What is insurance?

Insurance enables those who suffer a loss or accident to be

compensated for the effects of their misfortune. The payments come
from a fund of money contributed by all the holders of individual
insurance policies. In other words, individual risks are pooled and
shared, with each policyholder making a contribution to the common
fund. The contribution is known as the premium. Premiums are paid to
insurers - these are institutions which accumulate the money into the
fund from which claims are paid. The loss is in fact paid for by the
policyholder making the claim and by all the other policyholders who
have not suffered in the same way.

Insurers are professional risk takers. They know the probability of

different types of risk happening. They can calculate the premiums
needed to create a fund large enough to cover likely loss payments.
Clearly, only a proportion of policyholders will require compensation
from the fund at any one time.

Take three examples. In motor insurance a young person with a high

November 22, 2008

powered car or a driver with a long history of accidents will pay a higher
premium than a mature and experienced driver with a modest saloon
who has been accident free.

Similarly, the owner of a fish and chip shop will pay a higher premium
for his fire insurance than, say, the owner of an office. The risk is
greater, so the premium is higher.

Someone who is young, fit and in a risk-free job will find it easier to buy
life insurance, and will pay lower premiums than someone who has a
heart condition or is in a risky occupation

History of insurance
In some sense we can say that insurance appears simultaneously with
the appearance of human society. We know of two types of economies in
human societies: money economies (with markets, money, financial
instruments and so on) and non-money or natural economies (without
money, markets, financial instruments and so on). The second type is a
 more ancient form than the first. In such an economy and community, we
can see insurance in the form of people helping each other.

The Greeks and Romans introduced the origins of health and life
insurance c. 600 AD when they organized guilds called "benevolent
societies" which cared for the families and paid funeral expenses of
members upon death. Guilds in the Middle Ages served a similar
purpose. The Talmud deals with several aspects of insuring goods. Before
insurance was established in the late 17th century, "friendly societies"
existed in England, in which people donated amounts of money to a
general sum that could be used for emergencies.

The first insurance company in the United States underwrote fire

insurance and was formed in Charles Town (modern-day Charleston),
South Carolina, in 1732. Benjamin Franklin helped to popularize and
make standard the practice of insurance, particularly against fire in the
form of perpetual insurance. In 1752, he founded the Philadelphia
Contributionship for the Insurance of Houses from Loss by Fire. Franklin's
company was the first to make contributions toward fire prevention. Not
only did his company warn against certain fire hazards, it refused to
insure certain buildings where the risk of fire was too great, such as all
November 22, 2008

wooden houses. In the United States, regulation of the insurance industry

is highly Balkanized, with primary responsibility assumed by individual
state insurance departments. Whereas insurance markets have become
centralized nationally and internationally, state insurance commissioners
operate individually, though at times in concert through a national
insurance commissioners' organization. In recent years, some have
called for a dual state and federal regulatory system (commonly referred
to as the Optional Federal Charter (OFC)) for insurance similar to that
which oversees state banks and national banks.
 What is Health Insurance?
If you’ve ever been sick or injured, you know how important it is to have
health insurance coverage. Health insurance pays for things big and
small, from a lab test that might cost $75 to a hospital stay for major
surgery that could cost thousands of dollars. It gives you peace of mind
of knowing that no matter what kind of care or procedure you or a family
member might require, you won’t have to worry about shouldering the
cost on your own.

As important has health insurance is, it can also be very confusing. To

make smart health insurance choices, you need a basic understanding of
all the key terms, acronyms and concepts. This section answers common
questions about health insurance, provides information about different
types of policies, and discusses how to compare one policy with another.
There’s also an interactive healthcare cost estimator that lets you view
the average cost of common medical procedures, making it clear that
health insurance coverage is a necessity for anyone.
November 22, 2008

Historical Background Of Health

Insurance
A brief history of health insurance coverage reveals that in the aftermath
of World War II, the US government sought to provide maximum benefits
to the populations in her efforts to reduce the burden otherwise incurred
on rise in wages. This policy continued for a number of years, until the
introduction of relevant laws in 1950 to provide Medicare for the needy
populations of the state.

This was also the first time that the government participated in any form
of financing health care on behalf of the populations, and this was
accomplished through direct payment to the various health care
providers including doctors, physicians and hospitals.
 • The U.S Government Played A Vital Role In
Introducing Health Care Insurance
The US government also introduced the famous "Medical Assistance to
the Aged" legislation in the decade of 1960s, opening doors of medical
assistance and other health care services to the elderly and poor
populations though putting restrictions on the extent of medical
expenses.

This was followed by the passage of legislation for the establishment of

'Medicare and Medicaid Programs' in 1965 making a part of the Social
Security Act. Responsibilities of these programs was entrusted to the
Department of Health, Education and Welfare, all of who are presently
covered under a single department of Health and Human Services.

The Medicare program was however run by the Social Security

Administration, while the Medicaid program was run by the Social and
Rehabilitation Service. Both these areas were then transferred to the
newly formed Health Care Financing Administration (HCFA) as of year
1977, and renamed again as the Centers for Medicare & Medicaid
Services (CMS).
November 22, 2008

Why do we need health insurance?

As medical care advances and treatments increase, health care costs
also increase. The purpose of health insurance is to help you pay for
care. It protects you and your family financially in the event of an
unexpected serious illness or injury that could be very expensive. In
addition, you are more likely to get routine and preventive care if you
have health insurance. You need health insurance because you cannot
predict what your medical bills will be. In some years, your costs may
be low. In other years, you may have very high medical expenses. If
you have health insurance, you will have peace of mind in knowing that
you are protected from most of these costs. You should not wait until
you or a family member becomes seriously ill to try to purchase health
insurance. We also know that there is a link between having health
 insurance and getting better health care. Research shows that people
with health insurance are more likely to have a regular doctor and to
get care when they need it.

