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. The implications of the Patient Protection and Affordable Care Act of 2010 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 Goals
LG1 Discuss why having adequate health insurance is important and identify the factors
contributing to the growing cost of health insurance.
The estimates of the increasing costs of health care should be noted. While it is true that two-
thirds of health costs are incurred in the last three years of life, it is also true that inability to pay
health costs is the number cause of individual bankruptcies. Some health insurance is necessary
to have a sound financial plan.
LG2 Differentiate among the major types of health insurance plans and identify major private
and public health insurance providers and their programs.
Exhibit 9.2 gives a brief comparison of the major types of health insurance. The Affordable Care
Act major provisions should be discussed. The Health Saving Accounts should be discussed.
For young people who are generally healthy, the HSA is a good way to provide for health care
throughout life.
LG3 Analyze your own health insurance needs and explain how to shop for appropriate
coverage.
The information on Risk Avoidance is good and should be emphasized. The questions in Section
9-3c should be listed and discussed. While most will just take whatever group plan their
employer offers, some will have to search out a plan on their own.
LG4 Explain the basic types of medical expenses covered by and the policy provisions of health
insurance plans.
The text does this and I would use the class time otherwise.
LG5 Assess the need for and features of long-term-care insurance.
The need for and the cost are the issues. Generally it covers nursing home care which is
expensive, but the amount the insurance pays does not cover the cost. Also, note that the average
nursing home stay is about 15 months, less than two years. The policy normally have a six
month waiting period, so on average you get nine months of benefits. It is a costly decision, but
for a risk adverse person it may be a good thing.
LG6 Discuss the features of disability income insurance and how to determine your need for it.
Students probably identify disability insurance with the duck on the Aflac commercials. But
most disability insurance is a group plan from their employer. The risk of needing disability
insurance is small and the cost is small. The need can be great if you become disabled due to
accident or illness. Key point is “cost is small”.
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.
Health care insurance coverage should be viewed as an essential component
of your personal financial plans.
Fact: Health care insurance not only helps you meet the costs of illness or
injury, but it also protects your existing assets and nancial plans.
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.
Fantasy: One of the drawbacks of an HMO is that it is common to be treated
at its central facility and by its own doctors. More options are, however,
being o ered. In a PPO, on the other hand, there are typically more
opportunities to choose your health care providers from a network of
designated physicians and hospitals.
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 A ordable 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 unused money is the employee’s to keep.
Fantasy: While both accounts are consumer-directed plans, HRAs are funded
solely by employers. In contrast, the money in HSAs is provided by
employees, employers, or both to be spent on routine medical costs. If you
change jobs, the HRA money remains with your employer. However, the
money in an HSA belongs to the employee.
Hospital insurance is the most comprehensive type of medical insurance you
can buy. Fantasy: Major medical or comprehensive major medical provides
the most complete coverage, whereas hospital insurance covers only the
costs incurred while conned to a hospital.
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:
1. True 2. False 3. False 4. False 5. False 6. False
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
It’s worth taking the time to survey the policies and premiums available to you on an ACA health
insurance marketplace. Just go to https://www.healthcare.gov/see-plans. All you have to do is
put in your zip code and some basic information on yourself. If you’re shopping, it provides
useful information. And if you already have a plan through your job, it’ll be interesting to see
how it compares. It’s easy and you can do it now.
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.
Josh Expands His Health Insurance Coverage
Josh Wallace is 27 years old. He works for a company with a good health insurance plan.
Indeed, Josh 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. Josh pays just an additional $15 monthly
premium for the vision plan. Josh feels more comfortable having expanded health
insurance coverage.
What do you think about Josh’s decision to purchase the vision insurance?
While Josh feels better having expanded health insurance coverage in general and vision
coverage in particular, it isn’t currently a cost effective decision. Josh makes a $40 co-payment
for an annual eye exam, which is probably cheaper than the full cost of an eye exam. But he
doesn’t wear glasses or contacts. His $15 monthly premium costs him $180 per year. It’s
Insure Your Health!
Health care costs have increased dramatically in recent years, and many insurance providers have
reduced their coverage, leaving the individual to foot more of the bill. In this project, you’ll
examine your health insurance needs and determine the coverage that’s appropriate for you.
First, make a list of the possible health care needs you’re likely to have during the year. Be sure
to include the potential accident risks to which you’re typically exposed in pursuit of your
lifestyle activities. Then, if you currently have health insurance, make a list of the coverage it
provides, including deductibles, co-insurance amounts, prescription coverage, policy limits and
exclusions, and so forth. Is your coverage adequate in light of your needs? Are there ways you
can reduce your costs? If you don’t currently have health insurance, research possible providers.
Can you obtain insurance through your university, place of employment, or through an
organization to which you belong? Do you qualify for insurance that may be provided by your
state? Consider all of your feasible alternatives, the coverages that would be provided, and the
cost of each.
