Frequently Asked Questions
Q What is the first thing I
should know about buying California medical insurance coverage?
aim should be to insure yourself and your family against the most serious and
financially disastrous losses that can result from an illness or accident. If
you are offered health benefits at work, carefully review the plans’ literature
to make sure the one you select fits your needs. If you purchase California
individual coverage like Blue Cross of California, buy a policy that will cover
major expenses and pay them to the highest maximum level. Save money on
premiums, if necessary, by taking large deductibles and paying smaller costs
Q Can I buy a single
California health insurance policy that will provide all the benefits I’m likely
A No. Although you can select a California health plan such
as a Blue Cross of California plan or buy a policy that should cover most
medical, hospital, surgical, and pharmaceutical bills, no single policy covers
everything. Moreover, you may want to consider additional single-purpose
policies like long-term care or disability income insurance. If you are over 65,
you may want a Medicare supplement policy to fill in the gaps in Medicare
Q I’m planning to keep
working after age 65. Will I be covered by Medicare or by my company’s
California health insurance?
A If you work for a company with 20 or
more employees, your employer must offer you (through age 69) the same
California health insurance coverage offered to younger employees. After you
reach age 65, you may choose between Medicare and your company’s plan as your
primary insurer. If you elect to remain in the company plan, it will pay
first—for all benefits covered under the plan—before Medicare is billed. In most
instances, it is to your advantage to accept continued employer coverage.
be sure to enroll in Medicare Part A, which covers hospitalization and can
supplement your group coverage at no additional cost to you. You can save on
Medicare premiums by not enrolling in Medicare Part B until you finally retire.
Bear in mind, though, that delayed enrollment is more expensive and entails a
waiting period for coverage.
Q I’ve had a serious health
condition that appears to be stabilized. Can I buy California individual health
coverage such as Blue Cross of California?
A Depending on what your
condition is and when it was diagnosed and treated, you can probably buy
California health insurance. However, the insurer may do one of three
- provide full protection but with a higher premium,
as might be the case with a chronic disease, such as diabetes;
- modify the benefits to increase the deductible;
- exclude the specific medical problem from coverage,
if it is a clearly defined condition, as long as the insurer abides by state and
federal laws on exclusions.
Q One of my medical bills was
turned down by the California insurance company (or health plan). Is there
anything I can do?
A Ask the California insurance company why the
claim was rejected. If the answer is that the service isn’t covered under your
policy, and you’re sure that it is covered, check to see that the provider
entered the correct diagnosis or procedure code on the insurance claim form.
Also check that your deductible was correctly calculated.
Make sure that you didn’t skip an essential step
under your plan, such as pre admission certification. If everything is in order,
ask the insurer to review the claim.
Whether you end up choosing a fee-for-service plan or
a form of managed care from Blue Cross of California or others, you must examine
a benefits summary or an outline of coverage—the description of policy benefits,
exclusions, and provisions that makes it easier to understand a particular
policy and compare it with others.
Look at this information closely. Think about your
personal situation. After all, you may not mind that pregnancy is not covered,
but you may want coverage for psychological counseling. Do you want coverage for
your whole family or just yourself? Are you concerned with preventive care and
checkups? Or would you be comfortable in a managed care setting that might
restrict your choice somewhat but give you broad coverage and convenience? These
are questions that only you can answer.
Here are some of the things to look at when choosing
and comparing health insurance plans such as one from Blue Cross of
California Health Insurance Checklist
Covered medical services
- Inpatient hospital services
- Outpatient surgery
- Physician visits (in the hospital)
- Office visits
- Skilled nursing care
- Medical tests and X-rays
- Prescription drugs
- Mental health care
- Drug and alcohol abuse treatment
- Home health care visits
- Rehabilitation facility care
- Physical therapy
- Speech therapy
- Hospice care
- Maternity care
- Chiropractic treatment
- Preventive care and checkups
- Well-baby care
- Dental care Other covered services
Are there any medical service limits, exclusions, or
preexisting conditions that will affect you or your family?
What types of utilization review, pre authorization,
or certification procedures are included?
How much is the premium from Blue Cross of California
or another provider?
there any discounts available for good health or healthy behaviors (e.g.,
much is the annual deductible from Blue Cross of California or other
$_________________________________ per family
What coinsurance or
_________________________________% after I meet my
$_________________________________copay or % coinsurance per
$_________________________________copay or % coinsurance for
"wellness" care (includes well-baby care, annual eye exam, physical,
$_________________________________% copay or coinsurance for inpatient
Other Forms of
California Health Insurance
In addition to broad coverage for medical, surgical,
and hospital expenses, there are many other kinds of California health
Hospital-surgical policies, sometimes called basic
California health insurance, provide benefits when you have a covered condition
that requires hospitalization. These benefits typically include room and board
and other hospital services, surgery, physicians’ non surgical services that are
performed in a hospital, expenses for diagnostic X-rays and laboratory tests,
and room and board in an extended care facility.
Benefits for hospital room and board may be a per-day
dollar amount or all or part of the hospital’s daily rate for a semi-private
room. Benefits for surgery typically are listed, showing the maximum benefit for
each type of surgical procedure.
Hospital-surgical policies may provide "first-dollar"
coverage. That means that there is no deductible, or amount that you have to
pay, for a covered medical expense. Other policies may contain a small
Keep in mind that hospital-surgical policies usually
do not cover lengthy hospitalizations and costly medical care. In the event that
you need these types of services, you may incur large expenses that are
difficult to meet unless you have other California health insurance.
Catastrophic coverage pays hospital and medical
expenses above a certain deductible; this can provide additional protection if
you hold either a hospital-surgical policy or a major medical policy with a
lower-than-adequate lifetime limit. These policies typically contain a very high
deductible ($15,000 or more) and a maximum lifetime limit high enough to cover
the costs of catastrophic illness.
Specified or dread disease policies provide benefits
only if you get the specific disease or group of diseases named in the policy.
For example, a policy might cover only medical care for cancer. Because benefits
are limited in amount, these policies are not a substitute for broad medical
coverage. Nor are specified disease policies available in every
Hospital indemnity insurance pays you a specified
amount of cash benefits for each day that you are hospitalized, generally up to
a designated number of days. These cash benefits are paid directly to you, can
be used for any purpose, and may be useful in meeting out-of-pocket expenses not
covered by other insurance.
