Frequently Asked Questions

What are the principal types of medical expense insurance coverage?

Medical expense insurance is broadly classified into two principal types of coverage: base (or basic) plans and major medical plans. Base plans generally consist of either hospital expense coverage, surgical expense coverage, or both. Basic hospital and surgical expense plans generally provide coverage on a first-dollar basis (i.e., no deductible) and provide 100 percent reimbursement of covered expenses, up to a relatively low maximum of $10,000, $25,000, $50,000 or $100,000. Major medical plans, in contrast, apply a deductible to initial expenses, generally ranging from $100 to $500 per calendar year. After the deductible is satisfied, major medical plans typically reimburse 80 percent of eligible expenses up to a relatively high maximum (e.g., $500,000 or $1,000,000). Some major medical plans reimburse eligible expenses at 70 percent; some plans also provide unlimited lifetime benefits.

Major medical plans typically cover a broad list of medical expenditures, including hospital expense, surgical expense, physician (non-surgical) expense, private duty nursing, diagnostic X-ray and laboratory services, prescription drug expense, artificial limbs and organs, ambulance services, and many other types of medical expenses when prescribed by a duly licensed physician. Thus, in comparison with basic plans, major medical plans provide much broader coverage, with higher limits, but these plans require the insured to share in the cost of medical care through deductibles and coinsurance (i.e., 20 or 30 percent of eligible expenses above a deductible amount).

Is medical expense coverage available for substance abuse and mental illness?

Major medical expense plans also generally provide coverage for treatment of substance abuse (e.g., alcoholism and drug usage) and mental illness. A higher coinsurance percentage (usually 50 percent) and a lower lifetime benefit limit (usually $25,000 or $50,000) generally applies, however. In addition, the extent of coverage may depend on whether treatment is provided on an in-patient or out-patient basis.

What types of expenditures are commonly excluded under major medical expense plans?

Although providing very broad coverage, major medical plans typically contain a number of exclusions. Common exclusions include medical expenditures arising from: (1) convalescent or custodial care; (2) physical examinations, unless required for the treatment of an injury or illness (it should be noted that some plans now cover this expenditure); (3) cosmetic surgery unless required to correct a condition resulting from an injury or a birth defect; (4) occupational injuries and illnesses that are otherwise covered under a Workers’ Compensation law; and (5) routine dental and vision care (care required for treatment of an injury and dental and eye surgery are frequently covered, however). Other common exclusions relate to benefits provided by government agencies (such as VA hospitals) and expenses paid under other insurance programs, including Medicare.

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An insured’s “out-of-pocket” costs under major medical expense plans include the deductible, cost-sharing amounts arising from the operation of the coinsurance clause, and medical expenditures that are deemed by the plan to be in excess of “reasonable and customary” charges. Only charges that are “reasonable and customary” for a specific type of service, in a particular location or geographic area, are eligible for reimbursement under medical expense plans. The definition of “reasonable and customary” may vary somewhat from one medical expense plan to another.

What is the coinsurance clause in medical expense plans and how does it work?

Coinsurance, sometimes called “percentage participation,” requires the insured to share in the cost of medical care. Under an 80/20 coinsurance provision, the medical expense plan pays 80 percent of eligible medical charges above any deductible. The insured is required to pay the remaining 20 percent. Other coinsurance arrangements (e.g., 70/30 or 90/10), are sometimes used. In the event of large or catastrophic medical expenses, an insured might suffer severe financial hardship due to the operation of the coinsurance clause. To compensate for this possibility, many major medical expense plans contain a coinsurance cap, or stop-loss limit. This provision places a limit on the insured’s out-of-pocket costs in a given year arising from the operation of the coinsurance clause. The size of the coinsurance cap generally ranges from $2,000 to $3,000, depending on the plan, although limits as low as $1,000 are sometimes used. Once the coinsurance cap has been reached, all eligible expenses above this amount are paid in full, up to the plan’s overall limit of coverage.

What is the difference between coinsurance and copayment?

On occasion, these terms have been used interchangeably. However, it is preferable to define the two terms differently, despite their similarity of purpose. Under a copayment or copay provision, the insured usually is required to pay a set or fixed dollar amount ($5, $10, and $20) each time a particular medical service is used. Copay provisions are frequently found in medical plans offered by Health Maintenance Organizations (HMOs) where a nominal copayment is applied to each office visit and to each prescription that is filled.

What is a preexisting conditions clause and what is the effect of its inclusion in major medical expense plans?

A preexisting condition is often defined as a medical condition (i.e., an injury or illness) that required treatment during a prescribed period of time (3 or 6 months) prior to the insured’s effective date of coverage under the major medical expense plan. Sometimes, a preexisting condition is defined to include medical conditions that were known to the insured, even though no treatment was provided during the prescribed period. A preexisting condition clause excludes coverage for preexisting conditions for possibly as long as 12 months after the effective date of coverage. Because the definition of a preexisting condition, and the provisions of the clause itself, may differ considerably from one plan to another, it is recommended that newly insured individuals (and prospective insureds) completely familiarize themselves with this policy provision.

How does the medical expense coverage offered by Health Maintenance Organizations (HMOs) differ from the coverage provided under basic and major medical expense plans?

