Group Catastrophe Major Medical

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$2,000,000 In Insurance Protection to Help You When Your Basic Health Insurance Plan Limits Your Coverage.

Coverage provisions and availability may vary by state

Catastrophe Major Medical Insurance Can Take Over When Your Basic Health Insurance Runs Short. Today the cost of a serious non-job related sickness or injury may be beyond the benefits provided by the average hospitalization or major medical insurance policy. Extremely large hospital and medical bills can push your expenses far over the limit of your basic insurance or even Medicare.

Any basic major medical or hospitalization insurance policy you may be insured through right now—including Medicare— could still leave you with enormous bills to pay...especially if you are confined to a nursing home for convalescent or custodial care.

Even though your basic health insurance policy probably has a large lifetime maximum benefit, your dollar benefits may be limited per year and may be limited again as to what will and won’t be covered. Convalescent home expenses, convalescent and custodial care, for instance, may be very limited in basic insurance policies.

Purpose of the Plan

Helps protect you when your basic health insurance plan limits your coverage against extraordinary hospital–medical–surgical–convalescent expenses
Helps you when the dollar benefits paid by your health insurance are LIMITED PER YEAR and are LIMITED AGAIN as to what will and won’t be covered

Plan Highlights

No age limit, no termination age…renew your coverage for life.
Benefits up to $2,000,000 paid up to five full years*
Choice of $25,000 or $50,000 deductible
Eligible expenses that are reasonable and customary can count toward meeting the plan deductible, including those paid for by your basic health insurance or Medicare
36 consecutive months to satisfy the deductible
Includes valuable convalescent care and home healthcare benefits

*Subject to certain inner limits and exclusions.

Who is Eligible?

Required Basic Health Insurance

The required basic plan is a health insurance plan which provides benefits at least as great as the following:

semi-private room and board for 70 days
$10,000 for extra services other than room and board
$25,000 for physicians services
a lifetime maximum benefit of $1,000,000

In order to be eligible for the ASME Group Catastrophe Major Medical Insurance Plan, you must have a basic health insurance policy providing benefits at least as great as above.

For persons who are not covered under a basic plan at the time of claim, the following charges will not be covered:

hospital charges incurred during the first 70 days of each confinement
the first $10,000 of charges for chemotherapy, radiation therapy, physical therapy or speech therapy that would otherwise be covered
the first $50,000 of charges for physician services that would otherwise be covered
the first $2,500 of charges for prescription drugs while not hospitalized that would otherwise be covered

All members in good standing who are U.S. residents are eligible to apply for member or spouse coverage, regardless of age, as well as their unmarried dependent children typically those under age 21, age 27 if in school full-time (subject to state variations). All applicants must be covered by a basic major medical plan or by Medicare Parts A and B. (Please refer to the PreExisting Conditions Limitations section.)

Please note: This Plan is not available to members residing outside the United States nor to residents of AZ, KY, MA, NJ, NY, OR, VT, and WA state. New York residents may call the Group Insurance Program Administrator for information about a separate New York Plan.

How the Plan Works

Five Year Benefit Period

The $2,000,000 Catastrophe Major Medical Insurance Plan provides benefits for extraordinary expenses not covered by your basic hospitalization, major medical insurance, HMO, PPO, or Blue Cross/Blue Shield Plan or Medicare. The Plan pays benefits up to five full years from the date your first eligible expense is incurred and used to satisfy the deductible.

Choice of Two Deductibles

The Plan offers the choice of either a $25,000 or $50,000 deductible. All reasonable and customary expenses count toward your deductible in full— even those eligible expenses paid by your basic health plan as well as those paid out of your own pocket. The deductible amount payable is the greater of the deductible amount selected ($25,000 or $50,000) or the benefits provided by your basic health insurance plan (or Medicare).

36 Consecutive Months to Satisfy Your Deductible

Since this deductible is based on the total accumulation of eligible hospital–medical–surgical–convalescent expenses, you may include all eligible expenses regardless of whether or not the claims are related.

In other words, from the time of your first eligible expense, all additional eligible expenses immediately count toward satisfying your deductible— those paid by you as well as those paid by your basic health plan, Medicare, or a Medicare supplement.

What the Plan Covers

Important Convalescent Care Benefit

Anyone at any age can require custodial or convalescent care in a convalescent Home. That’s why this is an extremely important benefit. Should any insured family member become confined as an inpatient in a custodial or convalescent care facility for custodial or convalescent care due to a non-job related sickness or injury, the Plan will pay eligible expenses for room and board, general convalescent care services and supplies up to $500 per week for up to three full years ($78,000 lifetime maximum). Benefits will begin on the seventh day of a convalescent home confinement or provided confinement is prescribed by a licensed physician.

Note: Convalescent home means a licensed institution that has on its premises organized facilities to care for and treat its patients, a staff of physicians to supervise such care and treatment, and a registered nurse on duty at all times. Convalescent home does not mean a place, or part of one, which is used mainly for the aged, alcoholics, drug addicts, persons with mental, nervous or emotional disorders.

Valuable Home Health Care Benefits

Another benefit not found in many other plans is Home Health Care coverage. The Catastrophe Major Medical Insurance Plan provides this important benefit, and includes up to 100 visits per calendar year for part-time or intermittent home nursing care, or home health aide service, physical therapy, occupational therapy, or speech therapy. The visits must be set up and approved by the insured’s physician and certified home health care agency. Each visit by a member of a home health care team will be considered one home health care visit. Four hours of home health aide services will be considered one home health care visit. Home health care is in lieu of a hospital or skilled nursing facility stay.

Eligible Expenses

After you satisfy your deductible, the Plan pays for up to 100 percent of all reasonable and customary eligible expenses:

Hospital charges including daily semi-private room & board or intensive care.
Miscellaneous hospital services and supplies.
Charges by a currently licensed physician for diagnosis, treatment, and surgery.
Medically necessary private duty nursing services from a registered LPN or RN private duty nurse while in a hospital or at home–$120 maximum per eight-hour shift ($360 maximum per day) up to a lifetime maximum of $35,000 per insured.
Dental care, treatment, or surgery if natural teeth are injured by a non-job related injury caused by an accident which occurs while insured.
X-ray, physiotherapy (by a licensed physiotherapist), or laboratory tests and services for diagnosis and treatment.
Ambulance service to and from a hospital for treatment prescribed by a licensed physician–up to $2,000 lifetime maximum per insured.
Anesthetic and its administration.
Prescription drugs, casts, splints, braces, trusses, and crutches both in and out of the hospital.
Oxygen and rental of equipment for its administration and rental of other medical equipment, such as wheelchairs or hospital beds.
Psychiatric, mental, nervous or emotional disorders, alcoholism, or drug addiction treated in a hospital are covered up to a $25,000 lifetime maximum per Insured. A lifetime maximum benefit of $5,000 is provided for outpatient treatment up to a maximum eligible charge of $100 per visit.
Rental of mechanical equipment for the treatment of respiratory paralysis; rental of other mechanical equipment for medical or surgical treatment.

