Chapter 2, Part 1: Medical Expense Insurance

Basic plans, major medical, managed care, and health savings accounts

Start Here: 5 Things You MUST Know

1

Basic plans are first-dollar coverage (no deductible). They cover hospital, physician, or surgical expenses separately.

2

HMO = gatekeeper/PCP required. PPO = any doctor, lower cost in-network. POS = choose each visit (HMO + PPO hybrid).

3

A corridor deductible sits between basic coverage running out and supplemental major medical kicking in.

4

HSA = your money, follows you. HRA = employer's money, stays with the employer. FSA = use it or lose it.

5

Blue Cross = hospital services. Blue Shield = physician services. They are nonprofit, prepaid service plans.

1. Basic Medical Expense Plans

Basic plans are the oldest, simplest form of health insurance. They provide first-dollar coverage - meaning there is NO deductible. The insurance starts paying from dollar one. However, they have low maximum limits and only cover specific categories of expenses.

Exam Alert

"First-dollar coverage" = no deductible. If the exam asks which plan type has no deductible, the answer is basic plans.

A. Basic Hospital Expense

Covers the costs of staying in the hospital. Two main components:

Room & Board

Pays a daily dollar amount (e.g., $500/day) up to a maximum number of days. If the hospital charges more than the benefit, the insured pays the difference.

Miscellaneous Expenses

Lab work, X-rays, medications, operating room fees. Often set as a multiple of the daily room charge (e.g., 10x) or a flat dollar amount.

Example:

Your policy pays $500/day for room & board, up to 30 days. The hospital charges $650/day. You pay: $150/day out of pocket ($650 - $500 = $150). Over a 5-day stay, that is $750 out of your pocket + insurance pays $2,500.

B. Basic Medical Expense (Physician's Nonsurgical)

Covers doctor visits for NON-surgical care. Usually covers in-hospital visits, and sometimes limited office visits. Does NOT cover surgery - that is a separate plan.

How it works:

Typically limits benefits to a certain number of visits per day or per hospital stay. For example: "1 doctor visit per day while hospitalized, up to $75 per visit."

Example:

You are hospitalized for pneumonia. The doctor visits you each morning to check your progress - that is a nonsurgical visit. Your policy covers $75/visit, max 1 visit per day. The doctor charges $100. You pay: $25 per visit out of pocket.

C. Basic Surgical Expense

Covers surgeon fees, anesthesiologist, and operating room costs. Uses a surgical schedule - a list that assigns a dollar amount to each type of surgery.

Relative Value Approach:

Each surgery is assigned a point value based on complexity. Points are multiplied by a dollar conversion factor to get the benefit amount.

Real-World Scenario: Surgical Schedule

The Setup: A surgical schedule uses a $10 conversion factor. An appendectomy is rated at 200 points. Open-heart surgery is rated at 1,000 points.

What Happens: Mike needs an appendectomy. His benefit = 200 points x $10 = $2,000. If Mike needed open-heart surgery instead, his benefit = 1,000 points x $10 = $10,000.

The Result: More complex surgeries get more points, which means higher dollar benefits. If the surgeon charges more than the schedule allows, Mike pays the difference out of pocket.

Basic Plan Type What It Covers How It Pays Deductible?
Hospital Expense Room & board + misc. hospital charges $/day up to max days No
Medical (Physician) Doctor visits, nonsurgical care $/visit, limited visits No
Surgical Expense Surgeon, anesthesiologist, OR Surgical schedule (points x $) No

2. Major Medical Insurance

Major medical is the "big guns" of health insurance. It covers large, catastrophic medical expenses with high maximum limits. Unlike basic plans, major medical DOES have deductibles and coinsurance. It comes in two forms:

Supplemental Major Medical

Works ON TOP of a basic plan. After the basic plan's benefits run out, the insured pays a corridor deductible, then supplemental major medical kicks in.

Think of it as: Basic plan pays first --> Corridor deductible (gap the insured pays) --> Supplemental major medical pays the rest.

Comprehensive Major Medical

Combines basic + major medical in ONE single policy. Has a single deductible, then coinsurance applies. Most commonly sold as group insurance.

Think of it as: One deductible --> Coinsurance (e.g., 80/20) --> Stops at out-of-pocket max. Simpler because it is all in one plan.

What is a Corridor Deductible?