Hospital indemnity policies frequently are available
directly from California insurance companies by mail as well as through
insurance agents. You will find that these policies offer many choices, so be
sure to ask questions and find the right plan to meet your needs.
Some policies contain limitations on preexisting
medical conditions that you may have before your California health insurance
takes effect. Others contain an elimination period, which means that benefits
will not be paid until after you have been hospitalized for a specified number
of days. When you apply for the policy, you may be allowed to choose among two
or three elimination periods, with different premiums for each. Although you can
reduce your premiums by choosing a longer elimination period, you should bear in
mind that most patients are hospitalized for relatively brief periods of
If you purchase a hospital indemnity policy,
periodically review it to see if you need to increase your daily benefits to
keep pace with rising health care costs.
Medicare supplement insurance, sometimes called
Medigap or MedSup, is private insurance that helps cover some of the gaps in
Medicare is the federal program of hospital and
California medical insurance primarily for people age 65 and over who are not
covered by an employer’s plan. But Medicare doesn’t cover all medical expenses.
That’s where MedSup comes in.
All Medicare supplement policies must cover certain
expenses, such as the daily coinsurance amount for hospitalization and 90
percent of the hospital charges that otherwise would have been paid by Medicare,
after Medicare is exhausted. Some policies may offer additional benefits, such
as coverage for preventive medical care, prescription drugs, or at-home
There are 10 standard Medicare supplement policies,
designated by the letters A through J. With these standardized policies, it is
much easier to compare the costs of policies issued by different insurers. While
all 10 standard policies may not be available to you, Plan A must be made
available to Medicare recipients everywhere.
Insurers are not permitted to sell policies that
duplicate benefits you already receive under Medicare or other policies. If you
decide to replace an existing Medicare supplement policy—and you should do so
only after careful evaluation—you must sign a statement that you intend to
replace your current policy and that you will not keep both policies in
People who are 65 or older can buy Medicare
supplement insurance without having to worry about being rejected for existing
medical problems, so long as they apply within six months after enrolling in
Long-term care policies cover the medical care,
nursing care, and other assistance you might need if you ever have a chronic
illness or disability that leaves you unable to care for yourself for an
extended period of time. These services generally are not covered by other
health insurance. You may receive long-term care in a nursing home or in your
Long-term care can be very expensive. On average, a
year in a nursing home costs about $40,000. In some regions, it may cost much
more. Home care is less expensive, but it still adds up. (Home care can include
part-time skilled nursing care, speech therapy, physical or occupational
therapy, home health aides, and homemakers.)
Bringing an aide into your home just three times a
week—to help with dressing, bathing, preparing meals, and similar chores—easily
can cost$1,000 a month, or $12,000 a year. Add in the cost of skilled help, such
as physical therapy, and the costs can be much greater.
Most long-term care policies pay a fixed dollar
amount, typically from$40 to more than $200 a day, for each day you receive
covered care in a nursing home. The daily benefit for at-home care is usually
half the benefit for nursing home care. Because the per-day benefit you buy
today may be inadequate to cover higher costs in the future, most policies also
offer an inflation adjustment feature.
Keep in mind that unless you have a long-term care
policy, you are not covered for long-term care expenses under Medicare and most
other types of insurance. Recent changes in federal law may allow you to take
certain income tax deductions for some long-term care expenses and insurance
Disability insurance provides you with an income if
illness or injury prevents you from being able to work for an extended period of
time. It is an important but often overlooked form of insurance.
There are other possible sources of income if you are
disabled. Social Security provides protection, but only to those who are
severely disabled and unable to work at all; workers’ compensation provides
benefits if the illness or injury is work-related; civil service disability
covers federal or state government workers; and automobile insurance may pay
benefits if the disability results from an automobile accident. But these
sources are limited.
Some employers offer short- and long-term disability
coverage. If you are self-employed, you can buy individual disability income
insurance policies. Generally:
· Monthly benefits are usually 60 percent of
your income at the time of purchase, although cost-of-living adjustments may be
· If you pay the premiums for an individual disability policy,
payments you receive under the policy are not subject to income tax. If your
employer has paid some or all of the premiums under a group disability policy,
some or all of the benefits may be taxable.
Whether you are an employer shopping for a group
disability policy or someone thinking of purchasing disability income insurance,
you will need to evaluate different policies.
Here are some things to look for:
- Some policies pay benefits only if someone is unable
to perform the duties of their customary occupation, while others pay only if
the person can engage in no gainful employment at all. Make sure that you know
the insurer’s definition of disability.
- Some policies pay only for accidents, but it’s
important to be insured for illness, too. Be sure, as you evaluate policies,
that both accident and illness are covered.
- Benefits may begin anywhere from one month to six
months or more after the onset of disability. A later starting date can keep
your premiums down. But remember, if your policy only starts to pay (for
example) three months after the disability begins, you may lose a considerable
amount of income.
- Benefits may be payable for a period ranging
anywhere from one year to a lifetime. Since disability benefits replace income,
most people do not need benefits beyond their working years. But it’s generally
wise to insure at least until age 65 since a lengthy disability threatens
financial security much more than a short disability.
If you get California health care coverage at work,
or through a trade or professional association or a union, you are almost
certainly enrolled under a group contract. Generally, the contract is between
the group and the insurer, and your employer has done comparison shopping before
offering the plan to the employees. Nevertheless, while some employers only
offer one plan, some offer more than one. Compare California health plans
If you are buying California individual insurance, or
any form of insurance that you purchase directly, read and compare the policies
you are considering before you buy one, and make sure you understand all of the
provisions. Marketing or sales literature is no substitute for the actual
policy. Read the policy itself before you buy.
Ask for a summary of each policy’s benefits or an
outline of coverage. Good agents and good insurance companies want you to know
what you are buying. Don’t be afraid to ask your benefits manager or insurance
agent to explain anything that is unclear.
It is also a good idea to ask for the insurance
company’s rating. The A.M. Best Company, Standard & Poor’s Corporation, and
Moody’s all rate insurance companies after analyzing their financial records.