Types of Health Insurance

Health insurance pays for expenses incurred for diagnosis and treatment
of covered medical conditions. There are many different types of health
insurance. It is important if you have a choice of health insurance to
choose the plan that best fits your specific needs, budget, and lifestyle.
Also, make sure that you are aware of the state or federal agency that
regulates the type of health insurance you have in case you experience
questions or problems. Each of the different ways of receiving health
care services has advantages and disadvantages. It is in your best
interest to become familiar with the different types of health insurance,
so you know what may be available to you.

•Indemnity Policies (Traditional Fee-for-Service Insurance)

November 22, 2008

•Preferred Provider Organizations (PPOs)

•Health Maintenance Organizations (HMOs or Managed Care)

•Self-Insured Health Plans (Single Employer Self-Insured Plans)

•Multiple Employer Welfare Arrangements (MEWAs)

 Indemnity Policies (Traditional Fee-for-Service

Insurance)

Most indemnity policies allow you to choose any doctor and hospital that
you wish when seeking health care services. The hallmark of traditional
fee-for-service insurance is choice. You are given the choice of what
provider to visit when seeking covered medical services with few if any
geographic limitations. When purchasing an indemnity policy, you may
often have a deductible. The deductible is the amount you are required
to pay before policy benefits are provided. You may have a choice in the
amount of your deductible. If your health care charges are covered, or
 eligible for payment under the policy, any applicable deductible will
apply. Once the deductible has been paid, the remaining charges are
reimbursed to you at a specified percentage according to the policy
contract. The difference between eligible charges and the percentage
paid is called a "copayment," and is normally your responsibility. The
policy or an employee benefit booklet (if your indemnity policy is group
coverage) will spell out the terms and conditions of what is covered and
what is not covered. Read your policy or benefit booklet before you need
health care services and ask your health insurance agent, insurance
company, or employer to explain anything that is unclear.
Important Points to Remember About Indemnity Policies:

•You have the freedom to choose your doctor, specialist, or hospital

with few if any limitations.

•Your options are seldom if ever limited by geographic restrictions.

•You may be responsible for paying a deductible before covered

medical benefits are reimbursable.

•You may be required to pay a co-payment for covered medical

services.
November 22, 2008

•You can seek assistance from the CDI for questions regarding any
indemnity policy.

 Preferred Provider Organizations (PPOs)

A Preferred Provider Organization (PPO) provides a list of
contracted "preferred" providers from which to choose. You receive
the highest monetary benefit when you limit your health care
services to those providers on the list. If you go to a doctor or
hospital that is not on the preferred provider list referred to as
going "out-of-network", then the plan covers a smaller percentage
of your health care expenses or may cover none of your health care
expenses based on the contract wording of the plan. Always check
with your PPO or consult your list of preferred providers before you
seek health care services to make certain your physician or
hospital is a contracting provider (part of the network). Make sure
that your doctor refers you to health care providers within your PPO
network, if applicable.

Important Points to Remember About Preferred Provider

 Organizations:

•You receive the highest monetary benefit when staying within the
PPO network.

•You may have the option to go outside the PPO network at a higher
monetary cost to you.

•You should consider checking if your doctor or any specialist referred

to you is part of the PPO network before utilizing covered services.

•You can seek the assistance of the DMHC on all Blue Cross/Blue
Shield PPO health plans.

•You can contact either the CDI or the DMHC for clarification regarding
PPO issues.

 Health Maintenance Organizations (HMOs or

Managed Care)

Membership in a Health Maintenance Organization (HMO) requires plan

members to obtain their health care services from doctors and hospitals
November 22, 2008

affiliated with the HMO. It is common practice in HMOs for the plan
member to choose a primary care physician who treats and directs
health care decisions and who coordinates referrals to specialties within
the HMO network. The doctors and hospital personnel may be employees
of the HMO or contracted providers. Since HMOs operate in restricted
geographic regions, this may limit coverage for plan members if medical
treatment is obtained outside the HMO network or coverage area.
California HMOs are required to cover medically necessary emergency
services even when outside of their coverage area. The intent of
managed care products is to create less costly delivery of health care
services while maintaining quality health care by specifying provider
choice. HMOs offer access to a comprehensive package of covered health
care services in return for a prepaid monthly amount (premium). Most
HMOs charge a small copayment depending upon the type of service
provided.

Important Points to Remember About Health Maintenance

Organizations:
 •You must obtain health care services from HMO providers, except in
certain emergency situations.

•Your choice of primary care physician is important because he/she

directs your care. Also, your primary care physician often
coordinates referrals to specialties within the HMO.

•Your options may be limited by the geographic restrictions of the

HMO network.

•You may be charged a small copayment each time you utilize an

HMO covered service.

•You can seek assistance from the DMHC on all HMO and managed
care questions.

 Self-Insured Health Plans (Single Employer Self-

Insured Plans)

Self-Insured Health Plans have gained in popularity among large

employers and many labor unions as well as school districts and other
municipalities. These groups provide a pool of money and then proceed
November 22, 2008

to pay for the health care services of their members (employees) from
this pool. It is common for self-insured plans to turn over the
administration of their health plans to a Third Party Administrator (TPA).
The TPA handles all administrative tasks including claims processing and
payments. Often the employer can contract with an insurance company
to act as a TPA for all health care claims.

