reimbursement at prevailing area charges; preexisting condition is a condition treated or diagnosed before coverage (ACA prohibits exclusions on ACA-compliant plans); and preadmission certification plus second surgical opinion are utilization-review cost controls common in major medical.
Basic vs. Major Medical and the Worked Stack
Basic medical plans pay first-dollar benefits for specific services (hospital, surgical, physician) usually with no deductible but low limits. Major medical layers broad, high-limit catastrophic coverage on top, applying a deductible, coinsurance, and an out-of-pocket maximum. A comprehensive major medical plan combines both into one contract.
Worked stack: a plan has a $2,000 deductible, 80/20 coinsurance, and a $6,000 out-of-pocket max. On a $30,000 claim, the insured pays the $2,000 deductible, then 20% of the remaining $28,000 = $5,600, for $7,600 total — but the out-of-pocket cap stops the insured's share at $6,000, and the plan pays the other $24,000. Applying deductible, then coinsurance, then the cap in that order is the heart of medical-expense math.
Coordination of Benefits and Standard Provisions
When a person is covered by two group plans, coordination of benefits (COB) prevents paying more than 100% of the bill. The primary plan pays first to its normal limits; the secondary plan may pay the remaining allowable balance. The birthday rule decides which parent's plan is primary for a child — the parent whose birthday falls earlier in the calendar year.
Other standard medical provisions include the pre-existing condition treatment (now sharply limited by the ACA for major medical), coinsurance sharing, and stop-loss (the out-of-pocket maximum that caps insured exposure). COB and the birthday rule are reliably tested because they decide payment order, not benefit amount.
Common Exclusions and Limited-Benefit Caveats
Medical expense plans exclude predictable or non-medical costs: cosmetic surgery (unless reconstructive), experimental treatment, war or military injuries, self-inflicted injury, and care covered by workers' compensation. Pre-ACA plans also excluded pre-existing conditions; ACA-compliant major medical no longer can.
A frequent exam contrast is the limited-benefit plan — such as a dread-disease or hospital-indemnity policy — which pays a fixed cash amount per event rather than reimbursing actual charges. These are supplements, not substitutes for comprehensive coverage, and producers must not market them as major medical. Recognizing that a fixed-indemnity payout (e.g., $300/day in hospital) is not comprehensive reimbursement is a recurring test point.
A basic hospital expense plan pays a daily room-and-board limit but provides no deductible and relatively low maximums. To cover catastrophic costs above those limits, it is most commonly paired with which plan, separated by a corridor deductible?
An insured incurs a $9,000 covered claim. The primary plan pays $6,500. The secondary plan, acting alone, would have paid $7,000. Under coordination of benefits, how much does the secondary plan pay?