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by Tony Novak, CPA, MBA, MT
revised August 6, 2012
The demand for supplemental health insurance has grown steadily over the past decade and is now expected to expand further as a result of 2010's health reform laws. The primary demand stems comes from changes in employer-provided health plans that cover more than 60% of all Americans. Employers are expected to continue to cut back on covered plan benefits each year to combat increases in health care costs. More than 2/3 of companies polled in 2011 were expected to raise policy deductibles or co-payments over the next year. Additionally, beginning in 2014, most individual and group health insurance policies are expected to reduce or eliminate coverage for items not listed as "essential benefits" under the 2010 federal health reform law.
The spread of Health Savings Accounts and other consumer-driven health care means that the first $5,000 (more or less) of a family's medical expenses are not covered by the employer-provided health plan and this is often more financial risk than a middle income family can afford to pay on demand without additional insurance. Doctors and hospitals are increasingly requesting proof of financial responsibility - either cash or supplemental insurance - prior to providing treatment to patients with high deductible insurance plan. In these cases, supplemental coverage that has no deductible is typically used to fill in those gaps in coverage.
While there are no supplemental insurance plans are specifically designed to integrate with HSAs (providing only the first $5000 of coverage, for example) it is possible to select a supplemental insurance that provides roughly comparable coverage for this specific risk limit. Consumers shopping for $5,000 supplemental coverage, for example, might choose a plan that provides $1,000 per day supplemental hospital coverage and additional amounts for surgery, lab tests, cancer treatment, etc..
Small companies and retail businesses often use a "mini-med" type of employer-provided health insurance. These defined benefit policies typically pay a fixed amount for doctors visits, hospitalization, emergency room visit, ambulance service, etc. that is less than the full cost of the treatment. The maximum coverage amount typically works out to $10,000 to $20,000 per year. Any medical expense about that amount would not be insured. Recognizing these gaps in coverage, consumers are increasingly likely to purchase some type of supplemental insurance to cover catastrophic expenses.
One of the driving forces for the increased use of supplemental health insurance is favorable tax treatment. Unincorporated businesses and S corporations may be able to classify insurance for employees as a deductible business expense. Benefit payments received from a health insurance company are tax-free. In contrast, payments from businesses made directly to medical providers on behalf of employees are often not deductible by businesses. Individuals cannot deduct medical expenses unless they exceed 7.5% of income (The threshold limit increases to 10% in 2013 so even fewer people will qualify).
Special rules apply to Health Savings Accounts. Tax laws specify that some types of low deductible major medical and other health insurance cannot be combined with HSAs but most types of supplemental insurance is allowed. This topic is covered in more detail at www.healthsavingsaccount-hsa.com. It is possible to lower the financial risk associated with high deductible insurance by using both a supplemental insurance policy and a Health Savings Account in combination. We anticipate the continued growth of employer-provided high deductible insurance with individually purchased supplemental coverage.
This web site is independently owned and managed by Tony Novak operating under the trademarks "Freedom Benefits", "OnlineAdviser" and "OnlineNavigator". Opinions expressed are the sole responsibility of the author and do not represent the opinion of any other person, company or entity mentioned. Tony Novak is not an agent, broker, producer or navigator for any federal or state health insurance exchange but may provide uncompensated advice, reviews and referrals to these official resources. Novak is compensated as an accountant, adviser, affiliate consultant, marketer, reviewer, endorser, producer, lead generator or referrer to some of the other commercial companies listed on this site. Information is from sources believed to be reliable but cannot be guaranteed.