540 Chapter 13 Insurance and Risk Management
$350 of the overall deductible, leaving just $500 $350 $150 to satisfy overall. So his
second child’s claim will be covered for $670 $150 $520.The total covered claims are $590 $520 $1,110. Then (80%)($1,110) $888 is the
amount his insurance will pay.Example 13.2.5 Ken later submits a claim of $200 for his third child, for whom he
had not yet submitted any claims. How much will the insurance pay for this claim?$200 falls below the $250 per person deductible, but since the overall family deductible has
been satisfi ed, the insurer will pay (80%)($200) $160.00.Types of Health Insurance—PPOs, HMOs, and Managed Care
The ever-increasing costs of medical care pose a challenge to everyone involved in paying
for them. For employers providing health insurance, the rising costs of health insurance pose
a major expense, while employees contributing a portion of the cost of their health coverage
find this cost absorbing an ever-increasing proportion of their paychecks. For small business
owners, the self-employed, and workers whose employers do not offer health insurance as a
benefit of employment, the costs often place obtaining health insurance out of reach.
In an attempt to provide a desirable level of coverage while keeping costs under con-
trol, a number of alternative types of health insurance have been developed. A preferred-
provider organization (PPO) is a type of health insurance coverage that encourages insured
members to use certain “preferred providers” with whom the insurer has arranged favor-
able terms, by offering a greater level of coverage when preferred providers are used. A
health maintenance organization (HMO) may provide coverage only for care received
from specific health care providers, and also will require its members to arrange for all
care through a primary care provider. Members of HMOs often must obtain a referral
from their primary care provider in order to have their medical expenses covered under
the policy. An alternative to the HMO is a point-of-service plan (POS) that offers a com-
bination of an HMO with a traditional indemnity plan; members who obtain services from
nonapproved providers, or who do not follow the rules of the HMO and obtain referrals for
services from covered providers, receive “out-of-network” benefits based on a traditional
deductible/coinsurance plan offering less generous benefits than the “in-network” HMO.
Plans that attempt to control their costs by negotiating favorable financial arrangements
with health care providers and by managing which services their members’ access and how
they access them are referred to as managed care plans.
There is an enormous range of types of these plans, each with its own distinctive fea-
tures, pros, and cons. In contrast to traditional indemnity plans, many managed care plans
emphasize preventive care, often providing much greater coverage of things like annual
checkups or nutritional counseling.
Most of these types of plans do not require a deductible or coinsurance for most ben-
efits. Typically, managed care plans come with an array of copayments for each covered
service. A copayment is a flat fee charged to the member, usually when the service is pro-
vided. For example, a policy might have a $10 copayment for doctor’s office visits. In that
case, when you visit your doctor you would pay $10 then and there, and the remaining cost
of your visit would be paid by the plan directly to the doctor. In recent years, tiered copays
have become common for pharmacy benefits, calling for a higher copay for certain more
expensive drugs. For example, a 10/25 copay for prescriptions might require a $10 copay
for a generic drug, but a $25 copay for a brand name drug.
As a general rule, it is normally true that the higher the copayments, the lower the plan
premium is likely to be. This is true because a higher copay means that more of the cost
of each service will be borne by the member, and hence less by the insurer. It is also true
because if copayments are high, members are assumed to be more judicious about when
they access services. Someone who pays a $2 office visit copay will be more likely to see
a doctor for a case of the sniffles than someone who must pay $30. Yet, on the other hand,
if copays are too high costs may actually escalate if members avoid seeking care until