Imagine a hallway (corridor) between two rooms. Room 1 is your basic plan. Room 2 is your supplemental major medical. The corridor deductible is the gap you walk through - and pay for - between the two. It only applies to supplemental major medical, NOT comprehensive.

How Supplemental Major Medical Works:

Basic Plan Pays

Up to its limits

->

Corridor Deductible

YOU pay this gap

->

Major Medical Pays

With coinsurance

Real-World Scenario: Karen's Surgery

The Setup: Karen has a basic surgical plan that pays up to $5,000 for her procedure, plus supplemental major medical with a $500 corridor deductible and 80/20 coinsurance. Her surgery costs $15,000.

What Happens: Basic plan pays its max of $5,000. That leaves $10,000. Karen pays the $500 corridor deductible. Remaining: $9,500. Major medical pays 80% = $7,600. Karen pays 20% = $1,900.

The Result: Karen's total out-of-pocket = $500 (corridor) + $1,900 (coinsurance) = $2,400. Without the supplemental major medical, she would have owed $10,000.

3. Managed Care Plans

Managed care plans control costs by managing how, where, and from whom you get your healthcare. They emphasize prevention and use networks of doctors. The three main types are HMO, PPO, and POS.

A. HMO (Health Maintenance Organization)

The most restrictive but often cheapest plan. Focuses on preventive care. You MUST use HMO doctors and facilities.

Key Features:

  • - PCP (Primary Care Physician) required - your "gatekeeper"
  • - Need referral from PCP to see a specialist
  • - Limited service area (geographic region)
  • - Usually NO deductible - just copayments

How You Pay:

  • - Capitated/prepaid: Doctors get paid a fixed amount per member, per month - whether you visit or not
  • - You pay small copays ($20-$40 per visit)
  • - Services provided, NOT reimbursed

B. PPO (Preferred Provider Organization)

More flexible than an HMO. You can see ANY doctor, but you save money by staying in-network. Uses fee-for-service billing.

Key Features:

  • - NO PCP required - see any doctor you want
  • - NO referral needed for specialists
  • - In-network vs. out-of-network pricing
  • - Fee-for-service (pay per visit/procedure)

How You Pay:

  • - In-network: Plan pays ~90%, you pay ~10%
  • - Out-of-network: Plan pays ~70%, you pay ~30%
  • - Has deductibles and coinsurance

C. POS (Point of Service)

A hybrid of HMO and PPO. Also called an "open-ended HMO." You choose at each visit (the "point of service") whether to use the HMO network or go outside it.

How it works:

  • - May have a gatekeeper/PCP like an HMO
  • - In-network: works like an HMO (low copays, covered in full)
  • - Out-of-network: works like a PPO (higher costs, deductibles, coinsurance)
  • - You decide EACH TIME you need care which route to take
Feature HMO PPO POS
PCP Required? Yes (gatekeeper) No Often yes
Referral for Specialist? Yes No For in-network
Out-of-Network? Not covered (usually) Covered at lower rate Covered at lower rate
Deductible? Usually no Yes Out-of-network only
Payment Model Capitated/prepaid Fee-for-service Both (depends on choice)
Cost to Member Lowest Medium Varies by choice
Flexibility Least Most Middle

Real-World Scenario: Alex Needs a Specialist

The Setup: Alex has knee pain and wants to see an orthopedic specialist. He has three friends with different plans.

What Happens:

  • - HMO friend: Must visit PCP first, get a referral, then see an in-network specialist only. Copay: $40.
  • - PPO friend: Calls any orthopedic surgeon directly - no referral needed. In-network: pays 10%. Out-of-network: pays 30%.
  • - POS friend: Can go to PCP for a referral and pay HMO-level copay, OR skip the referral and see any doctor at higher out-of-network cost.

The Result: HMO = cheapest but least choice. PPO = most freedom. POS = flexibility to choose each time.

4. Blue Cross and Blue Shield Plans

The "Blues" are unique - they are nonprofit, prepaid service plans. Unlike regular insurance that reimburses you, Blue plans pay providers directly.

Blue Cross

Covers hospital services - room & board, surgery, lab work done in the hospital.

Memory trick: Cross = hospital bed (shaped like a +)

Blue Shield

Covers physician services - doctor visits, specialist consultations, outpatient care.