Important Points to Remember About Self-Insured Health Plans:

•If you work for a large employer, have a union affiliation, work for a
school district, or work for a municipality, the health plan offered to
you may be a self-insured entity.

•An insurance company or a TPA may administrate a self-insured

health plan.

•Self-Insured health plans are most likely subject to federal ERISA law.

•If your self-insured health plan is not a school district, other

municipality, or a church, you can seek help from the DOL-EBSA.
 •If your self-insured health plan is a school district, other municipality,
or a church, you may seek assistance from the plan directly or from
the courts.

 Multiple Employer Welfare Arrangements (MEWAs)

MEWAs permit employer members of trade, industry, professional, and

other associations to create trust funds for the purpose of offering and
providing health care benefits to their employees. Currently, fewer than
ten MEWAs have been issued certificates of compliance by the CDI,
which permit them to operate legally in California. Because of significant
and widely publicized mishandling in the 1980s and early 1990s,
legislation was passed to cleanup problems with MEWAs. This legislation
forced all MEWAs to file applications for certificates of compliance by
November 30, 1995, or cease operating in California. Only MEWAs that
satisfied strict requirements were granted certificates of compliance. It is
now illegal for new MEWAs to form and to offer health care benefits. If
your employer presents a health plan to you involving a new MEWA, then
contact the CDI immediately. If you receive your health care benefits
November 22, 2008

through one of the approved MEWAs, then you can seek assistance from
the CDI if you have any questions or complaints. Please see the last page
of this brochure for complete CDI contact information.

Important Points to Remember About Multiple Employer Welfare

Arrangements:

•Your employer may offer a MEWA health plan if they are an employer
member of a trade, industry, professional, or other association.

•There are currently less than ten MEWAs operating with CDI
certificates of compliance.

•After November 30, 1995, no new MEWAs can form, operate, or apply
for CDI certificates of compliance.

•You can contact the CDI for any questions regarding MEWAs.
 PREMIUM FOR HEALTH INSURANCE
The average health insurance premium depends on a variety of
factors:

•Insurance type: There are several different types of health

insurance, including job-based coverage, individual policies, and
government-funded plans like Medicare. The premium costs
associated with each type of insurance varies.

•State: Many job-based plans, and all individual policies, are

regulated at the state level. This means that each individual state
has its own rules governing insurance policies bought and sold
within that state. These rules can have a significant effect on
premium rates.

•Age: In most states, insurers selling individual policies can vary

premiums according to the age of the insured.
•Benefits: People often have a choice about what benefits they would
like in their insurance plan. For example, many jobs allow
employees to select from two or more job-based health plans.
Insurance companies selling individual policies may have a wide
November 22, 2008

array of plans available, including HSAs or high-deductible plans, as

well as more comprehensive options. Medicare Part D allows
seniors to choose from hundreds of prescription drug plan options.
These options vary in price.

•Health Status: Job-based health plans cost the same for every
employee on the plan, regardless of their health status. However,
in most states, insurers can charge higher premiums for individual
coverage (or deny coverage outright) if the applicant has a
preexisting medical condition.

Health Insurance Plans

In the past, there were limited choices of health insurance plans
available, but in today's world there are many different health insurance
options to choose from. Choosing the right health insurance plan is not
easy, and it is important that you know what you need from your health
 insurance policy. There are both indemnity plans and managed care
plans to choose from, and while both offer benefits, you may decide that
one or the other is a better fit for your family.

Indemnity health insurance plans do have a lot to offer and they do allow
you to go to any doctor you may choose. Usually these plans will pay for
a certain percentage of your care after you meet the required deductible,
but they may not cover certain things such as exams that are preventive.
Another type of health insurance that is available is Preferred Provider
Organization (PPO). This type of insurance is quite close to an indemnity
health plan, but you will receive discounts if you decide to go to doctors
that are in the system. Usually you will have a doctor's co-pay to pay and
a co-pay for prescriptions as well.

There are also HMO or Health Maintenance Organization health insurance

plans available as well. This type of a plan requires that you pay a
monthly fee for your health care benefits. With this type of a plan you will
have to make sure you go to the doctors within your plan or they will not
pay for your care. Some HMO's may require you to pay a co-pay for a
doctor's visit, while others require no co-pay at all.
November 22, 2008

There are a variety of health insurance plans to choose from, and

choosing may be difficult. The most important thing to remember when
choosing from the various health insurance plans is to find the plan that
will best meet your health care needs for a good price. It is important to
find a plan that will be exactly what you need for you and your family's
health care needs, as well as something that will fit your budget as well.

MOST COMMONLY USED HEALTH

INSURANCE PLAN IN PRACTICE
A brief view of health insurance from the perspective of employees
reveal that health insurance perhaps remains as the top most benefit
while negotiating employment terms with their employers. On the other
hand, the employers too gain a lot through the offer of various health
insurance plans as it provides tax benefits as well as serves as a cost-
effective means to compensate employees.
 • The Two Major Types Of Health Insurance
The most common types of health insurance plans include the HMO and
the PPO, each of which has their own utility for both the employees as
well as the employers. Though a majority of the employers only offer one
or two of the said health insurance plans, there are employers who offer
all three types of plans for their employees.

The HMO on the other hand offers a network of doctors and physicians all
of who are paid for by the employers. These health care professionals are
paid a specified amount of fee for their health services covered under the
respective insurance plan.