Other Important Information

Preexisting Conditions Limitation

Preexisting conditions will not be covered until 12 continuous months, from the date of the Insured’s coverage under the policy, have passed without incurring charges, receiving medical treatment, consulting a physician, or taking prescribed drugs for such condition; or until the Insured has been covered under the policy for 24 continuous months. Any condition for which the Insured incurred charges, received medical treatment, consulted a physician, or took prescribed drugs during the 12-month period prior to the date his/her insurance went into force is considered a preexisting condition. All covered accidents and sicknesses which originate after the effective date of insurance are covered immediately.

Common Disaster Provision

If more than one insured family member is injured in the same accident—or contracts the same contagious disease within 30 days—only one deductible will be applied and each insured family member will still be eligible for up to $2,000,000 in benefits for up to five years from the date the first expense is incurred against the deductible.

Reasonable and Customary Charges

Reasonable and customary charges are those charges which are not more than the usual charges for medical treatment in the locality where it is received.

Continuation of Coverage

Your coverage cannot be canceled as long as your premiums are paid when due, you remain an eligible ASME member, and the group policy remains in force. Coverage for dependents continues as long as 1) the member’s coverage remains in effect, 2) dependents’ insurance remains in effect under the group policy, 3) with respect to spouses, marriage does not end by divorce or annulment, 4) with respect to children, until the child reaches the limiting age, and 5) premiums are paid when due. If you should die while insured, your insured dependents may continue their coverage, provided the Group Policy remains in force, any required premiums are paid when due, and they continue to remain otherwise eligible.

Recurrent Illnesses

You are eligible for the maximum benefit for covered expenses up to $2,000,000 during any one benefit period. If a period of 12 consecutive months passes with no covered expenses, treatment for the same or related condition will be considered a new illness, with a new deductible and benefit period. Otherwise, the same or related condition will be considered a continuation of the first.

Termination of Benefit Period

Your benefit period will cease at the earlier date of: completion of five years from the day eligible expenses were first incurred and used to satisfy the deductible, the maximum of $2,000,000 has been paid, except as stated for Convalescent Care Benefits, or psychiatric, mental, nervous, or emotional disorders, alcoholism or drug addiction; the end of a period of 12 consecutive months during which no charge is incurred for the injury or sickness; or after 24 months from the date the first covered charge is used to satisfy the deductible, if a period of 90 consecutive days passes without at least $150 of covered charges being incurred.

EXCLUSIONS

The Plan does not cover loss caused by or resulting from any one or more of the following: intentionally self-inflicted injuries; war or act of war; eye examinations to prescribe or fit corrective lenses for eyeglasses, unless they result from a non-job related injury and the injury is caused by an accident which occurs while the person is insured; dental care, treatment, or surgery except to the extent that it is necessary to treat a non-job related injury to natural teeth caused by an accident which occurs while the person is insured; cosmetic treatment or surgery, unless such charges are the result of a non-job related injury or sickness or are necessitated by congenital defects in a dependent child, which have resulted in a functional defect; any treatment given by person’s spouse or his or her spouse’s father, mother, son, daughter, brother or sister or employer or employee of the employer; or treatment that would be free if the person were not insured; treatment which is not essential for the necessary care or treatment of the injury or sickness involved; or treatment for psychiatric mental, emotional, or nervous disorders, alcoholism and drug addiction, except as provided.

The Plan also excludes charges to buy or rent air conditioners, air purifiers, motorized transportation equipment, escalators or elevators in private homes, eye glass frames or lenses, hearing aids, swimming pools or supplies for them, general exercise equipment, charges for a routine physical exam, except charges for preventive mammography and cytologic screening. For persons who are not covered under a basic plan at the time of claim, the following charges will not be covered:

hospital charges incurred during the first 70 days of each confinement
the first $10,000 of charges for chemotherapy, radiation therapy, physical therapy or speech therapy that would otherwise be covered
the first $50,000 of charges for physician services that would otherwise be covered
the first $2,500 of charges for prescription drugs while not hospitalized that would otherwise be covered

Your Economical Cost

The premium for a member, spouse and children is based on the member’s age and automatically increases on the policy anniversary date on or after the member enters a new age bracket. The Insurance Company reserves the right to change premiums on a classwide basis on any premium due date.

SEMIANNUAL PREMIUMS

$25,000 Deductible
Member Age	Member	Spouse	Child(ren)
Less Than 40	$49.64	$49.64	$59.32
40–49	99.46	99.46	59.32
50–59	161.12	161.12	59.32
60–64	245.02	245.02	59.32
65–69	272.32	272.32	59.32
70–74	320.32	320.32	57.50
75 and over	376.34	376.34	55.40

$50,000 Deductible
Member Age	Member	Spouse	Child(ren)
Less Than 40	$37.24	$37.24	$44.44
40–49	74.62	74.62	44.44
50–59	120.88	120.88	44.44
60–64	183.74	183.74	44.44
65–69	204.24	204.24	44.44
70–74	240.18	240.18	43.12
75 and over	282.26	282.26	41.54

You have a choice of three ways to pay your premium—quarterly, semiannually or annually. If you wish to pay quarterly, your premiums are one half of the semiannual premiums. The annual premium is two times the semiannual premium.

Select Annual Billing or Electronic Funds Transfer (EFT) to avoid a $2.00 billing fee.

Effective Date

Coverage will become effective following approval of the application and receipt of the applicable premium. The effective date of insurance will be delayed if the insured is hospitalized or unable to perform the normal activities of a person of like age and sex, with like occupation or retired status. Insurance will become effective on the date the member is no longer hospitalized and/or resumes such normal activities. Dependents must be able to perform the normal activities of a person of like age and sex, with like occupation or retired status on the day Insurance takes effect. Otherwise, insurance will become effective on the date they resume such normal activities.

How to File a Claim

To file a claim, call or write the administrator for claim forms.

How to Apply

Refer to the Plan description for benefits and premium cost as you fill out the Application Form.
Make a check payable for the total amount of the premium due payable to: Administrator, ASME Insurance Program.
Mail the completed enrollment form with your check to :
Administrator,
ASME Insurance Program
P.O. Box 10374
Des Moines, IA 50306-0374

Consider Your Eligibility

Before you request coverage, you must be a member in good standing of ASME. Please wait until your application for membership is accepted before initiating your insurance requests. If you have any questions regarding membership, see the ASME home page.

30 Day Free Look

When you become insured you will be sent a Certificate of Insurance summarizing your insurance coverage. If you are not completely satisfied with the terms of your Certificate, you may return it, without claim, within 30 days. Your coverage will be invalidated and you will receive a full refund–no questions asked!

Certificate of Insurance

This plan is underwritten by The United States Life Insurance Company in the City of New York, NAIC No. 70106, domiciled in the state of New York with a principal place of business of 70 Pine Street, New York, NY 10270. It is currently authorized to transact business in all states plus DC, except PR. This summary is brief description of benefits only and is subject to the terms, conditions, exclusions and limitations of Group Policy Nos. E–191,206 and E–189,701, Form No. G–19000. Coverage may vary or may not be available in all states.

This underwriting risks, financial obligations and support functions associated with the products issued by The United States Life Insurance Company in the City of New York (United States Life) are its responsibility.

