Study guide
Health questions reward candidates who can trace a dollar through a claim and match each product to the specific risk it covers. This chapter covers medical expense cost-sharing and managed care, the ACA framework and uniform mandatory policy provisions, disability income (personal and business), long-term care, and Medicare/Medicaid — together a major share of the combined exam.
Cost Sharing and Managed Care Plan Types
Medical expense plans share cost with the insured through a standard, sequential structure. The deductible is the amount of covered expense the insured must pay first each calendar year before the plan pays anything. Coinsurance then splits the remaining covered costs by percentage between insurer and insured — classically 80/20 — up to a stop-loss limit on the insured's coinsurance share, after which the insurer pays 100 percent of further covered expenses for the rest of the year. Applying the sequence matters: given a deductible, coinsurance rate, and stop-loss, the insured's dollar out-of-pocket cost on a claim is the deductible plus their coinsurance share of the remainder (capped by the stop-loss), not coinsurance applied to the full billed amount and not simply the stop-loss amount as a flat charge. The out-of-pocket maximum caps the insured's total annual spending on deductibles, coinsurance, and copayments combined; premiums are never counted toward it. Copayments are flat per-service charges (e.g., a fixed dollar amount per office visit) rather than percentages. Managed care plans organize coverage around provider networks. A traditional HMO requires members to select a primary care physician who acts as a gatekeeper, coordinating and authorizing referrals to specialists, and generally requires staying within the network except for true emergencies; HMOs emphasize preventive care and typically use modest flat copays rather than deductibles and coinsurance. A PPO instead contracts discounted fee-for-service rates with a network of providers but imposes no gatekeeper requirement; members may self-refer to specialists and may go out of network, though usually at higher deductibles and coinsurance. A point-of-service (POS) plan is a hybrid, functioning like an HMO with a gatekeeper for in-network care but permitting PPO-style out-of-network care at greater cost sharing, with the choice made at the point each service is used.
ACA Framework and Metal Tiers
The Affordable Care Act reshaped individual and small-group major medical markets nationally. Non-grandfathered plans must be guaranteed issue during open or qualifying special enrollment periods, and insurers may not impose preexisting-condition exclusions or vary premiums based on health status or claims history. Dependents may remain on a parent's plan until age 26 regardless of student status, marital status, or residency. Covered plans must include the ten essential health benefit categories (such as hospitalization, prescription drugs, maternity and newborn care, mental health and substance use treatment, and preventive services, which must be offered without cost-sharing) and may not impose lifetime or annual dollar limits on those essential benefits. Marketplace plans are organized into metal tiers ranked by actuarial value — the average percentage of covered costs the plan pays for a standard population, not the number or richness of covered benefit categories, which are the same across all tiers. Bronze plans have an actuarial value around 60 percent, Silver around 70 percent, Gold around 80 percent, and Platinum around 90 percent; a catastrophic tier is available mainly to those under 30 or with a hardship exemption. A higher metal tier means the plan pays a larger average share of costs and the insured pays more in premium but less in cost-sharing at the point of care — the metal label says nothing about network quality, provider ratings, or the scope of covered services.
Uniform Mandatory Policy Provisions
Individual health insurance policies in most states are standardized by laws patterned on the NAIC Uniform Individual Accident and Sickness Policy Provisions Law, which requires a set of mandatory provisions regardless of insurer. Entire contract states that the policy and attached application form the whole agreement. Time limit on certain defenses is health insurance's version of incontestability, generally barring the insurer from denying a claim for misstatements in the application after the policy has been in force for a stated period, commonly two to three years (fraud may remain a narrow exception in some states). The grace period provision sets minimum grace periods that vary by premium payment mode: commonly at least 7 days for weekly-premium policies, at least 10 days for monthly-premium policies, and at least 31 days for all other modes (quarterly, semiannual, annual) — a frequently tested distinction, since many candidates default to the 31-day life insurance standard for every mode. Reinstatement allows restoring lapsed coverage; if the insurer accepts a premium without requiring a new application, or if it fails to act on a submitted reinstatement application within 45 days, reinstatement is automatically deemed approved. Notice of claim generally requires the insured to notify the insurer within 20 days of a loss (or as soon as reasonably possible). Claim forms must generally be furnished by the insurer within 15 days of notice. Proof of loss must generally be filed within 90 days of the loss. Time of payment of claims and payment of claims provisions govern how promptly and to whom benefits must be paid. Physical examination and autopsy lets the insurer require exams at its own expense during a claim. Legal actions bars a lawsuit sooner than 60 days after proof of loss is filed, and sets an outer limit (commonly three years) after which suit is barred. Change of beneficiary lets the insured change the named beneficiary unless previously designated as irrevocable. Optional provisions insurers may add include change of occupation, misstatement of age, illegal occupation, and relation of earnings to insurance (limiting benefits if reported income was overstated).