Memory trick: Shield = doctor's coat of arms

Key Facts for the Exam

  • - Service plan: Pays providers directly (not the subscriber)
  • - Nonprofit organizations
  • - Prepaid: Members pay in advance for covered services
  • - Community rating for small groups (everyone pays the same rate)
  • - Experience rating for large groups (rates based on the group's claims history)

Real-World Scenario: Service Plan vs. Reimbursement

The Setup: Dana has Blue Cross/Blue Shield. She gets knee surgery.

What Happens: With a regular insurance policy, Dana would pay the hospital $20,000, then submit a claim and wait to get reimbursed. With Blue Cross, the plan pays the hospital directly. Dana never handles the $20,000.

The Result: This is the difference between a service plan (Blue pays providers) vs. a reimbursement plan (regular insurance pays YOU, and you pay providers).

5. Health Savings and Tax-Advantaged Accounts

These accounts let people save money tax-free (or tax-deferred) to pay for medical expenses. The exam loves to test the differences between them. Pay close attention to who funds them, what happens to unused money, and the penalty rules.

A. MSA (Medical Savings Account) - Archer MSA

For small employers (50 or fewer employees) and self-employed individuals only. Must be paired with a high-deductible health plan.

Who funds it?

Employer-funded (employer contributes, NOT the employee)

Contribution limits:

Max 65% of deductible (individual) / 75% of deductible (family)

Penalty: Nonqualified withdrawal = income tax + 20% penalty

B. FSA (Flexible Spending Account)

Employee sets aside pre-tax salary dollars. Two types: Health Care Account and Dependent Care Account.

THE BIG RULE: Use It or Lose It!

Any money left in the FSA at the end of the plan year is forfeited. Gone. You don't get it back. This is the most-tested FSA fact.

Who funds it?

Employee via salary reduction (pre-tax)

Tax treatment:

Exempt from federal income tax, FICA, and most state taxes

Changes allowed:

Can only change contributions during open enrollment OR after a qualified life event (marriage, birth, divorce, job change).

C. HRA (Health Reimbursement Account)

100% employer-funded. NOT funded by salary reduction. The employer decides how much to contribute and what it covers.

Unused balances?

Roll over year to year (unlike FSA)

Portability?

Stays with the employer. If you leave the job, you lose it.

No statutory (legal) limit on how much the employer can contribute. The employer sets its own limits.

D. HSA (Health Savings Account)

The most flexible and powerful savings account. Must be linked to a High Deductible Health Plan (HDHP). Your money, your account - it follows you.

Eligibility requirements (must meet ALL):

  • - Must be covered by an HDHP
  • - Cannot have other health insurance coverage
  • - Cannot be enrolled in Medicare
  • - Cannot be claimed as a dependent on someone else's tax return

$4,150

Single contribution limit

$8,300

Family contribution limit

+$1,000

Catch-up (age 55+)

20%

Penalty before age 65

Withdrawal rules:

  • - Qualified health expenses: Tax-free, no penalty
  • - Nonhealth withdrawal BEFORE 65: Income tax + 20% penalty
  • - Nonhealth withdrawal AFTER 65: Income tax only (no penalty)

E. HDHP (High Deductible Health Plan)

Higher deductibles = lower premiums. Required to open an HSA. Preventive care is covered first-dollar (no deductible for preventive services).

$1,600

Minimum deductible (single)

$3,200

Minimum deductible (family)

F. CDHP (Consumer Driven Health Plan)

An employer-controlled plan that works in layers. First-dollar expenses come from an HRA or HSA until depleted, then there is a deductible gap (the insured pays), then traditional insurance kicks in. Rollover is at the employer's discretion.

HRA/HSA Pays

First dollar

->

Deductible Gap

YOU pay

->

Insurance Pays

With coinsurance

Savings Accounts: Side-by-Side Comparison

Feature MSA FSA HRA HSA
Who funds it? Employer Employee (salary reduction) Employer only Individual or employer
HDHP required? Yes No No Yes
Rollover? Yes No (use it or lose it) Yes Yes
Portable? Yes No No (stays with employer) Yes (follows you)
Who can use? Small employers / self-employed Any employer plan Any employer Anyone with HDHP
Nonhealth penalty Tax + 20% N/A (use it or lose it) N/A Before 65: tax + 20%. After 65: tax only

Real-World Scenario: Rachel's HSA

The Setup: Rachel, age 58, has an HDHP with a $1,600 deductible and an HSA. She contributes the max: $4,150 (single) + $1,000 (catch-up for being 55+) = $5,150 per year, all tax-deductible.