This plan is underwritten by The United States Life Insurance Company in the City of New York, NAIC No. 70106, domiciled in the state of New York with a principal place of business of 70 Pine Street New York, NY 10270. It is currently authorized to transact business in all states plus DC except PR. This summary is a brief description of benefits only and is subject to the terms, conditions, exclusions and limitations of Group Policy Nos. E–191,206 and E–189,701, Form No. G–19000. Coverage may vary or may not be available in all states. The underwriting risks, financial obligations and support functions associated with the products issued by The United States Life Insurance Company in the City of New York (United States Life) are its responsibility.

AG–6021

Health Savings Accounts

A Health Savings Account (HSA) is a tax-advantaged medical savings account available to taxpayers in the United States who are enrolled in a High Deductible Health Plan (HDHP). The funds contributed to the account are not subject to federal income tax at the time of deposit. Funds may be used to pay for qualified medical expenses at any time without federal tax liability. See below for additional information:

General Questions

What is a Health Savings Account?

A Health Savings Account ("HSA") is a tax-exempt trust or custodial account created for the purpose of saving and paying for qualified medical expenses in connection with a high deductible health plan. Authorized by Section 1201 of the Medicare Prescription Drug Improvement and Modernization Act of 2003, an HSA is established for the benefit of an individual, and is "portable." This means that if you change employers or leave the work force, the HSA stays with you rather than with your former employer. Your HSA at UMB Bank, n.a. is a custodial account that consists of all funds you or your employer contributes to your HSA, all investments you make with or through Custodian using those funds, and all earnings on those funds.

Who can offer a high-deductible health plan?

A high-deductible health plan may be offered by a variety of entities, including insurance companies and Health Maintenance Organizations (HMOs).

Can you be covered by another health plan and still be eligible for an HSA?

Except as provided below, you are ineligible for an HSA if you are covered under another health plan (whether as an individual, spouse or dependent) in addition to your qualified high-deductible health plan. You may be covered by two qualified HDHPs.

What other types of health coverage can you maintain without losing eligibility for an HSA?

You remain eligible for an HSA if, in addition to a high-deductible health plan, you have any one or more of the following:

insurance under which substantially all of the coverage relates to liabilities from workers' compensation laws, torts, or ownership or use of property (such as automobile insurance)
insurance for a specified disease or illness
insurance paying a fixed amount per day (or other period) of hospitalization
coverage (whether through insurance or otherwise) for accidents, disability, dental care, vision care, or long-term care.

You may also have coverage under an Employee Assistance Program (EAP), and you may have a discount card that enables you to obtain discounts for health care services or products at managed care market rates.

Are HSAs allowed under a cafeteria plan?

A high-deductible health plan can be provided as part of a cafeteria plan. Such a high-deductible health plan can be used in conjunction with an HSA. The HSA can be established under a cafeteria plan.

Can an employer allow you to elect an HSA mid-year if offered as a new benefit under the employer's cafeteria plan?

An employer may offer an HSA mid-year as a new benefit under a cafeteria plan, and allow you to elect an HSA, so long as your election for the HSA is made on a prospective basis. In such a situation, however, you may have other coverage under the cafeteria plan that cannot be changed (e.g., coverage under a health flexible spending account), which may prevent you from being an eligible individual with respect to the HSA.

Opening an HSA

How do you establish an HSA?

If you are eligible for an HSA, you can establish an HSA with a qualified HSA trustee or custodian. No permission or authorization from the Internal Revenue Service (IRS) is necessary. The trustee or custodian will furnish you a written HSA custodial or trust agreement.

Who can serve as an HSA trustee or custodian?

Any insurance company or any bank (including a similar financial institution as defined in Section 408(n) of the Code) can be an HSA trustee or custodian. In addition, any other persons already approved by the IRS to be trustees or custodians of IRAs are automatically approved to be HSA trustees or custodians.

HSA Contributions

Who may contribute to an HSA?

Any person (an eligible individual, an employer, a family member, or any other person) may make contributions to an HSA on behalf of an eligible individual.

What are the rules regarding contributions made by your employer?

If your employer makes a contribution to the HSA, your employer will be subject to a "comparability test." If your employer provides a high-deductible health plan and makes HSA contributions for some employees, then your employer is required to make available comparable contributions on behalf of all employees with comparable coverage. For this purpose, the term "comparable contributions" means contributions that are either (i) the same amount, or (ii) the same percentage of the annual deductible limit under the high-deductible health plan.

In what form may contributions be made to an HSA?

Contributions to an HSA must be made in cash. The custodian will accept contributions by check or direct deposit. The custodian will also accept rollovers or transfers of assets from an Archer MSA or an HSA, in accordance with the requirements of the Internal Revenue Code. The custodian will require that those rollover contributions be in the form of cash.

How much may be contributed to an HSA?

The maximum amount that may be contributed to an HSA is an amount established by the IRS for each year (depending on whether you have single coverage or family coverage). The amounts established by the IRS for 2008 are $2,900 for individual coverage and $5,800 for family coverage. You should check with your legal or tax advisor to determine the limit that applies to you for the current year. The same annual contribution limit applies regardless of whether the contributions
are made by an employee, an employer, or both.

The total contribution for the year can be made in one or more payments at any time up to your tax-filing deadline (without extensions). However, if you wish to have a contribution made between January 1 and April 15 treated as a contribution
for the preceding taxable year, you must provide written notification to UMB at the time such contribution is made. Otherwise, it will be treated as a contribution for the current taxable year. The annual limit is decreased by aggregate contributions to a medical savings account (Archer MSA).

When may "catch-up" contributions be made to an HSA?

If you are age 55 or over, you can make additional "catch-up" contributions to your HSA. The amount of this additional "catch-up" contribution is $900 for 2008. This additional "catch-up" amount increases by $100 for each year after 2008, but for 2009 and later years, the maximum additional "catch-up" contribution is $1,000.

When is the deadline for contributions to an HSA for any particular year?

You may make HSA contributions for a particular year no later than the deadline, without extensions, for filing your federal income tax return for that year. For calendar year taxpayers, this is generally April 15 following the year for which the contributions were made. However, the custodian will treat any contribution made between January 1 and April 15 as a contribution for the current taxable year unless you provide written notice to the custodian at the time of such contribution that the contribution is for the preceding taxable year.

What happens when HSA contributions exceed the amount that may be deducted or excluded from gross income?

A contribution made by you or your employer to an HSA that exceeds the amount allowed by law, or which is made during any year when you are not eligible to contribute, is called an "excess contribution." Excess contributions are not deductible by you or your employer and are included in your gross income if made on your behalf by your employer. In addition, excess contributions are subject to a six percent excise tax for each year they remain in your HSA.

However, you may avoid this excise tax if the excess contribution is not deducted and if you remove the excess contribution from your HSA, together with any net income attributable to the excess contribution, before the due date for filing your federal income tax return, including extensions, for the year for which the excess contribution was made.

In that case, the net income attributable to the excess contribution would be taxable as income for the year in which the distribution is made, but the removed excess contribution would not be taxable as income to you. Rollover contributions
do not count in determining whether an excess contribution has been made.

Who is responsible for determining the amount of eligible contributions?

You are responsible for determining your eligibility for an HSA and the amount of eligible contributions during any year. You are encouraged to speak with your tax advisor about these matters. The custodian has no responsibility for determining or advising you whether any contribution complies with the requirements and limitations of the Code.

