Insuring Your Health
Chapter 9
How Will This Affect Me?
Having adequate health insurance is critically important to your financial plan. Health care costs
have grown dramatically in recent years, and a major illness or accident could wipe you and your
family out financially if you are uninsured. Yet health insurance policies are complicated to price
and to compare. This chapter explains the importance of health insurance and the key
determinants of its costs. The various types of public and private health insurance are described
and a framework for decision making is provided. This includes discussions of how to analyze
your health insurance needs, how to make sense of common policy features, and policy buying
tips. While in political flux, the implications of the Patient Protection and Affordable Care Act of
2010 (ACA) in its current form on your decisions are considered. This chapter also discusses
how to determine whether you need long-term care insurance or disability income insurance.
After reading this chapter, you should understand how to insure your health most effectively and
economically.
Learning Objectives
9-1 Discuss why having adequate health insurance is important and identify the factors
contributing to the growing cost of health insurance.
9-2 Differentiate among the major types of health insurance plans and identify major private and
public health insurance providers and their programs.
9-3 Analyze your own health insurance needs and explain how to shop for appropriate coverage.
9-4 Explain the basic types of medical expenses covered by and the policy provisions of health
insurance plans.
9-5 Assess the need for and features of long-term-care insurance.
9-6 Discuss the features of disability income insurance and how to determine your need for it.
Financial Facts or Fantasies?
These may be used as “teasers” to get the students on the right page with you. Also, they may be
used as quizzes after you covered the material or as “pre–test questions” to get their attention.
With health care insurance that covers the whole family, children may be included up to
age 26 as long as they are full-time students.
Fantasy: Under the Affordable Care Act a child may be covered in a family insurance
plan so long as he or she is under 26 year of age. There is not a requirement that the
child be a full-time student.
Health reimbursement accounts (HRAs) and health savings accounts (HSAs) are both
funded by employers to help their employees cover health-related costs – and any
Disability insurance is helpful only if you make a lot of money – and then only if you are
out of work for a long period of time (at least six months to a year).
Fantasy: Disability income insurance replaces some or all of the weekly earnings lost in
case you are physically unable to work. The coverage usually begins after a short
waiting period and is just as valuable – perhaps more so – to the low-income family as
it is to those with high incomes.
Financial Facts or Fantasies?
These may be used as a quiz or as a pre-test to get the students interested.
1. True False Health care insurance coverage should be viewed as an essential
component of your personal financial plans.
2. True False The difference between a health maintenance organization (HMO) and a
preferred provider organization (PPO) is that the HMO offers a wider
range of choices of physicians, hospitals, and so forth.
3. True False With health care insurance that covers the whole family, children may be
included up to age 26 as long as they are full-time students.
4. True False Health reimbursement accounts (HRAs) and health savings accounts
(HSAs) are both funded by employers to help their employees cover
health-related costs – and any unused money is the employee’s to keep.
5. True False Hospital insurance is the most comprehensive type of medical insurance
you can buy.
6. True False Disability insurance is helpful only if you make a lot of money – and then
only if you are out of work for a long period of time (at least six months to
a year).
Answers:
YOU CAN DO IT NOW
The “You Can Do It Now” cases may be assigned to the students as short cases or problems.
They will help make the topic more real or relevant to the students. In most cases, it will only
take about ten minutes to do, that is, until the student starts looking around at the web site. But
they will learn by doing so.
Compare Policies on an ACA Health Insurance Exchange
The following may be used as cases for the student to work, or for class discussion.
Financial Impact of Personal Choices
Read and think about the choices being made. Do you agree or not? Ask the students to discuss
the choices being made.
Henry Expands His Health Insurance Coverage
Henry Morgan is 28 years old. He works for a company with a good health insurance plan.
Indeed, Henry has heard it’s priced better than most plans and has consequently taken out
the optional expanded dental and vision plans. While he doesn’t currently wear glasses or
contact lenses, he does go for an annual eye exam and wants the extra vision plan in case he
ends up needing corrective lens or has any eye problems. His plan has a $40 co-payment for
an annual eye exam and pays $100 toward eye glass frames plus 20 percent of the rest of
the cost. Contacts lenses have similar coverage. Henry pays just an additional $15 monthly
premium for the vision plan. Henry feels more comfortable having expanded health
insurance coverage.
What do you think about Henry’s decision to purchase the vision insurance?
While Henry feels better having expanded health insurance coverage in general and vision
Insure Your Health!
Financial Planning Exercises
1. Evaluating current health insurance. Assess your current health insurance situation.
What does your policy cover? What is excluded? Are there any gaps that you think need to
be filled? Are there any risks in your current lifestyle or situation that might make
additional coverage necessary? If you were to purchase health insurance for yourself in the
near future, what type of plan would you select, and why? What steps can you take to keep
your health costs down?