These publications that list ratings usually can be found in the business
section of libraries.
And bear in mind: In some cases, even after you buy a
policy, if you find that it doesn’t meet your needs, you may have 30 days to
return the policy and get your money back. This is called the "free look."
Insurance – An Introduction
If you have ever been sick or injured, you know how
important it is to have health coverage. But if you’re confused about what kind
is best for you, you’re not alone.
What types of California health coverage are
available? If your employer offers you a choice of health plans, what should you
know before making a decision? In addition to coverage for medical expenses, do
you need some other kind of insurance? What if you are too ill to work? Or, if
you are over 65, will Medicare pay for all your medical expenses?
These are questions that today’s consumers are
asking; and these questions aren’t necessarily easy to answer.
This booklet should help. It discusses the basic
forms of health coverage and includes a checklist to help you compare plans. It
answers some commonly asked questions and also includes thumbnail descriptions
of other forms of health insurance, including hospital-surgical policies,
specified disease policies, catastrophic coverage, hospital indemnity insurance,
and disability, long-term care, and Medicare supplement insurance.
While we know that our guide can’t answer all your
questions, we think it will help you make the right decisions for yourself, your
family, and even your business.
Making Sense of
California Health Insurance
The term health insurance refers to a wide variety of
insurance policies. These range from policies that cover the costs of doctors
and hospitals to those that meet a specific need, such as paying for long-term
care. Even disability insurance—which replaces lost income if you can’t work
because of illness or accident—is considered health insurance, even though it’s
not specifically for medical expenses.
But when people talk about California health
insurance, they usually mean the kind of insurance offered by employers to
employees, the kind that covers medical bills, surgery, and hospital expenses.
You may have heard this kind of health insurance referred to as comprehensive or
major medical policies, alluding to the broad protection they offer. But the
fact is, neither of these terms is particularly helpful to the
Today, when people talk about broad health care
coverage, instead of using the term "major medical," they are more likely to
refer to fee-for-service or managed care. These terms apply to different kinds
of coverage or health plans. Moreover, you’ll also hear about specific kinds of
managed care plans: health maintenance organizations or HMOs, preferred provider
organizations or PPOs, and point-of-service or POS plans.
While fee-for-service and managed care plans differ
in important ways, in some ways they are similar. Both cover an array of
medical, surgical, and hospital expenses. Most offer some coverage for
prescription drugs, and some include coverage for dentists and other providers.
But there are many important differences that will make one or the other form of
coverage the right one for you.
The section below is designed to acquaint you with
the basics of fee-for-service and managed care plans. But remember: The detailed
differences between one plan and another can only be understood by careful
reading of the materials provided by insurers, your employee benefits
specialist, or your agent or broker.
This type of coverage generally assumes that the
medical provider (usually a doctor or hospital) will be paid a fee for each
service rendered to the patient—you or a family member covered under your
policy. With fee-for-service insurance, you go to the doctor of your choice and
you or your doctor or hospital submits a claim to your California insurance
company for reimbursement. You will only receive reimbursement for "covered"
medical expenses, the ones listed in your benefits summary.
When a service is covered under your policy, you can
expect to be reimbursed for some, but generally not all, of the cost. How much
you will receive depends on the provisions of the policy on coinsurance and
deductibles. Here’s how it works:
- The portion of the covered medical expenses you pay
is called "coinsurance."
Although there are variations, fee-for-service
policies often reimburse doctor bills at 80 percent of the "reasonable and
customary charge." (This is the prevailing cost of a medical service in a given
geographic area.) You pay the other 20 percent—your coinsurance.
a medical provider charges more than the reasonable and customary fee, you will
have to pay the difference. For example, if the reasonable and customary fee for
a medical service is $100, the insurer will pay $80. If your doctor charged
$100, you will pay $20. But if the doctor charged $105, you will pay
Note that many fee-for-service plans pay hospital expenses in full; some
reimburse at the 80/20 level as described above.
- Deductibles are the amount of the covered expenses
you must pay each year before the insurer starts to reimburse you. These might
range from $100 to $300 per year per individual, or $500 or more per family.
Generally, the higher the deductible, the lower the premiums, which are the
monthly, quarterly, or annual payments for the insurance.
- Policies typically have an out-of-pocket maximum.
This means that once your expenses reach a certain amount in a given calendar
year, the reasonable and customary fee for covered benefits will be paid in full
by the insurer. (If your doctor bills you more than the reasonable and customary
charge, you may still have to pay a portion of the bill.) Note that Medicare
limits how much a physician may charge you above the usual amount.
- There also may be lifetime limits on benefits paid
under the policy. Most experts recommend that you look for a policy whose
lifetime limit is at least $1 million. Anything less may prove to be inadequate.
The three major types of managed care plans are
health maintenance organizations (HMOs), preferred provider organizations
(PPOs), and point-of-service (POS) plans.
Managed care plans generally provide comprehensive
health services to their members, and offer financial incentives for patients to
use the providers who belong to the plan. In managed care plans, instead of
paying separately for each service that you receive, your coverage is paid in
advance. This is called prepaid care.
For example, you may decide to join a local HMO where
you pay a monthly or quarterly premium. That premium is the same whether you use
the plan’s services or not. The plan may charge a copayment for certain
services—for example, $10 for an office visit, or $5 for every prescription. So,
if you join this HMO, you may find that you have few out-of-pocket expenses for
medical care—as long as you use doctors or hospitals that participate in or are
part of the HMO. Your share may be only the small copayments; generally, you
will not have deductibles or coinsurance.
One of the interesting things about HMOs is that they
deliver care directly to patients. Patients sometimes go to a medical facility
to see the nurses and doctors or to a specific doctor’s office. Another common
model is a network of individual practitioners. In these individual practice
associations (IPAs), you will get your care in a physician’s office.
