Health insurance helps lessen the costs of medical expenses in the event of an illness or accident and for preventive medicine such as routine medical tests, checkups and screening tests.
Health Insurance Basics
Health insurance policies are full of terms such as deductibles, co-payments, and co-insurance. Let’s look at what these terms mean.
Other than for preventative services, a policyholder must first pay a deductible before the insurance plan pays any benefits. After she pays the deductible, she’ll pay a copayment or co-insurance for covered services. The insurer pays the rest. Generally, plans with lower monthly premiums have higher deductibles. A plan with a higher monthly premium may have a lower deductible or even no deductible.
A co-payment, or co-pay, is an out-of-pocket fixed amount paid for a covered health care service after paying the deductible. For example, a plan may have an allowable cost for a doctor’s office visit of $100. The co-payment for a doctor visit may be $20. For each visit, the insured pays $20 and the insurance company will pay the rest.[1]
Co-insurance, featured by some health insurance plans, is the percentage of costs of a covered health care service that is paid by the insured after the deductible. Let’s take, for example, a person who had a surgery that costs $10,000 allowable under the plan, with a $1,000 deductible and 20 percent co-insurance. The policyholder would first pay a $1,000 deductible. She would have to pay co-insurance of 20 percent of the remaining balance after the deductible, or $1,800. She would have total out-of-pocket costs of $2,800 for the $10,000 surgery, including a $1,000 deductible and $1,800 co-insurance. Many plans also have limits on co-insurance after reaching a certain level. As with the deductible, a plan with low monthly premiums generally has higher co-insurance.[2]
Types of Health Plans
A variety of different health plans are available to the American consumer. An HMO, or Health Maintenance Organization, is a plan that offers a policyholder a local network of doctors and hospitals. A member of an HMO will typically pay lower monthly premiums than under other plans. HMOs typically require the insured to use a designated primary care physician and may require referrals for the use of specialists even within the HMO’s network.[3]
A Preferred Provider Organization plan, known as a PPO, is a health plan that offers a larger network with more doctors and hospitals. Policyholders usually need not designate primary care physicians and referrals are usually unnecessary to see specialists. PPOs also may be more flexible in covering out-of-network services. Out-of-pocket costs, such as premiums and copays, are usually higher with a PPO than with an HMO or EPO plan.[4]
An EPO, or Exclusive Provider Organization plan, offers a local network of doctors and hospitals. As a member of an EPO, the policyholder can use doctors and hospitals within the network, but cannot go outside of it for care except in case of emergency. EPOs are more flexible than HMOs in that they usually do not require referrals to see specialists.[5]
A High Deductible Health Plan (or “catastrophic” plan) is a plan with a higher deductible than a traditional insurance plan. The monthly premium is usually lower, but the policyholder pays more health care costs herself before the insurer starts to pay its share. This plan is often combined with usage of a health savings account, which is a tax device that allows pre-tax dollars to be used to pay healthcare expenses.[6]
Forming an Insurance Contract
A health insurance policy is a contract between the insured and a health insurer to cover medical expenses. The health insurer promises to pay healthcare expenses on a specified contingency in exchange for premium payments by the person seeking insurance.[7]
There are several methods of acquiring a health insurance policy. First, a person can acquire health insurance through a group health plan offered through an employer or spouse’s employer. The second option is to purchase an individual health insurance plan privately or through the federally managed Health Insurance Marketplace.[8] The rising costs of healthcare have increased the need for individuals to have access to health insurance. In 2010, Congress passed the Patient Protection and Affordable Care Act to reduce the number of uninsured Americans and to improve access to healthcare services.[9] The Affordable Care Act attempts to expand access for health insurance coverage, reduce costs and limit fraud.
Under the Affordable Care Act, a person can sign up for health insurance on the exchange only during an annual open enrollment period, unless the person has a qualifying life event, such as marriage or having a child. Open enrollment normally begins November 1 each year through the Health Insurance Marketplace. When an employee buys health insurance through his employer, the employer must inform him of the open enrollment period. An employee can also change coverage after a qualifying life event.
A valid health insurance contract must include specific terms, including:
- the person or interest to be insured;
- the premium rate;
- the duration of the policy;
- the nature of the risk; and
- the amount of insurance.[10]
Occasionally, an issue may arise in determining which state law governs an insurance contract. Under the traditional approach, the law of the state where the parties formed the insurance policy governs. This is typically the place where the policy was issued or the place where the policy was delivered to the insured.[11]
Today, most insurance companies, following the modern trend of contract law, include choice-of-law clauses in insurance contracts. This clause may have a heading such as “Governing Law”. The clause designates the jurisdiction that will govern any disputes that may arise between the parties.[12] For example, since many health insurance companies are headquartered in Connecticut, the policy may specify that Connecticut law governs should a dispute arise. If the parties have provided for the application of a jurisdiction’s laws, courts will usually honor such an agreement, subject to public policy considerations.
Policy Terms and Provisions
The policyholder and the insurer are free to agree to terms of their choice, so long as the provisions and terms aren’t ambiguous.