When will the custodian return excess contributions?

The custodian will return contributions that the custodian believes in good faith would exceed the sum of the maximum annual family coverage deductible plus the catch-up contribution amount as determined by the IRS. Since maximum annual contribution limits may vary depending on whether you have individual or family coverage, your policy deductible amount and your age, you should not rely on us to determine whether your contributions exceed the maximum annual contribution. The custodian will also return contributions when you notify us that you have made an excess contribution. You may be charged a fee on a returned contribution.

Rollovers and Transfers

What are the rules regarding rollovers and transfers of HSAs?

You may withdraw any portion or all of the funds from one HSA or Archer Medical Savings Account (MSA) and roll them to an HSA account with another custodian or trustee. However, you are required to roll the funds into a new HSA within 60 calendar days of your receipt of the funds. Another rule provides that you are only allowed to make one HSA rollover in a 12-month period. The 12-month period begins on the date you receive the distribution, not on the date you roll it to another HSA. In addition, you may transfer your Archer MSA or HSA funds directly from one HSA custodian or trustee to another without ever having direct control or custody of the funds. Rollover and transfer contributions are not deductible and do not count against the annual contribution limits.

Federal Tax Treatment of HSAs

What is the tax treatment of an eligible individual's HSA contributions?

When you make an eligible contribution to an HSA, the amount of your contribution (up to the maximum contribution limit discussed above) is deductible in computing your adjusted gross income. This means your contributions are deductible whether or not you itemize deductions. In addition, any person who may be claimed as a dependent on another taxpayer's return may not claim a deduction for a contribution to an HSA. A special rule applies to certain married individuals. If either spouse has family coverage under a high-deductible health plan, both spouses shall be treated as having only such family coverage (and if such spouses each have family coverage under different plans, as having the family coverage with the lowest annual deductible). The amount allowable as a deduction after application of this rule shall be divided equally between the spouses unless they agree on a different division.

What is the tax treatment of employer contributions to an HSA?

If your employer makes a contribution to an HSA for you, you are not allowed to deduct that contribution on your income tax return. Your employer, however, will be able to deduct the contribution up to your maximum contribution limit for that year. Although you cannot deduct your employer's HSA contribution, the contribution is not taxable to you or subject to income tax withholding or other employment taxes if it does not exceed your maximum contribution limit for that year.

What is the tax treatment of earnings on amounts in an HSA?

Earnings on amounts in an HSA are not taxable prior to distribution from the HSA. However, HSAs are subject to the taxes imposed by Section 511 of the Code (relating to tax on unrelated business income of charitable, etc., organizations). In addition, under certain circumstances, distributions from an HSA may have tax consequences.

What are the tax consequences of a "prohibited transaction?

If you or your beneficiary engage in a "prohibited transaction" as described in Section 4975 of the Code with respect to your HSA, it will lose its tax exemption and its fair market value will be added to your gross income for the year in which the prohibited transaction takes place. In addition to any regular income tax that may be payable, the 10 percent premature distribution penalty tax may also be applicable.

Are there any tax consequences to pledging your HSA as security for a loan?

Any portion of your HSA that you pledge as security for a loan will be treated as being distributed to you in that year. In addition to any regular income tax that may be payable, the 10 percent premature distribution penalty tax may also be applicable.

Will your custodian provide any tax advice in connection with your HSA?

As custodian, UMB will provide no tax advice concerning your HSA. The tax consequences of your HSA, including all contributions to and distributions from your HSA, are your sole responsibility. You are encouraged to discuss any questions with your own tax advisor.

Note: The above discussion relates to federal taxation, not state.

Distributions from HSAs

When can you receive distributions from an HSA?

You can take a distribution from your HSA at any time.

How are distributions from an HSA taxed?

Distributions from an HSA are generally excludable from income for federal income tax purposes if such expenses are not covered by insurance. Distributions used for any other purpose are includible in income and may also be subject to an additional 10 percent tax (see below).

When are you subject to the 10 percent premature distribution penalty tax?

Generally, if an HSA distribution is included in your gross income because it is not made for "qualified medical expenses," it will also be subject to an additional 10 percent premature distribution penalty tax. This 10 percent penalty tax does not apply to distributions made after your death, disability or attainment of age 65.

What happens if you receive an HSA distribution as the result of a mistake of fact due to reasonable cause?

If there is clear and convincing evidence that amounts were distributed from an HSA because of a mistake of fact due to reasonable cause, you may repay the mistaken distribution no later than April 15 following the first year you knew or should have known the distribution was a mistake. Under these circumstances, the distribution is not included in your gross income or subject to the 10 percent additional tax, and the repayment is not subject to the six percent excise tax for excess contributions.

What medical expenses are eligible for tax-free distributions from your HSA?

Distributions made for "qualified medical expenses" are generally excludable from income. For this purpose, the term "qualified medical expenses" means amounts paid for the medical care, as defined in Section 213(d) of the Code, of yourself, your spouse, or your dependents, but only to the extent such amounts are not compensated by insurance or otherwise. This includes amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body, as well as for transportation primarily for and essential to such care.

Qualified medical expenses do not include insurance premiums other than premiums for long-term care insurance, premiums on a health plan during any period of continuation coverage required by federal law (e.g., COBRA coverage), or premiums for health care coverage while an individual receives unemployment compensation. The IRS publishes a complete list and description of these expenses in Publication 502, Medical and Dental Expenses, which is available at www.irs.gov.
Typical expenses include:

Medical expenses, insurance deductibles, co-pays, and other eligible expenses not covered by insurance
Hospital charges
Prescription drugs
Medical supplies
Over-the-counter drugs
Eyeglasses, contact lenses, solutions and eye surgery
Vitamins, dietary supplements, weight loss drugs, if approved by your doctor
Dental services, orthodontics and psychologist's fees
Smoking cessation programs and related over-the-counter drugs

Is your custodian responsible for determining whether HSA distributions are used for medical expenses?

As custodian, UMB has no responsibility for determining whether distributions from your HSA are used for qualified medical expenses. It is your sole responsibility to determine the tax consequences of any distributions, for maintaining adequate records for tax purposes, and for paying any taxes and penalties arising as a result of any such distribution. You are encouraged to consult with your legal or tax advisor concerning any questions you may have.

If I am a retiree and age 65 or older, may I receive tax-free distributions from an HSA to pay my contribution to my employer's retiree health coverage?

After you reach age 65, you may receive tax-free distributions from an HSA to pay for your employer's retiree health insurance coverage. Although the purchase of health insurance is generally not a qualified medical expense that can be
paid or reimbursed by an HSA, the Code provides an exception for coverage for health insurance once an account beneficiary reaches age 65. This exception applies to both insured and self-insured plans.

If I am a retiree who is enrolled in Medicare, may I receive a tax-free distribution from an HSA to reimburse my Medicare premiums?

Such a distribution will be tax-free. When premiums for Medicare are deducted from Social Security benefit payments, an HSA distribution to reimburse an amount equal to the Medicare premium deduction is a qualified medical expense.

Divorce or Death of HSA Account Holder

What are the rules that apply if your HSA is transferred pursuant to a divorce decree?

