9.2 Medical Expense Insurance (Basic, Major Medical)

Medical Expense Insurance Structures

Medical expense insurance pays the cost of treating sickness and injury. The exam tests three historic structures and how modern comprehensive major medical combined them into one contract.

Basic plans came first and provided narrow, first-dollar coverage. Major medical was created to cover the catastrophic gap basic plans left open. Today most coverage is comprehensive major medical that merges both layers.

Basic Medical Expense Plans

Basic plans provide first-dollar coverage (no deductible) up to a relatively low limit, in three coordinated pieces:

• Basic Hospital Expense — pays room and board (a daily maximum for a set number of days) plus miscellaneous hospital charges (lab, X-ray, drugs).
• Basic Surgical Expense — pays the surgeon from a surgical schedule (a dollar amount assigned to each procedure) or on a relative-value basis using a conversion factor.
• Basic Physicians' (Medical) Expense — pays non-surgical physician visits, usually limited per visit and per number of visits.

Because the limits are low, basic plans leave large gaps for catastrophic care — exactly the gap major medical was built to fill.

Major Medical Features

Major medical offers high or unlimited maximums and broad coverage. The defining features the exam tests:

Two arrangements exist. Supplemental major medical sits on top of a basic plan; after the basic plan pays first-dollar benefits, a corridor deductible bridges to the major medical layer. Comprehensive major medical merges basic and major medical into one contract with a single deductible and coinsurance — the dominant modern form.

Worked Example: Coinsurance and Stop-Loss

Maria has a $2,000 deductible, 80/20 coinsurance, and a $6,000 out-of-pocket maximum, and incurs $30,000 in covered charges.

1. Maria pays the first $2,000 (deductible).
2. The remaining $28,000 splits 80/20; Maria's 20% = $5,600.
3. Deductible + coinsurance = $2,000 + $5,600 = $7,600 — but the OOP max caps her at $6,000.
4. Maria pays $6,000; the insurer pays the remaining $24,000.

The trap: students stack the deductible on top of the OOP max. Under ACA rules the deductible counts toward the out-of-pocket maximum, so the OOP max is the true ceiling.

Deductible Variations and Exclusions

Know how deductibles are structured:

• Flat / per-cause — applies once per illness or injury.
• Calendar-year (integrated) — a single annual amount across all causes; standard today.
• Family deductible — an embedded individual limit inside an aggregate family limit; once the family total is met, the plan pays for everyone.
• Carryover provision — expenses applied to the deductible in the last three months of the year carry into next year's deductible.

Common exclusions: cosmetic surgery (unless reconstructive), intentionally self-inflicted injury, war, services covered by workers' compensation, and experimental treatment. Post-ACA individual and small-group major medical must cover the ten Essential Health Benefits, so it cannot exclude maternity, mental health, or prescription drugs.

Surgical Schedules and Relative Value Scales

Basic surgical expense coverage reimburses the surgeon two ways, and the exam tests the difference.

A surgical schedule lists a flat dollar amount for each named procedure. If the schedule pays $1,200 for an appendectomy and the surgeon bills $1,500, the insured owes the $300 excess on a scheduled plan.

A relative value scale assigns each procedure a unit value reflecting its complexity (an appendectomy might be 200 units, a complex spinal fusion 1,000). The plan then multiplies units by a conversion factor (a dollar amount per unit) to compute the benefit. This keeps payments proportional to difficulty and is easier to update — only the conversion factor changes when costs rise.

Coinsurance Direction and the Common Provisions

Coinsurance is always written as the plan's share first: "80/20" means the plan pays 80% and the insured pays 20% after the deductible. A richer "90/10" plan shifts more cost to the insurer and carries a higher premium.

Two more provisions appear repeatedly:

• A stop-loss (out-of-pocket maximum) ends the insured's coinsurance obligation once their share reaches the cap; the plan then pays 100% of covered charges for the rest of the year.
• A pre-existing condition under pre-ACA individual plans could be excluded for a stated look-back period, but ACA-compliant major medical may not impose any pre-existing exclusion or waiting period.

Remember: copay is a flat dollar amount per service; coinsurance is a percentage of the charge.

Hospital Indemnity and Limited Plans

Not every medical product is comprehensive. The exam contrasts true expense coverage with fixed-benefit and limited plans that pay regardless of actual charges:

• A hospital indemnity (hospital confinement) policy pays a flat amount per day of confinement — e.g., $250/day for a 5-day stay pays $1,250 — no matter what the hospital actually bills. It supplements, never replaces, major medical.
• Dread-disease (critical illness) plans pay a lump sum on diagnosis of a named condition such as cancer or heart attack.
• Accident-only plans cover injury but exclude sickness entirely.

These are excepted benefits under the ACA, so they are not subject to Essential Health Benefit rules and may exclude pre-existing conditions. A key trap: because a hospital indemnity policy pays a stated sum, the insured can profit if benefits exceed actual cost — it is not a pure indemnity contract despite the name. Compare this to comprehensive major medical, which reimburses only covered charges and coordinates with other coverage to prevent over-recovery.