Test Yourself
9-1 Why should health insurance planning be included in your personal financial plan?
A study done at Harvard University indicates that medical expenses are the biggest cause of
bankruptcy, representing 62% of all personal bankruptcies. Health costs are increasing yearly;
9-2 What factors have contributed to today’s high costs of health care and health
insurance?
It is commonly stated that the demand for health services is a function of supply. If the service is
provided, it will be used and cost is not a limiting factor. In addition to the demand for health
services driving the cost up, new technologies are being applied to health problems and the
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.
Group health insurance refers to health insurance contracts written between a group (such as an
employer, union, credit union, or other organization) and the health care provider: a private
insurance company, Blue Cross/Blue Shield plan, or a managed care organization. With group
policies the under writer uses the statistics of the group to set the premium. Typically, a group
9-5 Describe the features of traditional indemnity (fee-for-service) plans and explain the
differences between them and managed care plans.
Most private health insurance plans fall into one of two categories: traditional indemnity (fee-for-
service) plans and managed care plans, which include health maintenance organizations
(HMOs), preferred provider organizations (PPOs), and similar plans. Both types of plans provide
financial aid for the cost of medical care arising from illness or accidents, but they do so in
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
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
An individual practice association (IPA) is the most popular type of HMO. IPA members
receive medical care from individual physicians practicing from their own offices and from
A preferred provider organization (PPO) is a managed care plan that has the characteristics of
both an IPA and an indemnity plan. An insurance company or provider group contracts with a
PPO customers Unlike the HMO, however, a PPO also provides insurance coverage for medical
services not provided by the PPO network, so you can choose to go to other doctors or hospitals.
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
hospital and medical expense plans. In recent years the Blues have incorporated as for profits
9-8 Who is eligible for Medicare and Medicaid benefits? What do those benefits
encompass?
Medicare is a federally funded and operated plan that provides health insurance to all who are 65
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
9-9 What is the objective of workers’ compensation insurance? Explain its benefits for
employees who are injured on the job or become ill through work-related causes.
Workers’ compensation insurance is designed to compensate workers who are injured on the
job or become ill through work-related causes. Although mandated by the federal government,
each state is responsible for setting workers’ compensation legislation and regulating its own
9-10 What are the key provisions of the ACA? How is it likely to affect your health care
insurance?
The ACA has two key goals:
Reduce the number of uninsured citizens in the country. All citizens not covered by
Reduce the increases in health care costs by providing a “state based” health insurance
The impact on health care insurance is large. Insurance policies must provide a list of essential
health benefits required by the ACA. The amount spent on administration and marketing of the
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
Loss prevention and control: People who accept responsibility for their own well-being and
live healthier lifestyles can prevent illness and reduce high medical costs. Smoking, alcohol and
Risk assumption: Consider the risks that you’re willing to retain as you deal with health
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
Many employers will offer a flexible benefit plan, referred to as a cafeteria plan by the enabling
Some employers will offer a Health Savings Account where the employer and employee may
contribute pretax income to the plan. The funds may be used for health services in the current or
Another possible benefit is insurance for retirees. The employer may continue to pay some
9-13 Discuss possible sources of health insurance available to supplement employer
sponsored health insurance plans.
Additional insurance is normally available from the group insurance provider, although the
employee will have to pay the cost. This insurance may be funded with a flexible benefit
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?
The financial road sign, “Choosing a Health Insurance Plan” gives a list of questions to answer
in selecting a plan. They are:
Ask the following questions when choosing among health care insurance plans:
• Can I choose to use any doctor, hospital, clinic, or pharmacy?
9-15 Explain the differences between hospitalization insurance and surgical expense
insurance.
Hospitalization policies usually pay for a portion of:
(1) the hospital’s daily semiprivate room rate, which typically includes meals, nursing care, and
(2) the cost of ancillary services, such as laboratory tests, imaging, and medications you receive
Surgical expense coverage is provided as part of a hospitalization insurance policy or as a rider
to such a policy. Most plans reimburse you for reasonable and customary surgical expenses
9-16 What are the features of a major medical plan? Compare major medical to
comprehensive major medical insurance.
Major medical coverage is designed to finance medical costs of a more catastrophic nature and
provides benefits for nearly all types of medical expenses resulting from either illnesses or
accidents. The amounts that can be collected under this coverage are relatively large. Major
A comprehensive major medical insurance plan combines the basic hospital, surgical,
and physician’s expense coverages with major medical protection to form a single policy and is
9-17 Describe these policy provisions commonly found in medical expense plans: (a)
deductibles, (b) co-insurance, and (c) coordination of benefits.
A participation, or co-insurance, clause stipulates that the company will pay some portion—
say, 80 percent or 90 percent—of the amount of the covered loss in excess of the deductible
A coordination of benefits provision clause prevents you from collecting more than 100