A Preferred Provider Organization or PPO, is a system of health insurance

where health care professionals, hospitals and other health care
providers agree to provide a set of health care services to the employees
of an organization in return for a fraction of the cost of the treatment or
visits. Since these health care professionals work under a network,
individuals wishing to obtain health care outside the parameters of these
PPOs will have to pay higher sums to the respective doctors and
hospitals.
November 22, 2008

Medical Health Insurance

Short term medical health insurance, or temporary health insurance, is
simply a short-term coverage policy. It might be a policy taken out by an
individual to cover a gap in health insurance between jobs or it might be
a medical health insurance policy taken out to cover an individual while
they finish school. There are numerous scenarios where a short term
medical health insurance policy would come in handy.

Generally speaking, short term medical health insurance is not any

cheaper than other policies. The company providing the insurance is not
going to make their money in premiums over the long haul, but they also
may not have any pay outs either. Temporary health insurance is not a
risk for the company, but it’s not much of an asset either. For this reason,
basic coverage isn’t going to be astronomically expensive, but it isn’t
 likely to be a bargain.

Premium costs aside, short term medical health insurance can provide
coverage during a gap in insurance due to job loss, job change, school, or
another situation. In most cases, it’s best to secure a short term policy
before your previous coverage becomes ineffective because the longer
you go without health insurance, the more difficult it may be to get new
coverage. Additionally, you should always avoid being unprotected
against unforeseen medical emergencies. A major medical incident can
easily equate to medical bills that would take years to repay.

When looking for a short term medical health insurance policy, you
should consider the length of coverage to decide which plan is best for
your situation. If you are only in need of 3 to 6 months worth of
coverage, go with the highest deductible you can afford and the lowest
premium cost. This will save you money while ensuring you are covered
in the event of a major medical expense. Even if you need the policy for
longer, remember that your deductible applies to a calendar year and
odds are, you will only meet your deductible if you incur major medical
expenses from hospitalization. You might even consider purchasing
major medical insurance only, which means only hospitalizations are
November 22, 2008

covered and you pay cash for routine doctor’s appointments.

Even if you are without health insurance coverage for a very short time,
say weeks rather than months, it is important to know that you have
some type of coverage. You may be surprised just how affordable a short
term medical health insurance policy is and the peace of mind it brings
you is likely well worth the cost. Contact an independent insurance agent
to receive quotes and coverage information. In the short-run, you can
probably get by with a minimal amount of coverage as long as you know
that better long-term coverage is in your immediate future.

Group Health Insurance

Group health insurance is an insurance policy that provides health
coverage for a group of people. Here instead of an individual policy,
people choose to enroll in a group plan to get health insurance coverage.
 Usually a company or small business establishes a group health
insurance plan to cover its employees, however, this form of health
insurance is not limited to employers only.

Clubs, organizations, chambers of commerce, special interest groups,

trade associations and religious groups can also offer group health care
for their members.

• There Are Many Benefits To Being In A Group

Health Insurance Plan
•After initial set-up costs, group plans are cheaper than individual
plans because the insurance companies profit from having more
people on their plans.

•Another great benefit of being in a group plan is that many

employers often cover part or all of the insurance premiums.

•And because an insurance company insures all employees under a

group policy, there are no physical exams or health history surveys
to complete, making it easier to get health insurance especially for
people with pre-existing conditions. A group health policy covers
November 22, 2008

people regardless of their age or present state of health. .

While some employers offer only one health insurance plan, others offer
a choice of plans, for example, fee-for-service plans, HMO plans, or PPO
plans.

Group insurance is the only way for employees to get immediate

maternity coverage, unless they already have an individual health
insurance policy for the minimum of a year and have already requested
coverage. For a business to qualify for group health coverage, most
states in the U.S. require that a company have at least two to three
employees.

Group health insurance is the best possible and most affordable health
coverage for employees. It ensures that all employees of a business are
covered by a health policy. Even people who have been turned down for
an individual health policy are eligible for a group health insurance plan.

The only real disadvantage of Group health insurance is the limitation of

choice. What this means is that a group plan is tailor made for an entire
 group and not any particular individual. Any person enrolled in a group
health care plan has no say in the type of policy, the amount of premium
and deductible and maximum lifetime coverage it provides.

If you leave or quit your job, you lose your employer-supported group
coverage as well. It certain cases it is possible to keep the same policy,
however you will have to pay the premiums yourself.

Choosing group or individual health insurance however should depend on

your situation. If you or one of your dependents have any special health
care needs, a group policy may offer you the coverage you need. It is
important that you carefully evaluate your health care situation and than
make a decision to chose a group health care policy.

• What is the major difference between group

and individual health insurance?
A: The major difference between group and individual health insurance
involves evidence of insurability. To purchase individual health
insurance, a person or family must generally answer a health
questionnaire, and go through the company's underwriting. An insurer
November 22, 2008

may decline coverage on the basis of the applicant's personal habits,

health, medical history, age, income or any other factors that bear on
risk acceptance. Or the insurer may issue a policy with limitations on
coverage. The majority of group health insurance plans issue coverage
without medical examination or other evidence of individual insurability
because the insurer knows that it can cover enough individuals to
balance those in poor health against those in good health. The risk of an
insurer failing to achieve this balance is diminished as the size of the
group increases, or as the insurer underwrites additional group policies
and increases the total number of individuals covered. This is known as
the "law of large numbers."

