9-18 What are the key provisions of COBRA? How do they relate to continuation of group
coverage when an employee voluntarily or involuntarily leaves the insured group?
When employees voluntarily or involuntarily (except in the case of gross misconduct) leave their
jobs and therefore give up membership in the insurance group, they can lose their health
insurance. In 1986, Congress passed the Consolidated Omnibus Budget Reconciliation Act
9-19 Explain the cost containment provisions commonly found in medical expense plans.
How might the provision for second surgical opinions help an insurer contain its costs?
Typical cost containment provisions include the following:
Pre-admission certification: Insurance company must approve scheduled hospitalization and an
estimated length of stay.
Continued stay review: Insurer must approve extensions of hospital stay beyond the number of
days set in pre-admission certification.
Waiver of coinsurance: Provides waiver of co-payment and/or deductible (pays 100%) for
certain cost-saving procedures, such as outpatient surgery and use of generic pharmaceuticals.
Requiring a second surgical opinion reduces the number of unnecessary, nonelective, and/or
elective surgeries, thereby holding down the insurer’s costs. Many conditions can now be treated
without surgery or with surgery that is not so invasive and requires less hospital and recovery
9-20 Why should a consumer consider purchasing a long-term care insurance policy?
Most regular health care policies do not cover the cost of long-term care. As more of the
population lives longer, there is a greater likelihood that many people will at some point in their
lives be unable to care for themselves for an extended time period. Long-term care insurance
covers the cost of medical, personal, and social services provided at home, in a community
9-21 Describe the differences among long-term-care policies regarding (a) type of care, (b)
eligibility requirements, and (c) services covered. List and discuss some other important
policy provisions.
a. Type of care: Policies will cover care in either a nursing home or in the home of the
b. Eligibility requirements: These are used to determine whether a person qualifies
for payment and use “gatekeeper provisions” that may vary considerably. Some policies pay if a
c. Services covered: Policies may differ in the levels of care that they will cover
Other long-term care policy provisions include:
Daily benefits—sets a daily maximum for reimbursement.
Benefit duration—how long the benefits will be paid; ranges from one year to the insured’s
lifetime. However, most common policy limits coverage to three years.
Waiting period—period after eligibility begins during which no benefit payments are made; the
9-22 Discuss some of the questions one should ask before buying long-term-care insurance.
What guidelines can be used to choose the right policy?
The Financial Planning Tips covers buying long-term care insurance. The major points are:
Buy the right amount and the right kind of coverage.
Buy at the right time.
9-23 What is disability income insurance? Explain the waiting-period provisions found in
such policies.
Disability income insurance provides families with weekly or monthly payments to replace
Social Security offers disability income benefits, but you must be unable to do any job
whatsoever to receive benefits. Benefits are payable only if your disability is expected to last at
9-24 Describe both the liberal and strict definitions used to establish whether an insured is
disabled.
Disability policies vary in the standards you must meet to receive benefits. Some pay benefits if
you’re unable to perform the duties of your customary occupation—the own occupation (or
“Own Occ”) definition—whereas others pay only if you can engage in no gainful employment at
all—the any occupation (or “Any Occ”) definition. Under the “Own Occ” definition, a professor
Individual disability policies may contain a presumptive disability clause that supersedes the
previously discussed definition of disability when certain types of losses occur. Loss of both
9-25 Why is it important to consider benefit duration when shopping for disability income
coverage?
The benefit duration determines whether the disability coverage will be for a specific time period
or for a lifetime. The choice depends on whether or not the insured has good pension benefits
Financial Planning Exercises
1. Choosing a health insurance plan. Joe and Whitney Alexander have two children, with
ages of 6 years and 5 months. Their younger child, Nathan, was born with a congenital
heart defect that will require several major surgeries in the next few years to correct fully.
Joe is employed as a salesperson for a major pharmaceutical firm, and Whitney is a stay-
at-home mother. Joe’s employer offers employees a choice between two health benefit
plans:
• An indemnity plan that allows the Alexanders to choose health services from a wide range
of doctors and hospitals. The plan pays 80 percent of all medical costs, and the Alexanders
are responsible for the other 20 percent. There’s a deductible of $500 per person. Joe’s
employer will pay 100 percent of the cost of this plan for Joe, but the Alexanders will be
responsible for paying $380 a month to cover Whitney and the children under this plan.