If you belong to an HMO, typically you must receive
your medical care through the plan. Generally, you will select a primary care
physician who coordinates your care. Primary care physicians may be family
practice doctors, internists, pediatricians, or other types of doctors. The
primary care physician is responsible for referring you to specialists when
needed. While most of these specialists will be "participating providers" in the
HMO, there are circumstances in which patients enrolled in an HMO may be
referred to providers outside the HMO network and still receive
PPOs and POS plans are categorized as managed care
plans. (Indeed, many people call POS plans "an HMO with a point-of-service
option.") From the consumer’s point of view, these plans combine features of
fee-for-service and HMOs. They offer more flexibility than HMOs, but premiums
are likely to be somewhat higher.
With a PPO or a POS plan, unlike most HMOs, you will
get some reimbursement if you receive a covered service from a provider who is
not in the plan. Of course, choosing a provider outside the plan’s network will
cost you more than choosing a provider in the network. These plans will act like
fee-for-service plans and charge you coinsurance when you go outside the
What is the difference between a PPO and a POS plan?
A POS plan has primary care physicians who coordinate patient care; and in most
cases, PPO plans do not. But there are exceptions!
HMOs and PPOs have contracts with doctors, hospitals,
and other providers. They have negotiated certain fees with these providers—and,
as long as you get your care from these providers, they should not ask you for
additional payment. (Of course, if your plan requires a copayment at the time
you receive care, you will have to pay that.)
Always look carefully at the description of the plans
you are considering for the conditions of payment. Check with your employer,
your benefits manager, or your state department of insurance to find out about
laws that may regulate who is responsible for payment.
Your employer may have set up a financial arrangement
that helps cover employees’ health care expenses. Sometimes employers do this
and have the "health plan" administered by an insurance company; but sometimes
there is no outside administrator. With self-insured health plans, certain
federal laws may apply. Thus, if you have problems with a plan that isn’t state
regulated, it’s probably a good idea to talk to an attorney who specializes in
HMOs, PPOs, and fee-for-service plans often share
certain features, including pre authorization, utilization review, and discharge
For example, you may be asked to get authorization
from your plan or insurer before admission to a hospital for certain types of
surgery. Utilization review is the process by which a plan determines whether a
specific medical or surgical service is appropriate and/or medically necessary.
Discharge planning is an approach that facilitates the transfer of a patient to
amore cost-effective facility if the patient no longer needs to stay in the
hospital. For example, if, following surgery, you no longer need hospitalization
but cannot be cared for at home, you may be transferred to a skilled nursing
Almost all fee-for-service plans apply managed
care techniques to contain costs and guarantee appropriate care; and an
increasing number of managed care plans contain fee-for-service elements. While
the distinctions among plans are growing increasingly blurred, the number of
options available to consumers increases every day.
How Do I Get California
California Health insurance is generally available
through groups and to individuals. Premiums—the regular fees that you pay for
health insurance coverage—are generally lower for group coverage. When you
receive group insurance at work, the premium usually is paid through your
California group insurance is typically offered
through employers, although unions, professional associations, and other
organizations also offer it. As an employee benefit, group health insurance has
many advantages. Much—although not all—of the cost may be borne by the employer.
Premium costs are frequently lower because economies of scale in large groups
make administration less expensive. With California group insurance, if you
enroll when you first become eligible for coverage, you generally will not be
asked for evidence that you are insurable. (Enrollment usually occurs when you
first take a job, and/or during a specified period each year, which is called
open enrollment.) Some employers offer employees a choice of fee-for-service and
managed care plans. In addition, some group plans offer dental insurance as well
California individual insurance is a good option if
you work for a small company that does not offer health insurance or if you are
self-employed. Buying individual insurance allows you to tailor a plan to fit
your needs from the insurance company of your choice. It requires careful
shopping, because coverage and costs vary from company to company. In evaluating
policies, consider what medical services are covered, what benefits are paid,
and how much you must pay in deductibles and coinsurance. You may keep premiums
down by accepting a higher deductible.
Many people worry about coverage for preexisting
conditions, especially when they change jobs. The Health Insurance Portability
and Accountability Act (HIPAA) helps assure continued health insurance coverage
for employees and their dependents. Starting July 1, 1997, insurers could impose
only one 12-month waiting period for any preexisting condition treated or
diagnosed in the previous six months. Your prior health insurance coverage will
be credited toward the preexisting condition exclusion period as long as you
have maintained continuous coverage without a break of more than 62 days.
Pregnancy is not considered a preexisting condition, and newborns and adopted
children who are covered within 30 days are not subject to the 12-monthwaiting
If you have had California group health coverage for
two years, and you switch jobs and go to another plan, that new health plan
cannot impose another preexisting condition exclusion period. If, for example,
you have had prior coverage of only eight months, you may be subject to a
four-month, preexisting condition exclusion period when you switch jobs. If
you’ve never been covered by an employer’s group plan, and you get a job that
offers such coverage, you may be subject to a 12-month, preexisting condition
Federal law also makes it easier for you to get
individual insurance under certain situations, including if you have left a job
where you had group health insurance, or had another plan for more than 18
months without a break of more than 62 days.
If you have not been covered
under a group plan and have found it difficult to get insurance on your own,
check with your state insurance department to see if your state has a risk pool.
Similar to risk pools for automobile insurance, these can provide health
insurance for people who cannot get it elsewhere.
What Is Not Covered?
While HMO benefits are generally more comprehensive
than those of traditional fee-for-service plans, no health plan will cover every
Very few plans cover eyeglasses and hearing aids
because these are considered budgetable expenses. Very few cover elective
cosmetic surgery, except to correct damage caused by a covered accidental
injury. Some fee-for-service plans do not cover checkups. Procedures that are
considered experimental may not be covered either. And some plans cover
complications arising from pregnancy, but do not cover normal pregnancy or
Health insurance policies frequently exclude coverage
for preexisting conditions, but, as explained, federal law now limits exclusions
based on such conditions.
You should also remember that insurers will not pay
duplicate benefits. You and your spouse may each be covered under a health
insurance plan at work but, under what is called a "coordination of benefits"
provision, the total you can receive under both plans for a covered medical
expense cannot exceed 100 percent of the allowable cost. Also note that if
neither of your plans covers 100 percent of your expenses, you will only be
covered for the percentage of coverage (for example, 80 percent) that your
primary plan covers. This provision benefits everyone in the long run because it
helps to keep costs down.