The transfer of your HSA to your spouse pursuant to a divorce decree is not considered a taxable transfer. After such transfer, the former spouse will be treated as the account holder of the HSA, but the former spouse must request UMB to transfer the account to his or her name, must provide UMB with a certified copy of the divorce decree and property settlement or transfer agreement, and must sign appropriate documents to establish the account in that person's name.

What happens to your HSA upon your death?

You have the right at any time to designate one or more beneficiaries to whom distribution of your HSA will be made upon your death. You also have the right to revoke a prior beneficiary designation and, if desired, designate different individuals as beneficiaries. To be valid, any such beneficiary designation must be delivered to UMB prior to your death on a form provided by or acceptable to UMB.

In the absence of a valid beneficiary designation, UMB will distribute the assets comprising your HSA upon your death to your estate. You should understand that in certain states, your spouse's consent may be necessary if you wish to name
a person other than or in addition to your spouse as beneficiary or to change an existing beneficiary designation. You should consult with your attorney before making such a beneficiary designation.

What are the tax consequences of HSA distributions following your death?

If your spouse is the named beneficiary of your HSA, your HSA becomes the HSA of your spouse upon your death, subject to UMB's consent and the completion of applicable documents as required by UMB. The surviving spouse is not required to include any amount in gross income for tax purposes as a result of your death and he or she is subject to income tax only on those distributions that are not made for qualified medical expenses.

If, at your death, your HSA passes to a named beneficiary other than your surviving spouse, the HSA ceases to be an HSA as of the date of your death, and the beneficiary is required to include the fair market value of the HSA assets as of the date of death in his or her gross income for the taxable year that includes the date of death. The includible amount is reduced by the amount in the HSA used, within one year of your death, to pay your qualified medical expenses incurred prior to death. If there is no named beneficiary of your HSA, the HSA ceases to be an HSA as of the date of your death, and the fair market value of the HSA assets as of the date of death is includible in your gross income for the year of death.

Statements and Filing Requirements

What information must be filed with the IRS?

As custodian, UMB will send each year to the IRS and to you a form, showing a valuation of your HSA as of December 31 of the prior year, and a report of the contributions to your HSA for the prior year. Unless UMB receives either a certification from your employer that contributions were made by the employer, or a notification from you that a contribution is a rollover contribution, all contributions will be reported as tax-deductible contributions made by you. Distributions will be reported by UMB on Form 1099.

Unless you provide written notice to the contrary, UMB will conclusively assume that any distribution, whether by check, debit card, or otherwise, is a "normal distribution" for purposes of tax reporting. Normal distributions include distributions
for qualified medical expenses, and expressly exclude the following: return of excess contributions, distributions following your disability, distributions following your death, and prohibited transactions. If a distribution falls within
one of these exceptions, you must provide written notification to UMB within seven days following such distribution.

Miscellaneous

Other Legal Requirements:

In addition to the legal requirements, your HSA is subject to the following rules:

None of the funds of your HSA may be invested in life insurance contracts.
With the exception of investments in a common trust fund or common investment fund, no assets of your HSA may be commingled.
Your interest in the balance of the HSA custodial account is not forfeitable.

Health Insurance Buyer's Guide

Here is a summary of the major forms of individual health insurance currently available:

Health Maintenance Organization (HMO)

Health maintenance organizations are the oldest form of traditional managed care group health plans and, generally, one of the least expensive options for businesses. HMOs serve a designated geographical area.

An HMO may be a single entity of providers and facilities under one roof, or a network of providers and facilities. In both cases the employee must choose a primary care physician, who acts as a gatekeeper for allowing the employee to seek other care.

The relative low cost and reduced paperwork have made HMOs popular choices for businesses. But their lack of flexibility has made them less desirable to employees, who find that they may have to change their health care providers and must obtain a referral before visiting a specialist within the HMO network. Insureds have no coverage for care outside the network.

In addition, to combat the rising cost of health care and to remain competitive, many HMOs are now charging deductibles or increasing copayments. This may make HMOs less attractive to employees.

HMOs still offer among the lowest costs for businesses, according to a number of surveys, and may be the appropriate choice if your business operates in one geographical area. However, if you have operations in more than one area, you may have to contract with different HMOs, which may differ in price, services, and reliability. In that case, you should engage an insurance representative who has the resources to package coverage by several different HMOs.

Preferred Provider Option (PPO)

With the preferred provider option (PPO), you receive a list of medical providers and facilities to select from when you require health care. Each has been screened to enable you to receive a high standard of medical care. This type of coverage typically pays for hospital room and board, physicians' and surgeons' fees, lab services, and much more. By utilizing preferred providers from the network, the coinsurance payments required of insureds is lower. Using non-network providers requires higher coinsurance payments from the insured.

Short Term Medical

Consumer Directed Healthcare (CDHC)

Faced with spiraling health care costs and consumer demand for greater flexibility, many organizations are now considering a move into consumer-directed health care (CDHC). CDHC is defined as a system where consumers, rather than their employer or insurance provider, determine how and where to spend their health care allotments. Recent legislative changes allow employers to be more flexible with their health care-related dollars.

For example, legislative changes by the federal government created health savings accounts (HSA) effective January 2004 and health reimbursement arrangements (HRA) available since 2000 for individual and family health insurance. Subject to some state variability, HRAs allow employers to make contributions to employee accounts to reimburse their employees tax-free for amounts spent on qualified medical expenses including individual or family health insurance premiums. Health savings accounts provide employees with tax-advantaged accounts that allow them to withdraw funds tax-free for qualified medical, dental, and vision expenses. Funds roll over each year if not used and are portable so that the employees may take the funds with them if they leave the company.

CDHC is a tax-advantaged strategy for employers and individuals to purchase health care—as opposed to a specific product or service. To meet market demand, insurers, brokers, and administrators have crafted custom solutions to deliver CDHC services to employers and individual consumers.

As such, there is no single CDHC approach. When considering a CDHC strategy at your company, you should evaluate various vendor solutions against your specific business needs to determine the optimal solution for your company.

How It Works

A consumer-directed health care plan consists of a banking component combined with an insurance component:

Banking: Asavings account to pay for routine health care expenses. A healthcare reimbursement arrangement (HRA) is funded exclusively by the employer. A healthcare savings account (HSA) may be funded by the employer, employee, or a combination of both. An HSA is completely in the control of the employee and any balance in the account is portable. Funds in the account may be carried over from year to year. HRA funds, on the other hand, are not portable, and unused funds remain with the employer.
Insurance: A high-deductible health plan (HDHP) protects against major health care expenses. Insurance premiums may be paid fully by the employer, the employee or split between the employee and employer. A qualified HDHP is required in order to open an HSA, but not required for an HRA.

Until the deductible is met, the employee pays for health care expenses out of his/her savings account, or out of pocket, if the account balance is insufficient to cover the charges. Once the deductible has been met, high-deductible health plans provide typical PPO or HMO plan benefits

A CDHC program enables business owners to help manage their total employee benefit expenses by contributing a portion of their HDHP premium savings into a fixed monthly tax-free contribution to an HRA or HSA. Business owners have some flexibility in design and contribution amounts, allowing them to focus on their business, not their benefits. Also, business owners may experience annual increases in group health plan rates that are lower with CDHC plans.

