164
CHAPTER 18
Health Insurance and Disability Income
I. SUGGESTED CLASSROOM TIME: 60– 80 MINUTES
II. CHAPTER OVERVIEW
There is considerable student interest in health insurance, in many cases because of
personal involvement with a claim. Other students take an interest in the issue because of
a genuine concern for the national health insurance question, which is currently of
political interest, or because parents or other relatives are in the healthcare delivery field.
For these and other reasons, we have found that this is one area of insurance where
student interest in the material is generally high.
III. LECTURE OUTLINE
A. Introduction—This chapter looks at private health insurance and losses from health-
related issues such as loss of income and medical expenses.
1. International comparison indicates flaws in U.S. system.
2. About three fourths of our population is currently covered by private health
insurance.
Chapter 18/Health Insurance and Disability Income 165
ii. Healthcare costs are increasing faster than costs of other products or
services.
a) Technological improvements
f) Government-to-private-sector cost shifting
iii. The aging of the U.S. population
iv. Lack of adequate access to health care for many Americans
b. Defenders of the current system say:
i. Only minor changes are needed to deal with the problems.
ii. Prevailing system is more consistent with current economic and political
philosophy.
4. Cost Containment—attempts to reduce or control costs versus cost shifting—tries
to shift costs to another party
a. Preadmission testing and case management
5. Politics and philosophy—the major issues
a. Universal access
b. Quality of care
B. Five Kinds of Health Insurance Coverage
1. Basic medical expense coverage
a. Generally “first-dollar” coverage associated with Blue Cross or private insurers,
often life insurers
166 Chapter 18/Health Insurance and Disability Income
2. Surgical contracts
a. Surgical contracts pay for surgical procedures.
3. Major medical coverage
a. Features high coverage amounts, deductible provisions, and a participation
4. Disability income insurance
a. Can be very important coverage as loss of income during a period when medical
expenses are high can be devastating. Even if medical expenses are covered by
insurance, other expenses continue; thus, this coverage can be quite necessary.
5. Medicare supplement insurance—intended to fill in the gaps in coverage under the
Social Security Medicare program.
a. The Omnibus Budget Reconciliation Act (November 1990) authorized the NAIC
to develop ten standard Medigap policies with a core group of benefits.
b. The contracts must meet the following standards:
i. Open enrollment—individuals 65 or older must be accepted regardless of
6. Long-term care insurance policies—provides custodial care but various levels of
care are provided under these contracts
a. Demographic changes—Demographics indicate that there is an increasing need
for long-term care for the elderly and disabled.
Chapter 18/Health Insurance and Disability Income 167
b. The financial problem—One third of current cost is financed by families and
two thirds by the federal and state governments. Private pay insurance covers
less than 1 percent. A stay for two years costs on the average $70,000 to
$100,000
c. Long-term care development—Long-term care insurance is still in
development.
d. Long-term care policy provisions
i. Trigger of coverage—not being able to perform a number of ADLs; few
mention loss of cognitive capability (mental impairment)
e. The continuing debate—glossary of terms
i. Activity of daily living (ADL)
ii. Adult day care
C. Common Contract Provisions
1. Entire contract
2. Grace period
3. Reinstatement
168 Chapter 18/Health Insurance and Disability Income
e. Cancellation
D. Health Insurance Providers
1. Blue Cross and Blue Shield and life and health insurance companies are the main
providers.
E. Definitions and Exclusions (very important in health insurance)
1. Disability: inability to engage in (any/your own or closely related) occupation. The
latter definition is obviously more advantageous for insured.
IV. ANSWERS TO REVIEW QUESTIONS
1. Compare the per capita cost spent on health care in the United States to
other industrialized countries. Explain the differences across countries.
Per capita spending on health care in the United States is the highest in the world,
2. Compare the quality of health care in the United States to that of other
countries. Based on standardized outcome, e.g., longevity and infant mortality, the
3. Why are more Americans uninsured for health care protection than other
countries? The main reason is that the U.S. healthcare delivery and healthcare
Chapter 18/Health Insurance and Disability Income 169
4. Identify four reasons that health care costs have been increasing in the
5. How does the existence of health insurance increase moral hazard in
health care? Because costs do not fall on insureds, except for deductibles and
6. Explain why critics argue that fee-for-service health care leads to the
7. Do all Americans use equal amounts of health care? If not, explain how
costs are distributed. No, the sickest 5 percent of Americans use 50 percent of all
8. Permanent disability can be a more expensive peril than death. Explain
why this is so. Permanent disability can be a more expensive peril than death
9. Explain the purpose of long-term care insurance. Long-term care insurance is
designed to provide resources for long-term in-home or custodial care for those who
10. List five activities of daily living (ADLs) used in LTC insurance. The following
11. Identify the problems with the current U.S. system for providing long–
term care. The essential problem is that there is not a system, and the costs of long-
12. Define the terms custodial care, intermediate care, hospice, and skilled
nursing facility. Custodial care is care given in a facility where the person receiving
170 Chapter 18/Health Insurance and Disability Income
13. Illness may cause two different types of monetary loss. What are they? The
first category of loss is medical expenses: hospital costs, doctor’s fees, and other such
homemaker.
14. Identify two common definitions of disability used in health insurance. A
strict definition of disability (“unable to engage in any occupation”) can be much less
15. Describe three important contractual provisions often found in health
insurance policies. The cancellation provision details the conditions under which a
16. Describe five standard clauses found in health insurance contracts.
1) The contract provision states the written policy, its application, and endorsements
and this constitutes the entire agreement. No other documents or unattached
applications may be incorporated by reference to modify the contract’s terms.
Chapter 18/Health Insurance and Disability Income 171
17. Describe the differences in renewability provisions of health insurance
contracts. A “cancellable” contract allows the insurer to cancel at any time.
18. Define the term “pre–existing conditions.” How does time enter into this
definition? The definition of pre-existing conditions describes a period of time,
19. Describe the methods used by HMOs to control health care costs. HMOs
20. Describe the difference in operations between an HMO and a PPO. HMOs
provide their services to their members on a capitation basis rather than the traditional
V. ANSWERS TO OBJECTIVE QUESTIONS
1. Which of the following is not a major type of individually purchased medical expense
or disability income policy?
172 Chapter 18/Health Insurance and Disability Income
2. Which of the following is not a reason given for increasing medical costs?
3. Which country spent the most (per capita) on health care in 2008?
4. Which of the following are examples of traditional fee-for-service healthcare
insurance?
5. Because health insurance decreases a consumer’s out-of–pocket cost for medical
coverage, consumers tend to use more health care, a practice commonly known as
6. A fee-for-service health care system is one that pays healthcare providers
7. The percent of uninsured Americans in 2008 was about
8. “A facility caring for the terminally ill” is the definition of a
Chapter 18/Health Insurance and Disability Income 173
VI. IDEAS FOR INSTRUCTORS AND TEACHING METHODS
1. Given the current concern over healthcare costs and providing health care to the entire
population, research the current law in your state and discuss any pending legislation
2. Have the students clip current newspaper articles concerning healthcare issues.
3. Contact a health insurance agent to determine the costs of long-term care provided in
4. Research the current status of the Patients’ Bill of Rights legislation. Is this currently
law? Does it really help consumers?