A court will construe the terms of an insurance policy according to the general rules of contract law. In one case, a father brought an action against a group health insurer to cover medical bills for the treatment of his child for autism. The insurer claimed that the policy’s limitations on coverage for “mental illness” allowed it to limit coverage for the Autism treatments. However, the court, looking to the tenets of contract law, applied the plain and ordinary meaning of the term “mental illness” to reach a decision. It held that the insurance company did not have a reasonable basis upon which to limit treatment and found in favor of the insured.[13]
Moreover, a court won’t enforce a provision in an insurance contract that violates public policy or an applicable statute. For example, a federal appeals court held that under Alabama law, a group health policy provision which provided coverage for the spouse of a participant who had entered into ceremonially solemnized marriage, but which denied coverage for a common-law spouse, was void and violated public policy. The court concluded that contractual provisions denying common-law marriages the same status as ceremonially solemnized marriages were against public policy.[14]
Duration of Coverage
A health insurance policy must indicate the dates of coverage. The benefit year for most plans begins January 1 and ends on December 31. Sometimes, though, disputes arise over the effective date of the policy. The effective date may be tied to making the first premium payment or signing the application, depending on the circumstances. For example, an Oklahoma appeals court held that an applicant for an insurance policy who failed to sign the application and pay the premium relieved the insurer from having to pay for injuries sustained by the applicant.[15]
An insurer may also provide temporary coverage, typically between 30 and 90 days, through a binder, prior to issuing a policy. A binder is an “insurer’s memorandum giving the insured temporary coverage while the application for an insurance policy is being processed or while the formal policy is being prepared.”[16]
Changing or Modifying Policies
Privately insured people can change insurance at any time. Typically, those covered by Health Insurance Marketplace policies can only change plans during the open enrollment period, but there are other opportunities to do so if there are qualifying life events or job-related changes.[17]
There are four types of “qualifying life events”:[18]
- loss of health coverage: examples of these events include when a person turns 26 years old and loses coverage through a parent’s plan or if a policyholder loses Medicare eligibility;
- changes in household: a policyholder may marry, divorce, or have a child, thereby needing a change to a health insurance plan during the benefits year;
- changes in residence; and
- other qualifying events such as changes in income or becoming a U.S. citizen.
A qualifying life event will trigger a “special enrollment period” that lasts 30 to 60 days. During this time period, a policyholder can select a new plan or add a dependent to a plan.
Court Reformation of an Insurance Policy
In extraordinary circumstances, a court may “reform” an insurance policy. Reformation is an equitable remedy whereby a court will modify a written agreement to reflect the parties’ actual intent.
The purpose of reformation of an insurance contract is to bring the written instrument into conformity with the intent of the contracting parties or to make the policy conform to a state statute.[19] Still, courts are reluctant to allow an insurer to unilaterally and retroactively reform a policy to avoid coverage for an incident that would be covered under the policy at the time of the incident, “absent clear evidence that the insured had reached an express agreement with the insurer that was not accurately represented in the policy.”[20]
To achieve reformation of an insurance policy, the party seeking reformation must show that the policy does not contain provisions desired and intended to be included. The most common grounds for reformation is mutual mistake. To show mutual mistake, the party seeking reformation must show that he made certain statements to the insurance agent concerning the coverage desired, but the policy issued did not provide the desired coverage, usually inadvertently.[21]
Renewal and Cancellation
State laws govern renewal and cancellation of insurance policies. The general rule is that each renewal of an insurance policy creates an entirely new and independent contract of insurance.
Where renewal is disputed, a court will consider the following factors in determining whether an existing policy is renewed:
- the ongoing relationship between the parties;
- the beginning date of a policy; and
- whether there is a change in the coverage from the previous policy.
The renewal of an insurance contract constitutes the making of a new contract for the purpose of incorporating into the policy changes in laws regulating insurance contracts that may have been promulgated in the interim. In most states, a contract of annually renewable insurance forms a new contract at each renewal. So, if the law is changed in the middle of a year, the policy can finish out the year under the “old” law, but when the policy renews, it will have to be adjusted to comply with the new laws or regulations.
In a Florida case, Bell Care Nurses Registry v. Continental Casualty Company, a provider of home health care services brought an action for benefits under a home health care insurance policy. The appellate court found that the insurance company had violated a Florida law that was effective as of October 1, 1992 in its denial of a claim. Though the policy had been issued before that, the court held that the policy was renewed each time the policyholder paid the semi-annual premium. [22]
Finally, we’ll move to cancellation of a health insurance policy. A policyholder may want to cancel health insurance for a variety of reasons, such as that she’s started a new job and is eligible for coverage through her new employer or because she’s turned 65 years old and is eligible for Medicare.
If a policyholder acquired health insurance through the marketplace, she can cancel her account by logging into her marketplace account and terminating coverage. There is typically a 14-day waiting period for cancelling coverage. If a policyholder acquired health insurance through an employer, she should contact her company’s human resources department and make sure that the cancellation date for her existing coverage is on or after the date when her new coverage is scheduled to take effect.