Next, let's take a more detailed look at the components of a CDHC in the following sections:

Health Savings Accounts;
Health Reimbursement Arrangements; and
High-Deductible Health Plans.

Health Savings Accounts

It is an unfortunate fact that more than half of all small business owners do not offer health benefits. The health savings account (HSA) provides a new way to make affordable health insurance possible.

The U.S. government established the HSA in 2004 as a new tax-free savings account to help with the rising costs of health care. As a tax-favored savings account, it is used in conjunction with a qualified high-deductible health plan (HDHP) to make health care more affordable and to allow one to save for medical expenses in retirement.

To establish an HSA, the following four conditions must be satisfied:

You must be covered under a qualified high deductible health plan;
You may not be covered under any plan that is not a qualified high-deductible health plan;
You may not be enrolled in Medicare; and
You may not be claimed as a dependent on someone else’s tax return.

In 2007, employees and owners enrolled under individual coverage may contribute up to $2,850 and up to $5,650 if enrolled with family coverage (employee plus one or more dependents). These amounts may also be deducted above the line from federal and most state taxes (please check with your personal tax advisors).

The individual never has to pay income taxes on withdrawals from the HSA used for qualified medical expenses. If funds are withdrawn for reasons other than medical, you must pay a 10 percent penalty as well as income tax. Once you go on Medicare, you may no longer make contributions to the account but you may continue to use funds tax-free for qualified medical expenses. You may then also use the funds for non-medical expenses, and you are subject to income taxes only.

By offering qualified HDHPs, employers may reduce their monthly expenses since the premium for these plans are typically much lower than traditional group plans. Unspent HSA amounts accumulate and earn interest tax-free for future health care expenses. The HSA can be used to pay for doctor visits, prescriptions, and even some over-the-counter medications.
Benefits of the Health Savings Account

Savings Rollover:
All HSA money not spent in the current year rolls over to the following year to use for future medical, dental, or vision expenses; or to save for retirement.
Tax Advantages:
Both the employee and employer receive a 100 percent "above the line" federal (and in most states) deduction to the extent of their contributions. Interest and dividends accrue tax-free federally as well as in most states. Withdrawals for payment of qualified medical expenses are never taxed.
Lower Cost:
Using the HSA to pay for the first few thousand dollars of health and wellness expenses allows the employee to enroll in a premium savings high-deductible health plan.

Qualified Health Savings Account Expenses

Most health care and medical expenses, such as doctor visits, prescription drugs, and chiropractic treatments, qualify as an HSA expense. The HSA can also be used to pay, tax-free, for:

periodic health evaluations (annual physicals);
screening services (e.g., mammograms);
routine prenatal and well-child care;
child and adult immunizations;
tobacco cessation programs;
certain over-the-counter medications;
dental services, including orthodontics (braces);
eyeglasses, contacts, and even LASIK surgery;
weight-loss programs supervised by a medical professional;
transportation to and from medical providers;
COBRA premiums, during periods of unemployment;
Medicare premiums; and
long-term care insurance premiums, which cover chronic illnesses and old age care (subject to IRS limits)

Health Reimbursement Arrangements

The health reimbursement arrangement (HRA) is sometimes called a "Section 105 plan" after the section of the federal income tax law that governs them. The HRA is a tax-free employer arrangement from which the employee can be reimbursed for individualized health insurance premiums and other qualifying medical expenses.

The employer is in complete control of the cost and can establish the HRA specific to its needs. Companies utilize an HRA to control the costs of their health benefit programs while offering their employees access to the tax-free reimbursements for qualifying medical expenses, including health insurance.

Advantages of HRA

The HRA provides the opportunity to define a specific contribution amount per participant.
All employees, including part-time, seasonal, and temporary employees are eligible to participate.
The HRA generally covers everything an FSA (flexible spending account) can cover as well as eligible expenses selected by the employer without the "use it or lose it" provision.

Additional uses of the HRA

The HRA also allows for:

individual and family health insurance premiums
Medicare and long-term care insurance premiums;
preventive care such as weight loss and smoking cessation;
a wider list of medical items like over-the-counter medicines.

High-Deductible Health Plan

The high-deductible health plan is the insurance component that protects the consumer against health care expenditures above and beyond the amount that can be funded through his/her personal health savings account or out-of-pocket expenses. It is designed to provide insurance protection against catastrophic health care expenses.

A high-deductible health plan is a PPO or HMO plan with higher deductibles. Because CDHCs are tax-advantaged, federal tax law imposes several requirements on the high-deductible health plan. Here are the 2007 requirements:

Self-only Coverage:
Deductible must be at least $1,100 with an out-of-pocket maximum of not more than $5,500.
Family Coverage:
Deductible must be at least $2,200 with an out-of-pocket maximum of not more than $11,000. Additionally, the insurance cannot begin paying for an individual until the $2,200 family deductible is satisfied.

Because of the high deductible, premiums for high-deductible plans are significantly lower than those for conventional low-deductible health plans.

Consumer Directed Healthcare FAQs

Q. What is consumer-directed (or consumer-driven) health care? (CDHC)

Consumer-driven health care (CDHC) is a new way to finance and manage health care. Most traditional fee-for-service or managed care health plans provide low deductibles, small co-insurance payments, and low out-of-pocket costs. As such, these plans don't give the consumer an incentive to shop for the lowest cost of services or make judicious use of health benefits.

CDHC plans, on the other hand, delegate greater decision-making authority to the consumer. Further, they provide financial incentive to keep health care expenses low.

CDHCs typically consist of a banking component and an insurance component:

The first component is a savings account to pay for routine health care expenses. This type of account takes the form of a healthcare savings account (HSA?funded by employer, employee, or both) or a healthcare reimbursement account (HRA?funded exclusively by the employer).

An HSA account is completely in the control of the employee, and any balance in the account is portable. Also, funds in the HSA may be carried over from year to year.
The second component is a high-deductible health plan. Premiums may be paid by the employer or split between the employee and employer. Until the deductible is met, the employee pays for health care expenses out of his/her savings account, or out of pocket, if the account balance is insufficient to cover the charges. Once the deductible has been met, high-deductible health plans provide PPO or HMO plan benefits.

Q. How do these plans empower the consumer?

With a consumer-driven health plan, the consumer is responsible for paying all his/her medical bills up to their deductible. As a result, consumers are motivated to choose what services are required. This also means that consumers are incented to evaluate cost and quality information.

Q. What is a qualified high-deductible health plan?

Because CDHCs are tax-advantaged, federal tax law imposes several requirements on the high-deductible health plan. Here are the 2007 requirements:

Self-only Coverage: Deductible must be at least $1,100 with an out-of-pocket maximum of not more than $5,500.
Family Coverage:

Deductible must be at least $2,200 with an out-of-pocket maximum of not more than $11,000. Additionally, the insurance cannot begin paying for an individual until the $2,200 family deductible is satisfied.

Because of the high deductible and the corresponding high degree of self-insurance, premiums for high-deductible plans are significantly lower than those for conventional low-deductible health plans.

Q. What are the advantages of a consumer-driven health care plan?

A consumer-driven health plan maximizes savings because it combines tax incentives with the lower premium structure of a high-deductible health plan (HDHP). Out-of-pocket cost risk to consumers can be minimized by funding HSAs to cover health expenditures up to the deductible.