What Happens to My Insurance if I Lose My
If you have had health coverage as an employee
benefit and you leave your job, voluntarily or otherwise, one of your first
concerns will be maintaining protection against the costs of health care. You
can do this in one of several ways:
- First, you should know that under a federal law (the
Consolidated Omnibus Budget Reconciliation Act of 1985, commonly known as
COBRA), group health plans sponsored by employers with 20 or more employees are
required to offer continued coverage for you and your dependents for 18 months
after you leave your job. (Under the same law, following an employee’s death or
divorce, the worker’s family has the right to continue coverage for up to three
years.) If you wish to continue your group coverage under this option, you must
notify your employer within 60 days. You must also pay the entire premium, up to
102 percent of the cost of the coverage.
- If COBRA does not apply in your case—perhaps because
you work for an employer with fewer than 20 employees—you may be able to convert
your group policy to individual coverage. The advantage of that option is that
you may not have to pass a medical exam, although an exclusion based on a
preexisting condition may apply, depending on your medical history and your
- If COBRA doesn’t apply and converting your group
coverage is not for you, then, if you are healthy, not yet eligible for
Medicare, and expect to take another job, you might consider an interim or
short-term policy. These policies provide medical insurance for people with a
short-term need, such as those temporarily between jobs or those making the
transition between college and a job. These policies, typically written for two
to six months and renewable once, cover hospitalization, intensive care, and
surgical and doctors’ care provided in the hospital, as well as expenses for
related services performed outside the hospital, such as X-rays or laboratory
- Another possibility is obtaining coverage through an
association. Many trade and professional associations offer their members health
coverage—often HMOs—as well as basic hospital-surgical policies and disability
and long-term care insurance. If you are self-employed, you may find association
membership an attractive route.
Health Savings Accounts
What Are HSAs and Who Can Have
1. What is an HSA?
An HSA is a tax-exempt trust or
custodial account established exclusively for the purpose of paying qualified
medical expenses of the account beneficiary who, for the months for which
contributions are made to an HSA, is covered under a high-deductible health
plan. A number of the rules that apply to HSA are similar to rules that apply to
an IRA. Thus, if the individual is an employee who later changes employers or
leaves the work force, the HSA does not stay behind with the former employer,
but stays with the individual. However, because HSAs differ from IRAs in some
important respects, taxpayers cannot use an IRA as an HSA, and cannot combine
and IRA and an HSA in a single account.
2. Who is eligible to establish an HSA?
An "eligible individual" can
establish an HSA. An "eligible individual" means, with respect to any month, any
individual who: (1) is covered under a high-deductible health plan (HDHP) on the
first day of such month; (2) is not also covered by any other health plan that
is not an HDHP (with certain exceptions for plans providing certain limited
types of coverage); (3) is not entitled to benefits under Medicare (generally,
has not yet reached age 65); and (4) may not be claimed as a dependent on
another person's tax return.
7. Can a self-insured medical reimbursement plan sponsored by an employer be
What tax implications are
1. What is the tax treatment of an eligible
individual's HSA contributions?
Contributions made by an eligible individual
to an HSA (which are subject to the limits) are deductible by the eligible
individual in determining adjusted gross income (i.e., "above-the- line"). The
contributions are deductible whether or not the eligible individual itemizes
deductions. However, the individual cannot also deduct the contributions as
medical expense deductions under section 213.
2. What is the tax treatment of contributions made by a family member on
behalf of an eligible individual?
Contributions made by a family member on
behalf of an eligible individual to an HSA (which are subject to the limits) are
deductible by the eligible individual in computing adjusted gross income. The
contributions are deductible whether or not the eligible individual itemizes
deductions. An individual who may be claimed as a dependent on another person's
tax return is not an eligible individual and may not deduct contributions to an
3. What is the tax treatment of employer contributions to an employee's
In the case of an employee who is an eligible individual, employer
contributions (provided they are within the limits) to the employee's HSA are
treated as employer-provided coverage for medical expenses under an accident or
health plan and are excludable from the employee's gross income. The employer
contributions are not subject to withholding from wages for income tax or
subject to the Federal Insurance Contributions Act (FICA), the Federal
Unemployment Tax Act (FUTA), or the Railroad Retirement Tax Act. Contributions
to an employee's HSA through a cafeteria plan are treated as employer
contributions. The employee cannot deduct employer contributions on his or her
federal income tax return as HSA contributions or as medical expense deductions
under section 213.
4. What is the tax treatment of an HSA?
An HSA is generally exempt from
tax (like an IRA or Archer MSA), unless it has ceased to be an HSA. Earnings on
amounts in an HSA are not includable in gross income while held in the HSA
(i.e., inside buildup is not taxable). There are other additional rules
regarding the taxation of distributions to the account beneficiary.
How Can An HSA Be
1. How does an eligible individual establish an HSA?
Beginning January 1,
2004, any eligible individual can establish an HSA with a qualified HSA trustee
or custodian, in much the same way that individuals establish IRAs or Archer
MSAs with qualified IRA or Archer MSA trustees or custodians. No permission or
authorization from the Internal Revenue Service (IRS) is necessary to establish
an HSA. An eligible individual who is an employee may establish an HSA with or
without involvement of the employer.
2. Who is a qualified HSA trustee or custodian?
Any insurance company or
any bank (including a similar financial institution as defined in section
408(n)) can be an HSA trustee or custodian. In addition, any other person
already approved by the IRS to be a trustee or custodian of IRAs or Archer MSAs
is automatically approved to be an HSA trustee or custodian. Other persons may
request approval to be a trustee or custodian in accordance with the procedures
set forth in Treas. Reg. § 1.408-2(e) (relating to IRA nonbank trustees). For
additional information concerning nonbank trustees and custodians, see
Announcement 2003-54, 2003-40 I.R.B. 761.