An insurer generally cannot arbitrarily cancel a person’s policy. State law dictates when an insurer can cancel a policy. In Texas, for example, an insurer may cancel a liability insurance policy at any time during the term of the policy for a variety of specified reasons including fraud in obtaining coverage or failure to pay premiums when due.[23]
The Texas Supreme Court considered a case involving health insurance coverage for a policyholder and his daughter after the medical insurer refused a claim for benefits related to the daughter’s hospitalization. The insurance company argued that after the daughter’s marriage, she ceased to be a dependent under the terms of the policy and so was not covered by the policy at the time of the hospitalization.
However, the Texas Supreme Court held that the clause providing that the coverage for any dependent child terminates on the child’s marriage does not become effective during the period for which the insurer had accepted premium payments. If the insurer accepts premium payments for a period, the earliest the insurer can terminate coverage of the child is the beginning of the next period.[24]
A court may award punitive damages for an insurer’s fraudulent breach and wrongful cancellation of a health insurance policy. In one case, the South Carolina Supreme Court held that the evidence sustained a finding that an insurer wrongfully cancelled a health policy when it deliberately misled the insured into believing that one of its agents would come back and straighten out a claim, and that in the meantime his policy would continue in force. The court found that the insurer committed an act of fraud in breach of contract when the insurer wrongfully cancelled the policy in spite of its agents’ representations to the contrary.[25]
[1] Copayment, HealthCare.gov, https://www.healthcare.gov/glossary/co-payment/ (last visited July 27, 2018).
[2] Coinsurance, HealthCare.gov, https://www.healthcare.gov/glossary/co-insurance/ (last visited July 27, 2018).
[3] Health Maintenance Organization (HMO), HealthCare.gov, https://www.healthcare.gov/glossary/health-maintenance-organization-hmo/(last visited July 27, 2018).
[4] Preferred Provider Organization (PPO), HealthCare.gov, https://www.healthcare.gov/glossary/preferred-provider-organization-ppo/ (last visited July 27, 2018).
[5] Exclusive Provider Organization (EPO) Plan, HealthCare.gov, https://www.healthcare.gov/glossary/exclusive-provider-organization-epo-plan/ (last visited July 27, 2018).
[6] High Deductible Health Plan (HDHP), HealthCare.gov, https://www.healthcare.gov/glossary/high-deductible-health-plan/ (last visited July 27, 2018).
[7] Kinkaid v. John Morrell & Co., 321F. Supp. 2d 1090, 1098 (N.D. Iowa 2004).
[8] Christina Merhar, Comparison of Individual Health Insurance vs. Group Health Insurance, PeopleKeep, (Oct. 12, 2016), https://www.peoplekeep.com/blog/bid/307429/comparison-of-individual-health-insurance-vs-group-health-insurance.
[9] Patient Protection and Affordable Care Act, Pub. L. 111-148, 124 Stat. 119 (Mar. 23, 2010) codified as amended at 42 U.S.C. § 18001 et seq. (2010).
[10] 43 Am. Jur. 2d Insurance § 175.
[11] Josephine H. Hicks & Terry L. Wallace, Insurance 101: Choice of Law in Insurance Coverage Disputes, American Bar Association, http://apps.americanbar.org/litigation/committees/insurance/docs/gratis_hicks.pdf (last visited July 27, 2018).
[12] Choice of Law Clause, Black’s Law Dictionary (10th ed. 2014).
[13] Kunin v. Benefit Tr. Life Ins. Co., 910F.2d 534, 538 (9th Cir. 1990).
[14] Scott v. Bd. of Trustees of Mobile S.S. Ass’n-Int’l Longshoremen’s Ass’n Pension, Welfare & Vacations Plans, 859 F.2d 872, 875 (11th Cir. 1988).
[15] Russell v. Prudential Property & Cas.Ins. Co., 866 P.2d 456, 457-58 (Okla. Ct. App. 1993).
[16] Binder, Black’s Law Dictionary (10th ed. 2014).
[17] When Can I Change My Health Plan, Aetna, https://www.aetna.com/health-guide/change-health-plan.html (last visited July 27, 2018)..
[18] Qualifying Life Event (QLE), HealthCare.gov, https://www.healthcare.gov/glossary/qualifying-life-event/ (last visited July 27, 2018).
[19] 43 Am. Jur. 2d Insurance § 358.
[20] Id.
[21] Baker v. Rural Mut. Ins. Co., 378 Wis. 2d 328 at *2 (Wis. Ct. App. 2017).
[22] Bell Care Nurses Registry, Inc. v. Cont’l Cas.Co., 25 So. 3d 13, 15 (Fla. Dist. Ct. App. 2009).
[23] Texas Insurance Code – INS § 551.052.
[24] Bomar v. Trinity Nat. Life & Acc. Ins.Co., 579 S.W.2d 464, 465 (Tex. 1979).
[25] Brown v. United Ins. Co., 113 S.E.2d 26, 30 (S.C. 1960).