2. Comparing health insurance policies. Use Worksheet 9.1. Lexi Thomas, a recent college
graduate, has decided to accept a job offer from a nonprofit organization. She’ll earn
$44,000 a year but will receive no employee health benefits. Lexi estimates that her monthly
living expenses will be about $2,000 a month, including rent, food, transportation, and
clothing. She has no health problems and expects to remain in good health in the near
future. Using the Internet or other resources, gather information about three health
insurance policies that Lexi could purchase on her own. Include at least one HMO. Use
Worksheet 9.1 to compare the policies’ features. Should Lexi buy health insurance? Why
or why not? Assuming that she does decide to purchase health insurance, which of the
three policies would you recommend, and why?
3. Choosing a health insurance plan. Harriet and Jake Sanders have two children, a six-
year old and a five-months old. Their younger child, Alex was born with a congenital heart
defect that will require several major surgeries in the next few years to correct fully. Jake
is employed as a salesperson for a major pharmaceutical firm, and Harriet is a stay-at-
home mother. Jake’s employer offers employees a choice between two health benefit plans:
• An indemnity plan that allows the Sanders to choose health services from a wide range of
doctors and hospitals. The plan pays 80 percent of all medical costs, and the Sanders are
responsible for the other 20 percent. There’s a deductible of $500 per person. Jake’s
employer will pay 100 percent of the cost of this plan for Jake, but the Sanderses will be
responsible for paying $380 a month to cover Harriet and the children under this plan.
• A group HMO. If the Sanders choose this plan, the company still pays 100 percent of the
plan’s cost for Jake, but insurance for Harriet and the children will cost $295 a month.
They’ll also have to make a $20 co–payment for any doctor’s office visits and prescription
drugs. They will be restricted to using the HMO’s doctors and hospital for medical
services.
Which plan would you recommend that the Sanders choose? Why? What other health
coverage options should they consider?
4. Out-of-pocket indemnity plans costs. Samuel Nguyen was seriously injured in a skiing
accident that broke both his legs and an arm. His medical expenses included five days of
hospitalization at $900 a day, $6,200 in surgical fees, $4,300 in physician’s fees (including
time in the hospital and eight follow-up office visits), $520 in prescription medications, and
$2,100 for physical therapy treatments. All of these charges fall within customary and
reasonable payment amounts.
a. If Samuel had an indemnity plan that pays 80 percent of his charges with a $500
deductible and a $5,000 stop-loss provision, how much would he have to pay out of pocket?
b. What would Samuel’s out–of-pocket expenses be if he belonged to an HMO with a $20
co-pay for office visits?
c. Monthly premiums are $155 for the indemnity plan and $250 for the HMO. If he had no
other medical expenses this year, which plan would have provided more cost-effective
coverage for Samuel? What other factors should be considered when deciding between the
two plans?
5. Evaluating health care coverage.
Edward Allen was a self-employed window washer earning approximately $700 per week.
One day, while cleaning windows on the eighth floor of the Second National Bank Building,
he tripped and fell from the scaffolding to the pavement below. He sustained multiple
severe injuries but miraculously survived the accident. He was immediately rushed to the
local hospital for surgery. Edward remained there for 60 days of treatment, after which he
was allowed to go home for further recuperation. During his hospital stay, he incurred the
following expenses: surgeon, $7,500, physician, $2,000, hospital bill for room and board,
$250 per day; nursing services, $1,200; anesthetics, $600; wheelchair rental, $100;
ambulance, $150; and drugs, $350. Edward has a major medical policy that has a $3,000
deductible clause, an 80 percent co-insurance clause, internal limits of $180 per day on
hospital room and board, and $1,500 as a maximum surgical fee. The policy provides no
disability income benefits.
a. Explain the policy provisions as they relate to deductibles, co-insurance, and internal
limits.
Deductibles: The initial amount not covered by an insurance policy and thus the insured’s
b. How much should Edward recover from the insurance company? How much must he
pay out of his own pocket?
Medical Charge
Paid by Edward
Paid by Insurance
Surgeon fee of $7,500
$6,000, not part of deductible
$1,500
Physician fee of $2,000
$2,000
Hospital bill, room and board,
$250/day for 60 days, $15,000
$4,200, not part of deductible
$10,800
Nursing Services $1,200
$1,200
anesthetics, $600
$ 600
wheelchair rental, $100
$ 100
ambulance, $150
$ 150
drugs, $350.
$ 350
Total before deductible and co-pay
$16,700
Deductible paid by Edward
$3,000
-$3,000 = $13,700
Balance subject to co-pay of 80/20
20% * $13,700 = $2,740
80% * $13,700 =
$10,960
Total
$15,940
$10,960
c. Would any other policies have offered Edward additional protection? What about his
inability to work while recovering from his injury?
d. Based on the information presented, how would you assess Edward’s health care
insurance coverage? Explain.