3. Does the HSA have to be opened at the same institution that provides the
No. The HSA can be established through a qualified trustee or custodian
who is different from the HDHP provider. Where a trustee or custodian does not
sponsor the HDHP, the trustee or custodian may require proof or certification
that the account beneficiary is an eligible individual, including that the
individual is covered by a health plan that meets all of the requirements of an
4. When and how do I apply for an HSA?
Does the employer or employee do
it? Before you can apply for an HSA you must have a qualified High Deductible
Health Plan in force. Then, either the employer or employee can contact an HSA
administrator, such as HSA Bank, to set-up a qualified Health Savings
1. Who may contribute to an HSA?
individual may contribute to an HSA. For an HSA established by an employee, the
employee, the employee's employer or both may contribute to the HSA of the
employee in a given year. For an HSA established by a self-employed (or
unemployed) individual, the individual may contribute to the HSA. Family members
may also make contributions to an HSA on behalf of another family member as long
as that other family member is an eligible individual.
2. How much may be contributed to an HSA in calendar year 2004?
maximum annual contribution to an HSA is the sum of the limits determined
separately for each month, based on status, eligibility and health plan coverage
as of the first day of the month. For calendar year 2004, the maximum monthly
contribution for eligible individuals with self-only coverage under an HDHP is
1/12 of the lesser of 100% of the annual deductible under the HDHP (minimum of
$1,000) but not more than $2,600. For eligible individuals with family coverage
under an HDHP, the maximum monthly contribution is 1/12 of the lesser of 100% of
the annual deductible under the HDHP (minimum of $2,000) but not more than
$5,150. In addition to the maximum contribution amount, catch-up contributions
may be made by or on behalf of individuals age 55 or older and younger than 65.
All HSA contributions made by or on behalf of an eligible individual to an HSA
are aggregated for purposes of applying the limit. The annual limit is decreased
by the aggregate contributions to an Archer MSA. The same annual contribution
limit applies whether the contributions are made by an employee, an employer, a
self-employed person, or a family member. Unlike Archer MSAs, contributions may
be made by or on behalf of eligible individuals even if the individuals have no
compensation or if the contributions exceed their compensation. If an individual
has more than one HSA, the aggregate annual contributions to all the HSAs are
subject to the limit.
3. How is the contribution limit computed for an individual who begins
self-only coverage under an HDHP on June 1, 2004 and continues to be covered
under the HDHP for the rest of the year?
The contribution limit is computed
each month. If the annual deductible is $5,000 for the HDHP, then the lesser of
the annual deductible and $2,600 is $2,600. The monthly contribution limit is
$216.67 ($2,600 /12). The annual contribution limit is $1,516.69 (7 x
4. What are the "catch-up contributions" for individuals age 55 or
For individuals (and their spouses covered under the HDHP) between
ages 55 and 65, the HSA contribution limit is increased by $500 in calendar year
2004. This catch-up amount will increase in $100 increments annually, until it
reaches $1,000 in calendar year 2009. As with the annual contribution limit, the
catch- up contribution is also computed on a monthly basis. After an individual
has attained age 65 (the Medicare eligibility age), contributions, including
catch-up contributions, cannot be made to an individual's HSA.
Example: An individual attains age 65 and becomes eligible for Medicare
benefits in July, 2004 and had been participating in self-only coverage under an
HDHP with an annual deductible of $1,000. The individual is no longer eligible
to make HSA contributions (including catch-up contributions) after June, 2004.
The monthly contribution limit is $125 ($1,000 /12+ $500/12 for the catch- up
contribution). The individual may make contributions for January through June
totaling $750 (6 x $125), but may not make any contributions for July through
If one or both spouses have family coverage, how is the contribution limit
In the case of individuals who are married to each other, if either
spouse has family coverage, both are treated as having family coverage. If each
spouse has family coverage under a separate health plan, both spouses are
treated as covered under the plan with the lowest deductible. The contribution
limit for the spouses is the lowest deductible amount, divided equally between
the spouses unless they agree on a different division. The family coverage limit
is reduced further by any contribution to an Archer MSA. However, both spouses
may make the catch- up contributions for individuals age 55 or over without
exceeding the family coverage limit.
Example (1): H and W are married. H is 58 and W is 53. H and W both have
family coverage under separate HDHPs. H has a $3,000 deductible under his HDHP
and W has a $2,000 deductible under her HDHP. H and W are treated as covered
under the plan with the $2,000 deductible. H can contribute $1,500 to an HSA
(1/2 the deductible of $2,000 + $500 catch up contribution) and W can contribute
$1,000 to an HSA (unless they agree to a different division).
Example (2): H and W are married. H is 35 and W is 33. H and W each have a
selfonly HDHP. H has a $1,000 deductible under his HDHP and W has a $1,500
deductible under her HDHP. H can contribute $1,000 to an HSA and W can
contribute $1,500 to an HSA.
6. In what form must contributions be made to an HSA?Contributions to an HSA
must be made in cash. For example, contributions may not be made in the form of
stock or other property. Payments for the HDHP and contributions to the HSA can
be made through a cafeteria plan.
7. When may HSA contributions be made? Is there a deadline for contributions
to an HSA for a taxable year?
Contributions for the taxable year can be made
in one or more payments, at the convenience of the individual or the employer,
at any time prior to the time prescribed by law (without extensions) for filing
the eligible individual's federal income tax return for that year, but not
before the beginning of that year. For calendar year taxpayers, the deadline for
contributions to an HSA is generally April 15 following the year for which the
contributions are made. Although the annual contribution is determined monthly,
the maximum contribution may be made on the first day of the year.
Example: B has self-only coverage under an HDHP with a deductible of
$1,500 and also has an HSA. B's employer contributes $200 to B's HSA at the end
of every quarter in 2004 and at the end of the first quarter in 2005 (March 31,
2005). B can exclude from income in 2004 all of the employer contributions
(i.e., $1,000) because B's exclusion for all contributions does not exceed the
maximum annual HSA contributions.
8. What happens when HSA contributions exceed the maximum amount that may be
deducted or excluded from gross income in a taxable year?
individuals to an HSA, or if made on behalf of an individual to an HSA, are not
deductible to the extent they exceed the limits. Contributions by an employer to
an HSA for an employee are included in the gross income of the employee to the
extent that they exceed the limits or if they are made on behalf of an employee
who is not an eligible individual. In addition, an excise tax of 6% for each
taxable year is imposed on the account beneficiary for excess individual and
employer contributions. However, if the excess contributions for a taxable year
and the net income attributable to such excess contributions are paid to the
account beneficiary before the last day prescribed by law (including extensions)
for filing the account beneficiary's federal income tax return for the taxable
year, then the net income attributable to the excess contributions is included
in the account beneficiary's gross income for the taxable year in which the
distribution is received but the excise tax is not imposed on the excess
contribution and the distribution of the excess contributions is not taxed.