• A group HMO. If the Alexanders choose this plan, the company still pays 100 percent of
the plan’s cost for Joe, but insurance for Whitney 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 Alexanders choose? Why? What other health
coverage options should the Alexanders consider?
The Alexanders have a specific concern—their son’s heart problems. The choice of health plans
will be determined by which plan has the doctors and hospital that they need for Nathan’s
surgery and recovery. If the HMO has the doctors and hospital that they need, they that is the
Most insurance plans have a stop-loss provision at which point 100% of costs are covered. The
information does not indicate if the plan has a stop-loss provision. This needs to be investigated.
2. Out-of-pocket indemnity plans costs. John Chang was seriously injured in a
snowboarding 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 John 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 John’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 John? What other factors should be considered when deciding between the
two plans?
The HMO costs $95 per month more, a total of $1,140 additional. The benefits are $3,924 – 160
= $3,764 more than the indemnity plan. That is an overall saving of $2,624. The HMO is more
3. Comparing health insurance policies. Use Worksheet 9.1. Erika Willis, a recent college
graduate, has decided to accept a job offer from a nonprofit organization. She’ll earn
$34,000 a year but will receive no employee health benefits. Erika 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 Erika could purchase on her own. Include at least one HMO. Use
Worksheet 9.1 to compare the policies’ features. Should Emily 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?
For 2015, Erika will have a personal exemption of $4,000 and a standard deduction of $6,300.
Thus, her taxable income will be $34,000 – 10,300 = $23,700 and her taxes will be $922.50 +
15% * (23,700 – 9,225) = $3,093.75. In addition she will probably have a state income tax of
about 5% or $1,185. Thus, Erika will have a maximum of $34,000 – 24,000 (living costs) –
4. 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?
Pros of long-term care insurance include: protection of assets should a covered family member
need lengthy nursing home care [an unlikely event, average length of stay is about 16 months)
and the security of arranging in advance for coverage for nursing home care. The disadvantages
are: 1) the high cost of this coverage; 2) by the time a person needs this coverage, inflation and
5. Calculating need for disability income insurance. Use Worksheet 9.2. Ben West, a 35-year–
old computer programmer, earns $72,000 a year. His monthly take-home pay is $3,750. His
wife, Ashley, works part-time at their children’s elementary school but receives no benefits.
Under state law, Ashley’s employer contributes to a workers’ compensation insurance fund
that would provide $2,250 per month for six months if Ben were disabled and unable to
work.
a. Use Worksheet 9.2 to calculate Ben’s disability insurance needs, assuming that he won’t
qualify for Medicare under his Social Security benefits.
DISABILITY BENEFIT NEEDS
Name(s): Ben West
1. Estimate current monthly take-home pay $ 3,750
2. Estimate existing monthly disability benefits:
a. Social security benefits $________
b. Based on your answer in part a, what would you advise Ben 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?
Ben needs to supplement his employer’s disability insurance with an individual policy. The
minimum he currently needs is $1,500 per month, and he will need $3,750 per month once his
employer’s plan is exhausted. A noncancellable policy is preferable because the premiums will
not go up, but a guaranteed renewable policy would be more affordable. Other factors to assess
6. 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.
Typically disability insurance is not very expensive, thus it is affordable. Group rates are
7. Assess your health insurance situation. Assess your current health insurance situation.
Do you have any health insurance now? 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?
Do you have any health insurance now? May be covered by parents until age 26. ACA requires
that you have health insurance.
What does your policy cover? ACA has a list of essential benefits that must be provided.
Coverage can vary from 60% to 90% of costs; coverage level is your decision.
What is excluded? ACA does not allow any significant exclusions other than experimental
Critical Thinking Cases
9.1 Evaluating Walter’s Health Care Coverage
Walter Burton was a self-employed window washer earning approximately $700 per week.
One day, while cleaning windows on the eighth floor of the Commercial Bank Building, he
tripped and fell from the scaffolding to the pavement below. He sustained severe multiple
injuries but miraculously survived the accident. He was immediately rushed to the local
hospital for surgery. He 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, $2,500; physician, $1,000; hospital bill for room and board,
$250 per day; nursing services, $1,200; anesthetics, $600; wheelchair rental, $100;
ambulance, $150; and drugs, $350. Walter 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.