• Q: What are the advantages of group health

insurance over individual health insurance?
A: For an employer that intends to provide health insurance protection to
its employees, the group approach ensures that all employees,
regardless of health, can be covered. Those with known health problems,
who might otherwise be unable to obtain individual insurance, can be
 covered automatically upon employment without evidence of insurability.
Some employers may also impose a waiting period prior to their
enrollment in the plan, most employees can receive coverage as soon as
they are eligible. The waiting period is set by the employer, and it usually
ranges anywhere from 30 to 180 days. Group health insurance plans are
also typically more flexible and tend to provide more liberal benefits than
individual health insurance coverage.

STUDENT HEALTH INSURANCE

Before you begin to shop for student health insurance, it is important to
understand the basics of a health insurance plan. Managed care and fee-
for-service plans are two main options for insurance. Managed care
programs allow for lower healthcare costs by stipulating certain rules and
regulations about how the program may be used. Fee for service
programs usually cover about 80% of medical costs, with the other 20%
being billed to the patient.

• Why Get Student Health Insurance?

November 22, 2008

Relying completely on free campus clinics is not an advisable option for a

student. While campus clinics can assist with run-of-the-mill maladies like
colds and the flu, student health insurance can provide you with the
resources necessary to treat more serious issues. Obtaining student
health insurance can allow you access to the advice of specialists that
are not available through campus medical care.

• Where to Obtain Student Health Insurance?

Some institutions require students to have some form of health coverage
before they are allowed to enroll. The dilemma comes when students
pass the age where they can be covered by their parent’s insurance. If
the college does not offer student health insurance, there are numerous
insurance companies that offer comparable health insurance plans.

• The Cost Factor

The best option for student medical insurance may be a short-term or
 interim policy, which can be renewed periodically. Short-term policies
may cover standard doctor’s visits, X-rays, lab tests, hospitalization and
emergency care. Short-term insurance is typically less expensive than
traditional plans. Another benefit of short-term medical insurance is that
it can become immediately effective upon purchase; however, short-term
policies may provide less coverage and benefits than a long-term plan,
so be sure to carefully research all aspects of the policy before buying.

ACCIDENT HEALTH INSURANCE

Accident health insurance is a type of insurance coverage that pays
benefits for loss of income resulting from sickness, accidental injury, or
accidental death. Most accident health insurance policies are riders on a
basic health or life insurance policy, meaning they are added into a
major policy, but this type of coverage can also be purchased singularly.

• What It Covers
November 22, 2008

Simply put, accident health insurance covers accidents. Medical plans do

not cover all, or even most of the expenses, that you may incur as a
result of an accident. This is when supplemental insurance pays off. Most
policies will cover additional expenses, such as:

•Loss of income due to time off work

•Uncovered medical expenses, deductibles, and/or co-pays

•Non-medical costs, such as transportation expenses, living expenses,

and domestic assistance
Accident insurance may also cover ambulance bills, hospital stays, and
other similar expenses. In some cases, benefits are paid for the loss of a
limb or death. And, unlike most accident or disability insurances offered
through employers, this kind of coverage protects you even if you are
injured outside of the workplace.

• Who Should Have Accident Health Insurance

 Almost everyone is a good candidate for accident insurance. Policies
typically offer individual or family coverage. For those who do not have
and cannot afford regular health insurance, accident health insurance is
a low-cost alternative. It also makes a wise supplement for those who
already have health insurance. As mentioned earlier, health insurance
may not cover all of the expenses incurred from an accident or injury.

Many employers also encourage their employees to purchase accident

health insurance. Workman’s comp benefits may only pay so much. An
accident health insurance policy will protect you further, ensuring that
you have the financial resources you need to support yourself and your
family.

This type of coverage may also be valuable if you have a high-risk job or
if you participate in high-risk activities and sports, such as skiing, bungee
jumping, or sky diving. Make sure your policy does not exclude particular
activities you enjoy.

Basics of Hospital Expense Insurance

November 22, 2008

Hospital expense insurance covers the expenses incurred on a patient’s

hospital stay, provided he/she already has a subscription in this regard.

Nobody has ever lived a life time without a bout of illness and a
subsequent hospital stay. This is something inevitable as no one is
perfectly immune to diseases. And every hospital stay one has brings
with the discharge order a mind boggling bill - the psychological effect of
which is more than enough to send back the fitness-regained patient for
another few days for treatment in the same hospital. When it comes to
health related issues, no one could keep a check on the cash flow. After
all, in such circumstances, it is the question of life and health that
supersedes the financial issue. But with hospital expense insurance, one
could reclaim the money spent by producing all the relevant certificates
and bill.

Hospital expense insurance is one form of the health insurance that pays
 for the expenses incurred for the patient’s room and board costs. The
coverage also compensates financially for incidental expenses such as x-
rays, the use of the operating room, anesthesia, drugs and laboratory
charges. When it comes to payment, some insurance providers prefer to
pay the claim on an indemnity style where the insurer pays a definite
sum each day for a set maximum number of days. Some players, on the
other hand, opt to pay the actual bill or a percentage of the actual
amount regardless of what the amount the bill indicates.

Generally, at the time of the payment, the insured is paid a claim that
amounts to a fixed percentage of the policy amount minus the
deductibles. Various hospital expense insurance policies follow different
schemes and hence the payable amount varies a lot. The customer
should ideally see if the "stop-loss" or "coinsurance maximum," which
limits the insured person’s liability is at an acceptable limit. A decently
followed scheme does not put much burden on the customer. Also look
for those insurance providers who offer a maximum benefit ceiling.

Practically, there are a large number of hospital expense insurance

policies which are rejected on technical grounds. The reality is that, for
November 22, 2008

the insurance firms, their aim is to make profits and by denying one a
hospital expense insurance policy claim, actually the company is gaining
profits in larger numbers. Inadequacy or discrepancy in the information
provided by the customer is one of the grounds in which they deny a
policy. Hence, the customer should ensure that he/she provides the
correct and updated information to the insurance companies.