6. Pros and cons of long-term care insurance. Discuss the pros and cons of long-term-care
insurance. Does it make sense for anyone in your family right now? Why or why not? What
factors might change this assessment in the future?
7. Calculating need for disability income insurance. Use Worksheet 9.2. Lorenzo Ricci, a 35-
year-old computer programmer, earns $96,000 a year. His monthly take-home pay is
$4,800. His wife, Siena, works part-time at their children’s elementary school but receives
no benefits. Under state law, Lorenzo’s employer contributes to a workers’ compensation
insurance fund that would provide $2,250 per month for six months if he were disabled and
unable to work.
a. Use Worksheet 9.2 to calculate Lorenzo’s disability insurance needs, assuming that he
won’t qualify for Medicare under his Social Security benefits.
DISABILITY BENEFIT NEEDS
Name(s):
1.
$ 4,800
2.
$________
________
________
2,250
3.
$ 2,250
4.
$ 2,550
b. Based on your answer in part a, what would you advise Lorenzo about his need for
additional disability income insurance? Discuss the type and size of disability income
insurance coverage he should consider, including possible provisions he might want to
include. What other factors should he take into account if he decides to purchase a policy?
8. Calculating your need for disability income insurance. Use Worksheet 9.2. Do you need
disability income insurance? Calculate your need using Worksheet 9.2. Discuss how you’d
go about purchasing this coverage.
Test Yourself
9-1 Why should health insurance planning be included in your personal financial plan?
9-2 What factors have contributed to today’s high costs of health care and health
insurance?
9-3 What are the two main sources of health insurance coverage in the United States?
9-4 What is group health insurance? Differentiate between group and individual health
insurance.
9-5 Describe the features of traditional indemnity (fee-for-service) plans and explain the
differences between them and managed care plans.
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or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a
password-protected website or school-approved learning management system for classroom use.
The indemnity (fee-for-service) plans pays 80% of the usual, customary, and reasonable charges.
The patient selects the medical provider who has no relation to the insurance company.
In a managed care plan, subscribers/users contract with and make monthly payments directly to
the organization that provides the health care service. An insurance company may not even be
involved, although today most major health insurance companies offer both indemnity and
managed care plans. Once you select the managed care organization, that organization selects
the specific doctors or other providers of care.
9-6 Briefly explain how an HMO works. Compare and contrast group HMOs, IPAs, and
PPOs.
A health maintenance organization (HMO) is an organization of hospitals, physicians, and
other health care providers who have joined to provide comprehensive health care services to its
9-7 Discuss the basics of the Blue Cross/Blue Shield plans.
Blue Cross/Blue Shield plans historically were not insurance policies, but rather are prepaid
9-8 Who is eligible for Medicare and Medicaid benefits? What do those benefits
encompass?
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole
or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a
password-protected website or school-approved learning management system for classroom use.
Medicaid is a state program where eligibility various from state to state. The federal government
pays most of the costs to the state. The Medicaid program is jointly funded by the federal
government and states. The federal government pays states for a specified percentage of program
expenditures, called the Federal Medical Assistance Percentage (FMAP). FMAP varies by state
based on criteria such as per capita income. The regular average state FMAP is 57%, but ranges
from 50% in wealthier states up to 75% in states with lower per capita incomes.
9-9 What is the objective of workers’ compensation insurance? Explain its benefits for
9-10 What are the key provisions of the ACA? How is it likely to affect your health care
insurance?
9-11 Explain four methods for controlling the risks associated with health care expenses.
Recall from Chapter 8 that you can deal with risk in four ways: risk avoidance, loss prevention
and control, risk assumption, and insurance.
Risk avoidance: Look for ways to avoid exposure to health care loss before it occurs. For
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole
or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a
password-protected website or school-approved learning management system for classroom use.
drug dependency, improper diet, inadequate sleep, and lack of regular exercise contribute to
more than 60 percent of all diagnosed illnesses.
Risk assumption: Consider the risks that you’re willing to retain as you deal with health
insurance decisions. Some risks pose relatively small loss potential; you can budget for them
rather than insure against them.
Purchasing insurance is the last of the four.
9-12 Explain what factors should be considered in evaluating available employer-sponsored
health insurance plans.
Group plans are less expensive than individual plans. So the factors to examine are the
alternatives that are offered. For example, a single person would not opt for family coverage.
9-13 Discuss possible sources of health insurance available to supplement employer
sponsored health insurance plans.
9-14 Answer the key questions posed to help you choose a plan, based on your current
situation. What type of plan do you think will best suit your needs?