9. Are rollover contributions to HSAs permitted?
from Archer MSAs and other HSAs into an HSA are permitted. Rollover
contributions need not be in cash. Rollovers are not subject to the annual
contribution limits. Rollovers from an IRA, from a health reimbursement
arrangement (HRA), or from a health flexible spending arrangement (FSA) to an
HSA are not permitted.
10. Can the employer pay for the setup fees for each of the employees and not
contribute to the HSA?
Yes. The employer can pay the setup fees by sending a
separate check with the employee applications accompanied by each employee's
check for the opening contributions.
11. How is money deposited into an HSA?
What frequency?Employer funded or
payroll deduction: Any frequency that employer desires. Most common is that
employer mails check with listing of employees with social security numbers so
we know how to allocate money. Employer can also request that the bank originate
ACH transfers on periodic basis. Or Employer can request to be set up to
originate ACH transfers (one time or recurring) themselves via internet called
"On Demand Transfer". All of these options are free.
Employee funded: Any frequency that employee desires. Most common is that
employee mails check with contribution form (we supply contribution/withdrawal
form in customer welcome kit or available to print from our website) or with
deposit ticket if they purchased checks. Employee can also request that the bank
originate ACH transfers on periodic basis. Or Employee can request to be set up
to originate ACH transfers (one time or recurring) themselves via internet
called "On Demand Transfer". All of these methods are free except deposit
tickets which can be purchased separately or are included with the check
12. What discrimination rules apply to HSA contributions?
If an employer
makes HSA contributions, the employer must make available comparable
contributions on behalf of all "comparable participating employees" (i.e.,
eligible employees with comparable coverage) during the same period.
Contributions are considered comparable if they are either the same amount or
same percentage of the deductible under the HDHP. The comparability rule is
applied separately to part-time employees (i.e., employees who are customarily
employed for fewer than 30 hours per week). The comparability rule does not
apply to amounts rolled over from an employee's HSA or Archer MSA, or to
contributions made through a cafeteria plan. If employer contributions do not
satisfy the comparability rule during a period, the employer is subject to an
excise tax equal to 35% of the aggregate amount contributed by the employer to
HSAs for that period.
Example: Employer X offers its collectively bargained employees three
health plans, including an HDHP with self-only coverage and a $2,000 deductible.
For each employee electing the HDHP self-only coverage, X contributes $1,000 per
year on behalf of the employee to an HSA. X makes no HSA contributions for
employees who do not elect the HDHP. X's plans and HSA contributions satisfy the
1. When is an individual permitted to receive
distributions from an HSA?
An individual is permitted to receive
distributions from an HSA at any time.
2. How are distributions from an HSA taxed?
Distributions from an HSA used
exclusively to pay for qualified medical expenses of the account beneficiary,
his or her spouse, or dependents are excludable from gross income. In general,
amounts in an HSA can be used for qualified medical expenses and will be
excludable from gross income even if the individual is not currently eligible
for contributions to the HSA. However, any amount of the distribution not used
exclusively to pay for qualified medical expenses of the account beneficiary,
spouse or dependents is includable in gross income of the account beneficiary
and is subject to an additional 10% tax on the amount includable, except in the
case of distributions made after the account beneficiary's death, disability, or
attaining age 65.
3. What are the "qualified medical expenses" that are eligible for tax- free
The term "qualified medical expenses" are expenses paid by the
account beneficiary, his or her spouse or dependents for medical care as defined
in section 213(d) (including nonprescription drugs as described in Rev. Rul.
2003-102, 2003-38 I.R.B. 559), but only to the extent the expenses are not
covered by insurance or otherwise. The qualified medical expenses must be
incurred only after the HSA has been established. For purposes of determining
the itemized deduction for medical expenses, medical expenses paid or reimbursed
by distributions from an HSA are not treated as expenses paid for medical care
under section 213.
4. Are health insurance premiums qualified medical expenses?
health insurance premiums are not qualified medical expenses except for the
following: qualified long-term care insurance, COBRA health care continuation
coverage, and health care coverage while an individual is receiving unemployment
compensation. In addition, for individuals over age 65, premiums for Medicare
Part A or B, Medicare HMO, and the employee share of premiums for
employer-sponsored health insurance, including premiums for employer-sponsored
retiree health insurance can be paid from an HSA. Premiums for Medigap policies
are not qualified medical expenses.
5. How are distributions from an HSA taxed after the account beneficiary is
no longer an eligible individual?
If the account beneficiary is no longer an
eligible individual (e.g., the individual is over age 65 and entitled to
Medicare benefits, or no longer has an HDHP), distributions used exclusively to
pay for qualified medical expenses continue to be excludable from the account
beneficiary's gross income.
6. Must HSA trustees or custodians determine whether HSA distributions are
used exclusively for qualified medical expenses?
No. HSA trustees or
custodians are not required to determine whether HSA distributions are used for
qualified medical expenses. Individuals who establish HSAs make that
determination and should maintain records of their medical expenses sufficient
to show that the distributions have been made exclusively for qualified medical
expenses and are therefore excludable from gross income.
7. Must employers who make contributions to an employee's HSA determine
whether HSA distributions are used exclusively for qualified medical
No. The same rule that applies to trustees or custodians applies to
employers. Individuals who establish HSAs make that determination and should
maintain records of their medical expenses sufficient to show that the
distributions have been made exclusively for qualified medical expenses and are
therefore excludable from gross income.
8.What are the income tax consequences after the HSA account beneficiary's
Upon death, any balance remaining in the account beneficiary's HSA
becomes the property of the individual named in the HSA as the beneficiary of
the account. If the account beneficiary's surviving spouse is the named
beneficiary of the HSA, the HSA becomes the HSA of the surviving spouse. The
surviving spouse is subject to income tax only to the extent distributions from
the HSA are not used for qualified medical expenses. If, by reason of the death
of the account beneficiary, the HSA passes to a person other than the account
beneficiary's surviving spouse, the HSA ceases to be an HSA as of the date of
the account beneficiary's death, and the person is required to include in gross
income the fair market value of the HSA assets as of the date of death. For such
a person (except the decedent's estate), the includable amount is reduced by any
payments from the HSA made for the decedent's qualified medical expenses, if
paid within one year after death.