HDHP premiums have, in general, not been subject to the kinds of rate increases that traditional health plans have seen over the last few years. However, this is not true in all states and for all health plans, so be sure to obtain a personalized premium quotation from your insurance representative.

Q. What are the potential negatives of a consumer-driven health care plan?

CDHPs require consumers to become more involved in their health care. To maximize the value of the CDHP, consumers should shop around and find the appropriate mix of price and quality for their health dollar.

Additionally, consumer-driven health plans often mean more out-of-pocket health care spending for average consumers. This should be partially offset by the level of funding provided to the savings plan.

Finally, if the high-deductible health plan is offered through an individual insurance policy as opposed to a group plan, each employee will need to pass the insurer’s health requirements. This is not an issue for many consumers, but individuals in poorer health may not be accepted by the insurer. These individuals will need to find other solutions, such as state-funded health programs.

Q. Aren't consumer-driven health care plans most appropriate for young, healthy people?

It is true that individuals who are unlikely to use covered medical services during the year will probably save the most money with high-deductible health plans. Consumer-driven health care can, however, result in greater premium savings and greater flexibility for consumers of all ages.

Individuals likely to make moderate or heavy use of medical services should be sure to understand the benefits covered under their CDHPs and pay special attention to the co-insurance, maximum out-of-pocket expense limits, and any exclusions, limits, or carve-outs in the plan. Also, they need to become more actively involved in the purchase of health care services to ensure that health care funds are being spent as wisely as possible.

Health Considerations

A group health insurance policy is issued to a company, and employees of that company receive benefits according to the terms of the policy. Group health insurance is generally “guaranteed issue,” meaning that all individuals who meet the eligibility requirements determined by the company qualify to receive coverage, regardless of their individual health conditions.

Individual health insurance differs from group insurance in three major ways:

First, individual health insurance is not guaranteed issue. Each employee must apply for the insurance coverage by providing information about his or her health history. The insurer then evaluates this information and elects whether or not to offer the employee coverage. Because of this, the per-person cost of individual health insurance is usually lower than that of group insurance, particularly for employees who are younger or who have maintained good health.
Second, an individual health insurance policy is issued to an individual or family, not a company. Thus, the health insurance coverage is not conditioned on employment. This means that when a person changes jobs, his or her health insurance remains with them (i.e., it is portable) as long as monthly premiums are paid. Additionally, the insurer is able to spread the cost of insurance over its very large pool of individual customers, so the monthly premium of one member is not adversely affected by high expenses incurred by another insured.
Third, individual health insurance is personalized. Each employee can select the insurer, provider network, and coverage levels that suit his or her needs; a single plan does not need to be selected by the employer.

Individuals with Existing Health Conditions

A study by America's Health Insurance Plans revealed that approximately 12 percent of applicants are denied coverage because of preexisting medical conditions (Employer Health Benefits 2004 Annual Survey Kaiser—Kaiser Family Foundation and the Health Research and Educational Trust). Each individual insurer sets the guidelines under which it will approve an applicant. However, if an individual does not qualify for coverage, in most states, he/she may be eligible for guaranteed coverage under HIPAA or state-run pools.

The greatest financial worry most people with preexisting conditions have is losing their health insurance if they are no longer able to work.

Three-fourths of the millions of families who have filed medically-related bankruptcy had health insurance when they first became ill but lost their health insurance when they could no longer work. Individual and family health insurance helps to solve this problem because individuals do not lose their insurance if they lose their job, as long as they continue to pay premiums.

Individual and family health insurance offers a priceless benefit—the peace of mind that comes from having access to affordable health insurance regardless of what may happen to one’s job or preexisting health condition.

Options for Those with Preexisting Conditions

During the health insurance underwriting process, insurers have several ways of handling individuals with unfavorable health history, including:

Extended Waiting Period:
The health insurance policy might grant coverage, but impose waiting periods for preexisting conditions.
Premium Surcharge:
The person can still obtain an individual and family policy, but at a higher premium (or insurer rate-up) for the insured with a preexisting condition.
Exclusion:
The policy might specifically exclude coverage for a stated preexisting condition.
Decline coverage:
In a worst-case scenario, the insurer may elect to not insure the person with the preexisting condition. Generally, though, the declination is limited to the specific individual with the prior health history; family members are still eligible for coverage.

Other Considerations

If an employer-sponsored group plan is cancelled by the employer, employees with preexisting conditions may be able to apply as HIPAA-eligible to a health insurance provider and receive a state-subsidized, guaranteed issue policy that can cost, on average, two times that of a healthy individual. These plans are also available to employees who exhaust their COBRA benefits. In order to qualify for HIPAA coverage, they may not have access to any health insurance coverage.

In some states, if an employer-sponsored group plan is cancelled by the employer, employees may qualify for subsidized state-guaranteed insurance with no exclusions for preexisting conditions, and they may receive coverage that is similar to that of a healthy employee and also about twice the cost.

The cost, coverage, and availability of state-sponsored health insurance for individuals who are unable to purchase standard individual health insurance differ from state to state. This coverage, though, is typically the same as for healthy individuals except that the state pays the insurer for excess losses attributable to the preexisting conditions.

Short-Term Medical Insurance

Short-term medical (STM) plans provide individual and family coverage from 30 days up to 6 months. These plans are major medical plans designed to protect you and your family when temporary health coverage is necessary for a specific amount of time. A short-term medical plan is ideal for individuals who are between jobs or in need of immediate coverage while they shop for more permanent coverage.

Short-term health plans typically do not cover pre-existing medical conditions. While differing by state, in general, short-term health insurance policies exclude coverage for conditions that have been diagnosed or treated within the previous 3 to 5 years.

If you have an existing medical condition and are currently insured, you may want extend your current insurance. Employer-sponsored insurance can be extended under a government-regulated option commonly referred to as COBRA, which you should seriously consider if you have an existing medical condition.

At the end of your coverage term, most health insurance companies allow you to re-apply for another short-term plan. These plans do not typically constitute an automatic continuation of your first plan. Many short-term health insurance plans only allow you to re-apply once.

Applying for Short-term Coverage

Like most health insurance policies, you request coverage by submitting an insurance application. You can typically apply for insurance online, or by sending the insurance company a paper application.

Coverage for most short-term health insurance plans can start as soon as 24 hours after you submit your application. In order for coverage to start promptly, you can make your first premium payment by supplying a valid credit card number with your application. Please note that credit card billing of premiums is optional and you can obtain coverage without using that method of payment.

If you do not need your coverage to start immediately, you can select a date up to 30 days in the future.

If you submit an application you are under no obligation to buy the policy. After submitting your application you may cancel it at any time during the underwriting process. Also, you have a 'free look period' after issuance of the policy in which you are allowed to cancel your coverage and obtain a full refund of your premium. The 'free look period' is generally ten days.

When you submit an application you will typically include your credit card number or a check for the first premium payment. Most insurance companies will not charge your card or deposit your check until you are approved. If you are charged or your check is cashed and you are denied for coverage or cancel your application prior to approval, the insurance company will issue a refund.