Disability Income Insurance
Disability income insurance replaces a portion of earned income lost to sickness or injury, typically limited to roughly 60 to 70 percent of gross pay so the insured retains some financial incentive to return to work. The definition of total disability used by a policy is the single most important variable in both cost and claims outcomes. An own-occupation definition pays full benefits if the insured cannot perform the substantial and material duties of their own specific occupation, even if the insured is working and earning income in a different occupation — this is the more liberal, and more expensive, definition, and it is frequently tested with a professional (such as a surgeon) who cannot perform their specialty but earns income doing something else and still collects. Many policies apply own-occupation only for an initial period (such as the first two years) and then shift to an any-occupation definition, under which benefits continue only if the insured cannot perform any occupation reasonably suited to their education, training, and experience — a materially stricter standard. The elimination period functions like a deductible measured in time rather than dollars: the number of days (commonly 30, 90, or 180) after disability begins before benefits start being paid; a longer elimination period lowers the premium because the insurer is on the hook for a shorter portion of any given disability. The benefit period defines how long payments continue once they start — options range from a few years to age 65 — and a longer benefit period raises the premium. Partial disability typically pays a flat reduced benefit (often around 50 percent) while the insured works at reduced duties, while residual disability pays a benefit proportionate to the actual percentage of income lost, better fitting a gradual return to work. Presumptive disability provisions pay the full benefit automatically, without a separate proof-of-loss inquiry into ability to work, upon specified catastrophic losses such as sight, hearing, speech, or two limbs. Taxation of disability benefits follows who paid the premium: benefits are received income-tax-free when the insured personally paid premiums with after-tax dollars, but are taxable as ordinary income when an employer paid the premiums and did not include them in the employee's taxable wages; split premium arrangements are taxed proportionately to each party's share.
Business Uses of Disability Insurance and Long-Term Care Insurance
Businesses use three distinct disability-related products, and confusing them is a common wrong-answer trap. A business overhead expense (BOE) policy reimburses the business's actual fixed operating expenses — rent, utilities, and employee (non-owner) salaries — while the insured owner is disabled and unable to work; it explicitly does not replace the disabled owner's own personal income or profit. A key person disability policy instead protects the business itself against the financial impact of losing a vital, income-generating employee, with benefits paid to the business to offset lost revenue and the cost of finding and training a replacement. A disability buy-sell (buyout) policy funds the purchase of a permanently disabled owner's business interest by the remaining co-owners or the entity, typically after a long elimination period (often a year or more) confirming the disability is likely permanent. Long-term care insurance covers extended custodial and health-related care that ordinary health insurance and Medicare largely exclude. Policies commonly define graduated levels of care: skilled nursing care is continuous, daily care that must be performed by or under the supervision of licensed medical personnel under a physician's direction; intermediate care is similar in nature but required only occasionally rather than around the clock; and custodial care — the type of care most LTC claimants actually need — is nonmedical assistance with daily living tasks that can be provided by unlicensed caregivers. Coverage commonly extends beyond nursing facilities to home health care, adult day care, assisted living, and respite care (temporary substitute care that lets a family caregiver rest). For a policy to be federally tax-qualified, HIPAA sets the benefit-trigger standard: the insured must be certified by a licensed health care practitioner as chronically ill, meaning either unable to perform at least two of six activities of daily living (bathing, dressing, eating, toileting, transferring, and continence) for a period expected to last at least 90 days, or requiring substantial supervision due to severe cognitive impairment — the cognitive-impairment trigger applies on its own even without any ADL limitation. A prior hospital stay is not a permissible trigger for a tax-qualified LTC policy (that is a Medicare skilled nursing facility rule, not an LTC insurance rule), and a physician's certification of general medical necessity alone is likewise not a valid HIPAA trigger. Because a policy purchased at 55 may not pay a claim for decades, inflation protection is critical, and insurers in most states must at least offer it, commonly as a compound annual benefit increase. Individual LTC policies are typically guaranteed renewable, meaning the insurer cannot cancel coverage or unilaterally reduce benefits, though it may raise premiums for an entire class of policyholders.