What Happens: Rachel uses $2,000 from her HSA for dental work and a specialist visit. That withdrawal is tax-free because it was for qualified health expenses. The remaining $3,150 rolls over to next year - it never expires.

The Result: Years later at age 67, Rachel retires and withdraws $10,000 from her HSA to pay for a vacation. Since she is over 65, she pays income tax on the $10,000 but NO 20% penalty. If she were 60 and tried the same thing, she would owe income tax PLUS a 20% penalty ($2,000).

Cheat Sheet

Print this page for quick reference

Basic Plans:

  • First-dollar coverage (NO deductible)
  • Hospital = room & board + misc
  • Medical = physician nonsurgical
  • Surgical = schedule of surgeries

Major Medical:

  • Supplemental = basic + corridor deductible + major medical
  • Comprehensive = one policy, one deductible
  • Corridor deductible = gap between basic and supplemental

Managed Care:

  • HMO = PCP/gatekeeper, referrals, capitated, cheapest
  • PPO = any doctor, no referral, fee-for-service
  • POS = hybrid, choose each visit, "open-ended HMO"

Blue Plans:

  • Blue Cross = hospital
  • Blue Shield = physician
  • Nonprofit, prepaid, service plan
  • Community rating (small) / Experience rating (large)

HSA Key Numbers:

  • Single: $4,150 / Family: $8,300
  • Catch-up (55+): extra $1,000
  • Nonhealth before 65: tax + 20%
  • Nonhealth after 65: tax only

Account Rules:

  • FSA = use it or lose it
  • HRA = employer-funded, stays with employer
  • HSA = your money, follows you
  • MSA = small employers only (50 or fewer)
  • HDHP min deductible: $1,600 / $3,200

Exam Trap Alerts

1. Basic plans have NO deductible

If the exam asks "which type of health plan provides first-dollar coverage?" the answer is basic plans. Major medical has deductibles - basic plans do not.

2. Corridor deductible is ONLY for supplemental major medical

Comprehensive major medical does NOT have a corridor deductible - it has a single regular deductible. If they mention a corridor deductible, the answer is always supplemental major medical.

3. HMO provides services, NOT reimbursement

An HMO does not reimburse you - it provides services directly. You go to HMO doctors who are paid by the HMO. This is the same as Blue plans (service plans). PPOs use fee-for-service with reimbursement.

4. FSA = use it or lose it. HSA = rolls over forever.

The exam loves to test this. FSA money left at year-end is forfeited. HSA money rolls over indefinitely. HRA also rolls over, but stays with the employer. Don't confuse these three.

5. HSA requires HDHP and has strict eligibility rules

You cannot open an HSA if you have other health coverage, are on Medicare, or are someone's dependent. The HDHP is mandatory. If the exam describes someone with a regular health plan trying to open an HSA - they can't.

6. HSA nonhealth withdrawal penalty disappears at age 65

Before 65: income tax + 20% penalty. After 65: income tax only, no penalty. Both MSA and HSA have the same 20% penalty for nonqualified withdrawals before age 65.

7. POS is an "open-ended HMO" - NOT an "open-ended PPO"

The exam may try to trick you. A POS plan is called an open-ended HMO because it starts as an HMO but gives you the option to go outside the network (like a PPO). It is NOT called an "open-ended PPO."

Quick Reference Summary

Basic Hospital Expense

Room & board $/day + misc. No deductible.

Basic Surgical Expense

Surgical schedule: points x conversion factor.

Supplemental Major Medical

Basic runs out -> corridor deductible -> major medical.

Comprehensive Major Medical

One policy, one deductible, coinsurance. Usually group.

HMO

PCP gatekeeper, referrals, capitated, cheapest, most restrictive.

PPO

Any doctor, no referral, in-network 90% / out 70%.

POS (Open-Ended HMO)

Choose each visit: HMO route or PPO route.

Blue Cross / Blue Shield

Nonprofit, service plan, hospital / physician.

HSA

HDHP required. $4,150/$8,300. Portable. Rolls over.

FSA

Salary reduction. Use it or lose it. Pre-tax.

HRA

Employer-funded only. Rolls over. NOT portable.

HDHP Minimums

$1,600 single / $3,200 family deductible.