Some insurance companies may charge an application fee, typically $25 or less. You will be notified in the application if the plan you chose requires an application fee. Please note that these fees are non-refundable, and not included in the 'free look' refund provision.

How to Choose and Deal with HMOs

Health care options have changed considerably over the last decade. HMOs have become a common health care choice. If you’re thinking of switching to an HMO from a fee-for-service type of plan or switching to a different HMO, here are some of the things you should know about HMOs.

Topics

What should you look for when choosing an HMO? There are many differences among various HMOs, and you should know the features of each in order to make an informed decision.

We’re all familiar with the possible negative aspects of HMOs—the pre-approval requirement, the necessity of going through a gatekeeper physician, and the forms and bureaucracy you may encounter. On the positive side, HMOs can be very convenient, since you can go a long time without filling out a claim form; and you will probably pay a lot less for your health care than you would under a traditional fee-for-service plan.

This Financial Guide gives you an overview of the possible problems with this type of managed care plan—things you won’t find listed in the HMO’s own literature. We’ll tell you how to look for these possible problems and how, if at all, you can counteract them.

Capitation

Many HMOs now pay member physicians by capitation, a payment method in which the doctor receives a monthly payment "per capita"—i.e., by a patient head count. In other words, for every patient that is signed up with a certain doctor as a primary care physician, the physician receives a monthly payment. The physician receives this payment for as long as the patient is signed up, without regard to how frequently the patient visits the doctor. In contrast, doctors who are paid under a fee-for-service system submit bills to the plan and receive payments based on the rendering of services.

What does this mean to the patient? Because the doctor is being paid a level amount that does not increase when more services are provided, the payment method can create a monetary incentive to provide fewer services.

Further, many HMOs and other types of managed-care plans have additional monetary incentives and/or pressures for physicians to keep the levels of referrals and special services down. Two of these incentives are "withholds" and risk pools.

With a withhold system, part of the doctor’s monthly payment is withheld for a year. If the doctor meets the financial incentives for the year, then the withheld amounts are paid to him. For instance, if the doctor’s rate of referrals to specialists meets the HMO’s guidelines, then the withholds are given to the doctor at the end of the year.
With a risk pool, primary care physicians get a sum in addition to the withhold with which to pay for specialists and other out-of-the-ordinary care. Whatever part of the risk pools is not used for patient referrals and care goes to the physician.

Some HMOs give doctors a bonus if they meet guidelines for keeping referrals low.

These incentives can create an atmosphere of financial incentive, and often financial pressure, for doctors to keep referrals to specialists low.

Tip: Ask the plan representative how doctors are paid. Find out whether there are withholds, risk pools, or other financial incentives or pressures to which doctors may be subject, and find out what the terms of these provisions are.

Tip: If you join an HMO, be prepared to become more knowledgeable about the services you are receiving, and more willing to ask health care providers questions about your treatment. Patients who know when they need to ask their gatekeeper to refer them to a specialist, or whether they might fare better with a program of treatment other than the one referred in the guidelines followed by the HMO, will often fare better.

Lack Of Coverage For Certain Procedures

HMO guidelines do not usually allow for approval of payment for procedures that are not approved by the Food and Drug Administration (FDA). Therefore, if there is a procedure that is being used for treatment but has not yet gotten FDA approval, you will probably not be able to get approval for such a treatment. Note that this would not just apply to experimental procedures, but also to those for which FDA approval is pending.

Tip: Look at your HMO papers to find out what the rules are relating to procedures that are not FDA-approved.

If your HMO contract says that only "medically necessary" procedures will be covered, you could run into trouble somewhere down the road. For instance, if a procedure that is usually cosmetic (e.g., a breast reduction) is recommended by a physician for a medical purpose, there may be a problem with coverage for that procedure because of the HMO’s guidelines.

Lack Of Coordination

A complaint frequently cited by HMO patients is that information given out by HMO representatives is not always reliable. For instance, a patient may call the HMO to inquire whether a certain procedure is covered, or how soon you must notify the HMO after an emergency room visit, and the answer may not be correct—a nuisance for the patient, who must end up paying out of pocket or spending time and energy appealing the HMO’s denial.

Need For Pre-Approvals

HMOs often require pre-approval for various types of care outside of the care given by your primary care doctor. Any time you want to see a specialist, you’ll have to go through your gatekeeper. Any time you go to the emergency room, you’ll have to call your primary care doctor (or another HMO number) within a certain amount of time, usually 24 hours.

Tip: Carefully investigate how the HMO defines emergency. Patients who have gone to the emergency room have later been denied coverage for the emergency services because the illness did not meet the HMO’s definition of emergency—even though the situation, according to the patient’s judgment, required emergency room care. If you don’t want to spend time second-guessing your judgment about whether something is an emergency, make sure the HMO’s definition is liberal enough.

Lack Of Full Disclosure

Here are some of the questions you should ask an HMO:

Have patients been dropping out a faster rate lately?
Are doctors paid on a capitation basis?
How are the doctors rated?
How many doctors are board certified?
What is the definition of an emergency?
How to get pre-approval, and in which instances is it required?
Are survival and/or recovery rates for certain types of illness better or worse than a national average?

But don’t expect to get answer easily. Much of the information we discuss in this Financial Guide is not easily available to patients, if at all. Thus, it’s difficult to comparison shop.

Planning Aid: For information on HMOs you are considering, please see National Committee for Quality Assurance.

Need To Go Through A Gatekeeper

It’s important to have a primary care doctor whom you trust. You will rely on this physician not only for care for you and your family, but also for referrals to specialists. Carefully investigate the doctors you are considering choosing as your gatekeeper.

One problem encountered by HMO patients is that primary care doctors, who may be under pressure to keep referrals low, perform procedures that would be better done by specialists. Although there may be nothing wrong with this, it may mean you are not getting the best care you can possibly get.

Difficulty In Obtaining Redress

If you are treated badly or negligently by an HMO, it may be difficult to sue and difficult to claim damages other than actual costs.

Artificial Formulas May Dictate Your Treatment

HMOs have guidelines, based on historical data and actuarial studies, for various procedures and treatments. For instance, the birth guidelines for most HMOs now state that a normal delivery requires no more than a 24-hour hospital stay, and a Caesarean section requires no more than 48 hours. Be aware that these guidelines are not regarded as discretionary guidelines to be overridden if a physician feels they are not in the patient’s interest but are actually strictly applied.

Tip: Ask the HMO about its treatment guidelines for various types of procedures—e.g., strokes, heart attacks, and whatever illnesses come to mind.

Second-Rate Devices

HMO patients have had problems with implants and joint replacements being of merely standard quality. If you join an HMO and need such a device (e.g., for a hip replacement or prosthesis), be sure to ask whether the device being recommended is the best alternative. Do your own research.

Inadequate Mental Health

As with all managed-care plans, if you need counseling or therapy, you will probably end up paying for most of it yourself. However, there are differences among plans, so investigate whether and how much the HMO will pay for. The number of therapy visits an HMO will pay for is often woefully inadequate.

Source: CPA Site Solutions

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Address:	Marsh U.S. Consumer
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Title:	United States Life
Address:	3600 Route 66
	P.O. Box 1580
	Neptune, NJ 07754-1580