Medicare and Medicaid
Medicare is the federal program primarily for those age 65 and older (and certain younger disabled individuals). Part A (hospital insurance) covers inpatient hospital care, limited skilled nursing facility care (generally only after a qualifying inpatient hospital stay, and only for skilled — not custodial — care), hospice, and some home health services; it is premium-free for most people with sufficient work history and uses a deductible per benefit period rather than a calendar-year deductible. Part B (medical insurance) is voluntary, covers physician services, outpatient care, and preventive services, requires an income-adjusted monthly premium, and after an annual deductible generally pays about 80 percent of Medicare-approved charges, leaving the insured responsible for the rest absent supplemental coverage. Part C (Medicare Advantage) allows private insurers to deliver Part A and Part B benefits (often bundling Part D drug coverage and extra benefits) through managed-care-style plans. Part D provides outpatient prescription drug coverage through private plans for an additional premium. Medicare supplement (Medigap) policies are private, state-regulated contracts, standardized in most states into lettered plans, that help pay Medicare's own deductibles and coinsurance; an applicant must already be enrolled in both Parts A and B, and a one-time six-month open enrollment window beginning at age 65 (and enrollment in Part B) guarantees issue regardless of health status — outside that window, medical underwriting may apply. Critically, Medicare does not cover ongoing custodial long-term care, which is the gap long-term care insurance and Medicaid fill. Medicaid is the joint federal-state, means-tested program with strict income and asset limits, and it functions as the payer of last resort for long-term nursing home care once a person's own resources are exhausted. The core distinction to remember: Medicare eligibility is based on age or disability status, while Medicaid eligibility is based on financial need.
Key terms
- Stop-loss limit
- — The point at which the insured's coinsurance share stops accruing and the insurer begins paying 100 percent of further covered expenses for the year.
- Health maintenance organization (HMO)
- — A managed care plan requiring in-network care coordinated through a primary care physician gatekeeper, emphasizing preventive care.
- Preferred provider organization (PPO)
- — A network plan offering discounted in-network rates with no gatekeeper requirement, allowing out-of-network care at higher cost-sharing.
- Metal tiers
- — ACA marketplace plan levels ranked by actuarial value (average share of costs the plan pays): Bronze ~60%, Silver ~70%, Gold ~80%, Platinum ~90%.
- Time limit on certain defenses
- — Health insurance's incontestability provision, generally barring denial for application misstatements after the policy has been in force 2-3 years.
- Elimination period
- — The waiting period between the onset of disability and the start of benefit payments; functions as a time-based deductible.
- Own-occupation definition
- — A disability definition paying full benefits when the insured cannot perform their own specific occupation, even if working in another.
- Business overhead expense (BOE) policy
- — Reimburses a disabled business owner's fixed operating expenses (rent, utilities, staff salaries), but not the owner's personal income.
- Chronically ill (HIPAA definition)
- — Certified as unable to perform at least two of six ADLs for at least 90 days, or requiring substantial supervision for severe cognitive impairment — the tax-qualified LTC benefit trigger.
- Medigap
- — Standardized private Medicare supplement policies that pay Medicare's deductibles and coinsurance, with guaranteed issue during a one-time enrollment window at 65.
Exam tips
- Work cost-sharing problems in strict order: subtract the deductible first, then apply the coinsurance percentage to what remains, then compare the insured's coinsurance share to the stop-loss limit — do not apply coinsurance to the full billed charge.
- HMO = gatekeeper PCP, in-network only, copays; PPO = no gatekeeper, in/out of network, deductible/coinsurance; POS = gatekeeper in-network, PPO-style if out-of-network — match the fact pattern precisely.
- Metal tiers measure actuarial value (cost-sharing generosity), not the number of covered benefit categories — all ACA-compliant plans cover the same essential health benefits regardless of tier.
- Grace periods differ by premium mode under uniform provisions: 7 days weekly, 10 days monthly, 31 days for all other modes — do not default to 31 days for a monthly-pay policy.
- The tax-qualified LTC trigger is 2 of 6 ADLs for 90+ days OR severe cognitive impairment — a prior hospital stay or a physician's bare medical-necessity statement is not a valid HIPAA trigger.
- Keep Medicare parts straight: A = hospital (usually premium-free), B = doctors/outpatient (premium, ~80% after deductible), C = private Advantage plans replacing A/B, D = drug coverage; Medigap is private insurance layered on top of A and B, and Medicare never pays for ongoing custodial care.