What is short-term health insurance?

Short-term health insurance plans provide you with coverage for a
limited period of time, and may be an ideal solution for those between
jobs or those waiting for other health insurance to start. Typically, short-
term plans offer coverage up to six months, although some plans may
offer coverage up to 12 months. If you think you'll need coverage for a
longer period of time, you may want to look at a standard, longer-term
health insurance option like our individual and family health insurance
plans.
 The application process for short-term health insurance is usually simpler
than standard, longer-term health insurance. Short-term health insurance
plans are designed to protect against unforeseen accidents or illnesses,
rather than to provide comprehensive coverage, and, as such, typically
do not include coverage for preventive care, physicals, immunizations,
dental or vision care.

Short-term health insurance plans typically do not cover pre-existing

medical conditions. The definition of a pre-existing condition varies by
state, but, in general, short-term health insurance policies exclude
coverage for conditions that have been diagnosed or treated within the
previous 3 to 5 years. If you have an existing medical condition, you may
want to research whether you can extend your current insurance.
Employer-sponsored insurance can be extended under a government-
regulated option commonly referred to as COBRA, which you should
seriously consider if you have an existing medical condition.

THE ROLE OF ACTUARIES IN

November 22, 2008

HEALTH INSURANCE
An organization’s financial risk depends partly on what it has promised in
the way of health care, whether as benefits promised by an employer to
its employees or as coverage promised by an insurer to its members. The
risk also depends on the techniques and environment within which the
organization delivers its health-care obligations. Managed care has
emerged as a set of techniques and systems for managing risk, some of
which can also apply to traditional health programs. Under traditional
indemnity (or fee-for-service) health plans, the physician, hospital, or
other provider bills the patient, who then submits a claim to the insurer
or claims administrator for reimbursement. Sometimes, as with some
Blue Cross/Blue Shield plans, this process involves little or no paperwork
for the patient. Regardless of the paper trail, under these traditional
arrangements, the payer or patient bears the financial risk. The health-
care provider bears the risk of nonpayment. The payer’s financial risks
are illustrated in the following

Examples:
 1. Expenditures can exceed the amount budgeted. For example, overly
generous benefits, insufficient premiums, or misestimating of inflation
can cause financial losses.

2. Overly high premiums can be uncompetitive. For example, an insurer

can raise its premiums so that many of its customers switch to
competitors.

3. Unexpected financial losses can bankrupt the program. For example, a

benefits program with $1,000,000 in financial surplus could become
insolvent if it has to pay one $2,000,000 claim.

4. Misestimating of outstanding claim liabilities can cause financial

problems. For example, a small insurer estimates that liabilities due to
unpaid claims amount to $20 million and that it earns $15 million of
profit in a year; if 6 months later the insurer realizes the liabilities were
really $40 million, then the insurer actually lost $5 million for the year
and also delayed taking corrective action.

5. Investment losses of plan assets can threaten the plan’s solvency. For
example, a plan whose assets become illiquid or devalued can face
serious financial problems. Traditional insurers have developed proven
November 22, 2008

techniques to manage these and other risks, involving the functions

listed below:

6. Financial and actuarial management. This includes raising capital,

setting premium rates, reimbursement, and benefits, and analyzing claim
liabilities and solvency.

7. Underwriting. This includes evaluating the products that the insurer

sells, deciding whether to sell, and determining the offering price.

8. Marketing and sales. Insurance risk implies that the ultimate financial
results of a sold product remain unknown for some time and that
financial results depend on the size of the program. Therefore, the
marketing and sales functions must be integrated with the risk strategy
of the corporation.

9. Administration. Premium collection and claims payment efficiency

strongly affect the company’s financial results, response to change, and
attractiveness to the market. Health-care actuaries play several roles in
traditional risk-bearing organizations such as life and health insurers.
 They evaluate how each of the above areas affects the organization’s
financial performance, often in the context of an overall strategic plan,
and have special responsibility for rate-setting, underwriting, and
estimating financial liability. As explained below, managed care
organizations depend on similar kinds of actuarial expertise.

Benefits Of Health Insurance

Though one may take great care of him or herself, there is always a
chance of a person falling ill. This means that any type of ailment can
befall a person; it may even be severe and last for a long period. Types
of illnesses that can take one by surprise include cancer. This type of
illness is something that requires a great deal of consideration; it needs
to be considered that it requires a great deal of expense treat, and those
with out treatments do not have a chance of surviving.

Though one may not be able to prevent getting a disease, there is a lot
November 22, 2008

more that s/he could do to prevent having slimmer chances of survival in

case of disease. If a person gets him or herself insured, treatment can be
taken care of.

Health insurance is a means of backing one self up in case of unforeseen

circumstances. It is a method of providing funds for treating an illness
that one could get unexpectedly. A person single-handedly may not be
able to take on the expenses of a serious ailment, and for this reason
s/he would need help. The help that one can get is in the form of health
insurance, but this requires input on a regular basis. This input is referred
to as premium.

Premiums may vary by the amount one has to put in on a regular basis,
and the amount is dependent on the level of coverage. The higher a
person’s chances are of developing a serious ailment, the higher the
premium would be. Also, the amount of coverage that one wants
influences the premium and the length of insurance as well.