Basic and major medical expense plans are generally classified as indemnity contracts. These plans indemnify, or reimburse, the insured for medical expenses incurred and typically require the completion and filing of claim forms. In addition, these plans usually contain deductible and coinsurance cost sharing provisions and may restrict coverage for certain types of medical care expenditures. Indemnity plans, however, provide the insured with substantial freedom relative to the choice of physicians, including whether a primary care physician or a specialist will be seen. In contrast, HMO coverage emphasizes comprehensive (including preventive) care and typically contains very few exclusions, no (or small) deductibles, and nominal copayments. However, there is much less freedom of choice of physicians under traditional HMO coverage since the patient is typically required to be under the care of a primary care physician who serves as a “gatekeeper.” In this role the primary care physician determines whether the services of a specialist are needed, in addition to determining what other medical services are required for treatment. Some HMOs today offer a point-of-service option, whereby patients may opt for indemnity type coverage (with a deductible and coinsurance) when they desire medical treatment outside the HMO network.

What is a generic drug?

A new drug is given two names. One is the generic or chemical name. The other is the brand name, which is what the manufacturer chooses to call the product. Every drug has a generic name to describe its chemical makeup. You’ve probably been hearing a lot about generic drugs at your pharmacy. Perhaps, when having a prescription filled, you were given a generic or asked if you wanted a generic product. A number of questions and concerns have been raised about the quaility of generics as compared to brand name products, and you wonder whether or not you should take them. Following are answers to some of the more commonly asked questions regarding generic pharmacy products. We hope this will answer most of your questions and many concerns you may have regarding generic drugs.

Why are generic drugs less expensive than brand name products?

When a company develops a new drug, it has a patent for 17 years. The patent protects the drug company’s right to be the only manufacturer of that drug. After the patent expires, other companies can then manufacture and sell the drug under either a different brand name of the generic name. Because of lower research costs and more competition, the new product is sold at a lower price than the original brand name product.

Who manufactures generic drug products?

Many drug companies that manufacture brand name products also manufacture generic products. In fact, some 70 to 80 percent of all generic drugs are made by the same companies who make brand name products. And many companies that manufacture generic name products also manufacture drugs for the brand name companies.

How are generic drugs approved for use?

All name brand products and generic products are reviewed for safety and effectiveness by the Food and Drug Administration (FDA). Before a generic drug is approved for use in the United States, its manufacturer must provide proof to the FDA that the product has the identical active chemical compound when compared to the brand name product. In addition, the generic product must meet FDA standards for the amount of active ingredient and speed absorption into the body. When the generic product meets these standards, it is considered equivalent.

Are generic drugs effective?

To gain FDA approval, generic drugs must have the same effect on the body as the brand name product. This means that the generic product must contain the same active ingredient and must be the same strength. Sometimes, the generic product may have a different color or shape than the brand name product. This has no effect on the medical action of the drug; however, it does help to distinguish one product from another.

Are generic drugs safe?

The FDA requires that all drugs be safe and effective, whether they are generic or brand name products. The FDA also monitors reports from health care providers (for example, doctors and pharmacists) on adverse drug reactions and has found that there is no difference between generic and brand name products.

Why does my health care plan have generic drugs on its formulary?

Because generic drugs are less expensive than brand name products, the use of generic drugs help to hold down rising health care costs. In addition, generic drugs offer you a better value and may, in some cases, extend your yearly drug benefit limit (if a lower cost generic is used, a lesser dollar amount is applied toward your drug benefit). We hope you now have a better understanding of generic drugs, their effectiveness and safety, and how they are approved and manufactured. Occasionally your doctor will prescribe a specific brand name product. Other times, your doctor will either prescribe or agree to have your pharmacist substitute a generic drug. Some brand name products are not available as generic. However, you can ask your doctor to, whenever possible, specify a product which is manufactured as a generic in order to help reduce costs and extend your benefit. Feel free to discuss the generic drug issue with your doctor or pharmacist the next time you receive a prescription and have it filled. When you have your prescription filled with a generic, you can be sure you are getting the quality medication you need at a better value.

What is a formulary?

Simply stated, a formulary is a list of medications available to your health care provider to use in your treatment and covered as a prescription drug benefit for you. Most hospitals have used formularies for years to control costs while still providing quality medications. Health plans and even some large medical groups have turned to formularies to help put a lid on rising medication costs.

Are there different types of formularies?

Basically, there are two types of formularies. An open formulary is a list of medications from which your health care provider can prescribe. In addition he or she would also be able to prescribe medications not on the formulary. A closed formulary allows your doctor to prescribe from the formulary list. All other medications (called non-formulary) would not be covered.

Why are formularies necessary?

Medication costs continue to rise. Formularies list those medications which offer the best value without sacrificing quality of care. Keeping a lid on rising prescription costs help all of us reduce health care and premium costs.

Who decides which medications are on the formulary?

Medications are added or deleted from a formulary only after careful review by a committee of practicing physicians and pharmacists. This committee, called a pharmacy and therapeutics committee, has the responsibility of reviewing new and existing medications. This committee decides which medications provide quality treatment at the best value.

How is a medication added or deleted from the formulary?

A medication must first demonstrate safety and effectiveness to be added to a formulary. Only after this is determined is the cost of the medication considered. Some medications have similar safety and effectiveness however, are available at a lower cost. The lower cost medication would then be placed on the formulary while the higher cost medication would not.

How does my health care provider know which drugs are on the formulary?

Health plans print their formularies yearly. Formulary books are distributed to your health care provider annually. In addition, all changes to the formulary are communicated to your doctor on a regular basis.

What if my medication is not on the formulary?

Formularies usually have listed alternative medications which often have the same therapeutics action on your body but, available at a lower cost. If your medication is not listed on the formulary, ask your doctor or pharmacist for an alternative.

Provided by Georgia State University’s Dept. of Risk Management and Insurance. The answers are provided for your general information. Although we make every effort to insure accuracy in the information provided, we cannot make any guarantees as to this accuracy. We urge you to consult your lawyer, accountant or tax advisor for specific legal or tax advice.