5.1 Health Insurance Basics & Medical Expense

What Health Insurance Does

Health insurance transfers the financial risk of medical expenses from an individual to an insurer in return for a premium. Texas regulates these contracts under the Insurance Code, and the exam expects you to know how the insured and insurer share costs.

Unlike life insurance, which pays a fixed face amount, most health coverage is reimbursement-based — it pays actual covered charges (up to plan limits) after the insured satisfies cost-sharing requirements. A small category of plans pay a fixed dollar amount per day or per event regardless of actual cost; these are indemnity or valued benefits (e.g., a hospital indemnity plan paying $200/day).

Cost-Sharing Building Blocks

Four terms describe how the insured and insurer split the bill. Memorize the order in which they apply.

A classic exam scenario: a plan has a $1,000 deductible and 80/20 coinsurance. On a $6,000 covered claim, the insured pays the first $1,000, then 20% of the remaining $5,000 ($1,000), for a total of $2,000; the insurer pays $4,000.

Stop-Loss and Out-of-Pocket Maximums

The stop-loss provision (also called the out-of-pocket maximum) protects the insured from catastrophic coinsurance. Once the insured's cumulative deductible and coinsurance reach the stop-loss figure for the year, the insurer pays 100% of additional covered expenses. This is why a policy can advertise "unlimited" major-medical protection — the insured's exposure is capped even though benefits are not.

Distinguish three other limit terms the exam loves:

• Coinsurance reduces moral hazard by keeping the insured financially involved.
• Copayment is a flat dollar charge per service, common in managed care, and usually does NOT count toward the deductible.
• Benefit limits cap what the insurer will pay — per service, per year, or per lifetime. The Affordable Care Act prohibits annual and lifetime dollar limits on essential health benefits, a frequently tested point.

Basic Medical vs. Major Medical

Historically, basic medical expense plans provided first-dollar coverage — they paid from the first dollar with no deductible, but had low benefit limits and covered only specific services (hospital, surgical, physicians' visits). They were sold as separate basic hospital, basic surgical, and basic physicians' expense policies.

Major medical plans solved the limit problem: they feature a deductible, coinsurance, and high overall maximums (often $1 million or unlimited) covering a broad range of services. The trade-off is that the insured shares more of the early cost.

Comprehensive Major Medical

Comprehensive major medical combines the two approaches into one contract: it layers a basic plan's first-dollar features over a major medical plan's high limits, administered under a single deductible and coinsurance structure. This is the dominant individual-and-group design and the one the exam treats as the modern standard.

A related term is the corridor deductible — used when a separate major-medical plan sits on top of a basic plan. The basic plan pays first-dollar benefits up to its limit; then the insured pays a small corridor deductible before the major-medical layer engages.

Consumer-Directed Plans: HSA, HRA, FSA

Three tax-advantaged accounts pair with health coverage. Know who owns them and the funding rules.

A Health Savings Account (HSA) must be paired with a qualifying High-Deductible Health Plan (HDHP). For 2026, an HDHP must have a minimum annual deductible of $1,700 (self-only) or $3,400 (family) and an out-of-pocket maximum no greater than $8,500 (self-only) or $17,000 (family). The 2026 HSA contribution limit is $4,400 self-only and $8,750 family, plus a $1,000 catch-up contribution at age 55 or older. HSA funds are owned by the individual, are portable between jobs, and roll over indefinitely.

A Health Reimbursement Arrangement (HRA) is employer-funded and employer-owned; unused amounts may roll over only if the employer permits. A Flexible Spending Account (FSA) is funded with the employee's pre-tax salary and is generally "use-it-or-lose-it" (subject to a limited carryover or grace period). The HSA's triple tax advantage — pre-tax contributions, tax-free growth, tax-free qualified withdrawals — makes it the most heavily tested of the three.

Common Traps on This Topic

• A copayment is a flat per-visit charge and usually does NOT apply toward the deductible; a deductible is a separate annual threshold. The exam often pairs these to see if you confuse them.
• The out-of-pocket maximum counts deductibles, coinsurance, and copays, but it does not include monthly premiums. Premiums never count toward stop-loss.
• An individual must have no other disqualifying coverage (such as a general-purpose FSA or Medicare enrollment) to contribute to an HSA. Being enrolled in Medicare ends HSA eligibility.
• HSA withdrawals for non-qualified expenses before age 65 are taxable and hit with a 20% penalty; after age 65, non-qualified withdrawals are taxed as income but carry no penalty — the account then behaves like a traditional retirement account for non-medical use.