Considering the chances of a person developing a serious illness, it must

be asserted that insurance companies need to assess a person’s
 condition before ensuring them. If they find out that a person has already
gotten symptoms that are close to the early stages of cancer or any
serious disease, the insurance company may reject the individual’s
application. If they do decide to insure a person in spite of their high
chance of developing a serious illness that is costly to treat, they may
insure the individual for a much smaller amount.

The chances a person then has of dealing with an ailment, should it

develop, will be limited. This is due to the lack of funds. Appropriate
medical attention that is required cannot be supplied, and for this reason
a person may die. Hence, it is advised that a person should get a medical
checkup and insurance as early as possible before any disease develops.
A person’s chances of survival are greater in this way, and even incase of
minor illnesses one can cover a great deal of the cost.

It is better to be safe than sorry as is said, and so, getting health

insurance at the earliest possible time is the best ting to do.

Health insurance in other countries

November 22, 2008

• In Dubai
Health care insurance is not compulsory for all employers. Foreign
workers may either obtain their own health insurance or apply for a
health card issued by the DOHMS. Public hospitals only accept foreign
patients with health cards but on an emergency basis only.

When choosing private health insurance companies or health

maintenance organizations, the amount of cover, the health cases that
can be covered, and the general medical benefits that can be obtained
by the insured should be looked at.

Expatriates used to constitute about 75% of public hospitals’ patient

burden. Thus beginning 2001, medical services are no longer free to
expatriates but are still provided with high subsidies. Come 2004, only
foreign patients required for admission are accepted by public hospitals.
Discount is only provided to cover room rates but other services while in
the hospital are unsubsidized. However, life threatening emergency
 cases are provided free of charge.

Public hospitals offer the most number of surgical procedures. However,

private health insurance in Dubai has no provision to allow procedures to
be done in public hospitals so they go to private health practitioners just
to avoid from personally paying for the procedure.

• In Canada
Canada is recognized for its effective health care system. Although
provincial governments provide its citizens with basic health insurance
needs, there are many important health care factors that are overlooked.

When it comes to health insurance, all provincial governments offer

limited coverage. The following is a list of what most governments
cover in full:

•One eye examination every 24 months

•Basic ward accommodations in hospital

•Regular physician visits

November 22, 2008

It is important to note that this list is not reflective of all the health
insurance plans across Canada. Some provinces do not even provide full
health insurance coverage for these basic needs, while others provide
full coverage for more.

• IN AUSTRALIA
The Australian Government provides a basic universal health insurance,
Medicare. Private health insurance in Australia is limited to those
services not covered by Medicare or to services provided in private
hospitals.

The Australian Taxation system encourages middle to high income

earners to take out Private Health Insurance. While most taxpayers pay a
1.5% Medicare Levy, an additional 1% Medicare Levy Surcharge is
payable by those taxpayers who earn more than $50,000 and do not
have Private Health Insurance
 • In United States
The US market-based health care system relies heavily on private and
not-for-profit health insurance, which is the primary source of coverage
for most Americans. According to the United States Census Bureau,
approximately 85% of Americans have health insurance; nearly 60%
obtain it through an employer, while about 9% purchase it directly.[2]
Various government agencies provide coverage to about 28% of
Americans (there is some overlap in these figures).[2]

In 2007, there were nearly 46 million people in the US (over 15% of the
population) who were without health insurance for at least part of that
year.[2] The percentage of the non-elderly population who are uninsured
has been generally increasing since the year 2000.[3] There is
considerable debate in the US on the causes of and possible remedies for
this level of uninsurance as well as the impact it has on the overall US
health care system

CALCULATION OF INDIVIDUAL
November 22, 2008

INSURANCE
Like individual life insurance, health insurance policies require the person
applying to submit evidence of good health, and the gross premiums are
generally calculated on a level premiums basis.

• PREMIUMS FOR INDIVIDUAL HEALTH INSURANCE

Morbidity experience is used to calculate net annual premiums
for health insurance, just as mortality experience is used to calculate life
insurance net premiums.

In individual health insurance, as in life insurance, net annual

premiums may be calculated either on a net level basis or a modified
basis.

The premiums of health or disability income policies net annual

premiums are usually calculated in a manner quite similar to that
 Annual claim cost
Frequency = (Average
of claim amount payable * (frequency
incurredof claim)
Present value of Annual = (Net=level
$1000(dxV/lx) claim incurred
annual / person’s
* (P.V of $1 premium per year)
Present value of net = (Net annual premiums) * (lx + lx+1 V +????/lx)
Each claim)
ClaimAverage
cost amount = amount of claim incurred / no’s of claim incurred
premium)
Annual premiums

dx = in the numerator represents the number becoming disabled instead

of the number dying.

• CALCULATION OF THE PRESENT VALUE OF THE

ANNUAL CLAIM COSTS

This is for the surgical expensive

By this formula we find out present value of annual premium.

• ANNUAL CLAIM COST

November 22, 2008

• FOR AVERAGE AMOUNT

• FOR FREQUENCY CLAIM

• RESERVES FOR INDIVIDUAL HEALTH POLICES

The terminal reserves can be calculated in manner similar to that for
life insurance. If the prospective method is used, this would involve the
usual equation.
 Terminal
Midterminal reserve
reserve = (P.V of terminal
= (previous future benefits)
reserve)– +
(P.V of future
(terminal net premium)
reserve) /2
Actual loss ratio = (claim payment made) + (increase in claim reserve) /

(Premiums collected) – (insurance in policy reserve)

• MIDTERMINAL RESERVE
December 31 reserves for individual health polices are generally
calculated as being midterminal reserves and unearned premiums
reserves (the two parts being shown separately), where

• ACTUAL LOSS RATIO

An actual ratio is calculated yearly in the company’s financial statement.
The actual loss ratio is calculated as
November 22, 2008

EXAMPLES # 1
Calculate the annual claim cost expected for particular health coverage.
Use the following actual experience for this coverage as the basis of the
calculation?