9. How do you pay for a service rendered (office visit, Rx)? What is the
Healthcare Provider: Customer still informs provider with
proof of insurance w/ insurance card. Customer receives services. Customer can
pay at time of visit or wait to be billed. Provider still files claim with
insurance carrier like normal. If customer paid too much, either due to
discounts or by meeting the high deductible, the provider will credit them.
Customer also has the option to pay (at time of service or when invoiced) w/
non-HSA accounts like their personal checking. They can choose to reimburse
themselves later by taking funds from their HSA, but they are not required to...
ie. they can use their HSA like another retirement account.
Rx (Ex. Walgreens): Customers that pay for services where proof of insurance
is not required or where insurance claims are not processed need to keep
receipts and talk to their insurance agent on how to submit claims to the
carrier so that carrier can determine whether claims count towards the
deductible or not. Customers will pay upfront (either pay w/ their HSA debit
card or HSA checks or choose instead to use non-HSA funds). Again if they used
non-HSA funds, the customer can decide later if they want to reimburse
themselves by taking the funds out of the HSA (via withdrawal forms, debit card
at ATM, or checks).
How Insurance Policies work with
1. What is a "high-deductible health plan"
Generally, an HDHP is a health plan that satisfies certain
requirements with respect to deductibles and out-of-pocket expenses.
Specifically, for self-only coverage, an HDHP has an annual deductible of at
least $1,000 and annual out-of-pocket expenses required to be paid (deductibles,
co-payments and other amounts, but not premiums) not exceeding $5,000. For
family coverage, an HDHP has an annual deductible of at least $2,000 and annual
out-of-pocket expenses required to be paid not exceeding $10,000. In the case of
family coverage, a plan is an HDHP only if, under the terms of the plan and
without regard to which family member or members incur expenses, no amounts are
payable from the HDHP until the family has incurred annual covered medical
expenses in excess of the minimum annual deductible. Amounts are indexed for
inflation. A plan does not fail to qualify as an HDHP merely because it does not
have a deductible (or has a small deductible) for preventive care (e.g., first
dollar coverage for preventive care). However, except for preventive care, a
plan may not provide benefits for any year until the deductible for that year is
met. See additional responses below for special rules regarding network plans
and plans providing certain types of coverage.
Example (1): A Plan provides coverage for A and his family. The Plan
provides for the payment of covered medical expenses of any member of A's family
if the member has incurred covered medical expenses during the year in excess of
$1,000 even if the family has not incurred covered medical expenses in excess of
$2,000. If A incurred covered medical expenses of $1,500 in a year, the Plan
would pay $500. Thus, benefits are potentially available under the Plan even if
the family's covered medical expenses do not exceed $2,000. Because the Plan
provides family coverage with an annual deductible of less than $2,000, the Plan
is not an HDHP.
Example (2): Same facts as in example (1), except that the Plan has a
$5,000 family deductible and provides payment for covered medical expenses if
any member of A's family has incurred covered medical expenses during the year
in excess of $2,000. The Plan satisfies the requirements for an HDHP with
respect to the deductibles.
2. What are the special rules for determining whether a health plan that is a
network plan meets the requirements of an HDHP?
A network plan is a plan that
generally provides more favorable benefits for services provided by its network
of providers than for services provided outside of the network. In the case of a
plan using a network of providers, the plan does not fail to be an HDHP (if it
would otherwise meet the requirements of an HDHP) solely because the
out-of-pocket expense limits for services provided outside of the network
exceeds the maximum annual out-of-pocket expense limits allowed for an HDHP. In
addition, the plan's annual deductible for out-of- network services is not taken
into account in determining the annual contribution limit. Rather, the annual
contribution limit is determined by reference to the deductible for services
within the network.
3. What kind of other health coverage makes an individual ineligible for an
Generally, an individual is ineligible for an HSA if the individual,
while covered under an HDHP, is also covered under a health plan (whether as an
individual, spouse, or dependent) that is not an HDHP. Also see question 4
4. What other kinds of health coverage may an individual maintain without
losing eligibility for an HSA?
An individual does not fail to be eligible for
an HSA merely because, in addition to an HDHP, the individual has coverage for
any benefit provided by "permitted insurance." Permitted insurance is insurance
under which substantially all of the coverage provided relates to liabilities
incurred under workers' compensation laws, tort liabilities, liabilities
relating to ownership or use of property (e.g., automobile insurance), insurance
for a specified disease or illness, and insurance that pays a fixed amount per
day (or other period) of hospitalization. In addition to permitted insurance, an
individual does not fail to be eligible for an HSA merely because, in addition
to an HDHP, the individual has coverage (whether provided through insurance or
otherwise) for accidents, disability, dental care, vision care, or longterm
care. If a plan that is intended to be an HDHP is one in which substantially all
of the coverage of the plan is through permitted insurance or other coverage as
described in this answer, it is not an HDHP.
5. Can an HSA be offered under a cafeteria plan?
Yes. Both an HSA and an
HDHP may be offered as options under a cafeteria plan. Thus, an employee may
elect to have amounts contributed as employer contributions to an HSA and an
HDHP on a salary-reduction basis.
6. Are HSAs subject to COBRA continuation coverage under section 4980B?No.
Like Archer MSAs, HSAs are not subject to COBRA continuation coverage.
8. Can COBRA employees contribute to their HSA? What other factors would be
required to allow COBRA employees to contribute to an HSA?An individual can
choose to contribute to their HSA as long as they have the High Deductible
Health Plan in force.
Information Reported by Trustees
1. What reporting is required for an HSA?
contributions to an HSA must be reported on the employee's Form W-2. In
addition, information reporting for HSAs will be similar to information
reporting for Archer MSAs. The IRS will release forms and instructions, similar
to those required for Archer MSAs, on how to report HSA contributions,
deductions, and distributions.