Last year’s number of persons insures = 1000

Last year’s number of claim incurved = 40

Last year’s amount of claim incurved = $80,000

• Annual claim cost

 Annual claim cost = (average amount payable for each claim)
* (frequency of claim)

• For the frequency of claim

Frequency of claim = claim incurred / persons incurred

Frequency of claim = 40 / 100

Frequency of claim = 0.04

• For average amount

Average amount = amount of claims incurred / no’s of claim
incurred

Average amount = $ 8000 / 40

Average amount = $ 2000

• Put frequency and average into formula

Annual claim cost = 2000*0.04
November 22, 2008

Annual claim cost = $ 80

EXAMPLE #2
Given the following information, calculate the gross annual premium to
be charged for a particular individual health insurance policy?

Present value of annual costs = $ 540000

Present value of $1 per year premium = 13,500

Loading needed = 25% net premium

Gross = net + constant + % gross

• Gross annual premium

 Gross premium – net premium = loading %

• For net
Net premium = P.V of annual cost / P.V of $1 year premium

Net premium = 54000 / 13500

Net premium = $40

• Gross annual premium = 40*(1+0.25)

Gross annual premium = 40*1.25

Gross annual premium = $ 50

EXAMPLE # 3
Given information, calculate the actual loss ratio experienced in a year
for a particular group of individual health policies?
November 22, 2008

Premium collected = $ 350,000

Claim payments made = 150,000

Claim reserve, beginning of year = 100,000

Claim reserve, end of year = 200,000

Policy reserve, beginning of year = 40,000

Policy reserve, end of year = 30,000

• Actual loss ratio = claim payment made

+ increase in claim reserve / premiums
collected – insurance in policy reserve

• Increase in claim reserve = end of year – beginning of year

 Increase in claim reserve = 200,000-100,000

Increase in claim reserve = 100,000

• Increase in policy reserve = end of year – beginning of year

Increase in policy reserve = 30000-40000

Increase in policy reserve = -10000

• Now put the value in actual loss ratio

Actual loss ratio = 150,000 + 100,000 / 350,000
– (-1000)

Actual loss ratio = 250,000 / 360,000

Actual loss ratio = 0.69 or 69%

EXAMPLE # 4
November 22, 2008

A company’s individual major medical policy shows the following

amounts for the year 1985?

Premium collected = $ 1500,000

Claim payment made = 440,000

Claim reserve, beginning of year = 300,000

Claim reserve, end of year = 500,000

Policy reserve, beginning of year = 800,000

Policy reserve, end of year = 1,200,000

• Actual loss ratio = claim payment made +

increase in claim reserve / premiums
collected – insurance in policy reserve
 • Increase in claim reserve = end of year – beginning of year

Increase in claim reserve = 500,000 – 300,000

Increase in claim reserve = $ 200,000

• Increase in policy reserve = end of year – beginning of year

Increase in policy reserve = 1,200,000 – 800,000

Increase in policy reserve = $ 400,000

• Put in formula
Actual loss ratio = 440,000 + 200,000 / 1500,000 –
400,000

Actual loss ratio = 640000 / 1100000

Actual loss ratio = 0.58 or 58%

November 22, 2008

EXAMPLE # 5
Given the following information, calculate the midterminal reserve that
would be included in the company’s December 31, 1986 financial
statement for a certain individual health insurance policy?

Date of issue = June 1, 1984

Net annual premium = $306.12 (after

year)

1st terminal reserve =0

2nd terminal reserve = 31.60

3rd terminal reserve = 66.48

• For December 1986

2nd terminal reserve = 13.60
 3rd terminal reserve = 66.48

• Midterminal reserve = 1st terminal reserve + 2nd terminal reserve

/2

Midterminal reserve = 31.60 + 66.48 / 2

Midterminal reserve = 98.08 / 2

Midterminal reserve = $49.04

EXAMPLE # 6
Calculate the loss ratio which the actuary would predict the policies
referred to exercise # 11. Assume that the gross of one-year term
premium for a male age 40 is $ 298.44?

• Loss ratio = annual claim cost / gross one – year term

premium
November 22, 2008

• Annual claim cost = (average amount Payable *

(frequency

for each claim)

of claim)

• Form the previous data

Frequency of claim at age 40 = 0.072

Average amount payable for each claim = $ 2860

• Average claim cost = $2860*0.072

Average claim cost = $ 205.92

• Loss ratio = 205.92 / 298.44

Loss ratio = 0.68 or 68%

 EXAMPLE # 7
Calculate the net one-year term premium for an experience rate group’s
health insurance coverage for males age 40. use the following data from
the experience of that particular group.

Frequency of claim = 0.072

Average amount = $2860

• Net one year premium = annual claim cost

Annual claim cost = 0.072*2860

Annual claim cost = $ 205.92

EXAMPLE # 8
If company wished to express the dividend for an individual health
November 22, 2008

insurance policy as a % of the premium, what percent would be used for

a policy having gross premium $ 612.00, assuming the same premium
would be $ 581.40 if it were calculated using actually expected
assumption?

• Percent of premium = gross premium 2 – gross premium 1

/ Gross premium 2

Percent of premium = 612.00 – 581.40 / 612.00

Percent of premium = 30.6 / 612.00

Percent of premium = 0.05 or 5%

November 22, 2008