• Excessive drinking and the use of drugs represent serious moral hazards

• Applicants who are seen as accident prone or potential malingerers (feigning a continuing
  disability in order to collect benefits) likewise might be heavy risks, particularly those applying
  for disability income insurance

• Other signals of high moral hazard can be a poor credit rating or dishonest business practices

Occupation

• There is little physical risk associated with professional persons, office managers, or office
  workers. However, occupations involving heavy machinery, strong chemicals, or high electrical
  voltage, for example, represent a high degree of risk for the insurer.

• According to the change of occupation provision, if the insured changes to a less hazardous job,
  the insurer will return any excess unearned premium. However, if the change is to a more
  hazardous occupation, the benefits are reduced proportionately and the premium remains the same

Other Risk Factors

Additional health insurance risk factors include the applicant's age, sex, medical and family history, and
avocations.

Age

Generally, the older the applicant, the higher the risk

Sex

An applicant's sex is also an underwriting consideration. Men show a lower rate of disability than
women, except at the upper ages. Women are sometimes required to undergo a Pap test, which is used for detecting cervical cancer.

History

An applicant’s medical history may point to the possibility of a recurrence of a certain health condition.
Likewise, an applicant's family history may reflect a tendency toward certain medical conditions or
health impairments.

Avocations

Certain hobbies an applicant may have (such as skydiving or mountain climbing) may increase his/her
risk to the insurer

Insurable Interest

• An insurable interest exists if the applicant is in a position to suffer a loss should the insured
  incur medical expenses or be unable to work due to a disability

• As with life insurance, insurable interest is a prerequisite for issuing a health insurance policy

Classification of Applicants

There are four ways to classify the applicant and their request for health coverage: as a preferred risk, a
standard risk, a substandard risk, or an uninsurable risk.

• Standard risk applicants are usually issued a policy at standard terms and rates

• Preferred risks generally receive lower rates than standard risks, reflecting the fact that  people in this class  have a better-than-standard risk profile

• Uninsurable applicants are usually rejected and denied coverage

• Substandard risk applicants (those who pose a higher-than-average risk for one or more
  reasons) are treated differently. The insurer can either: reject the risk, charge
 a higher premium (called a rating), or attach a rider excluding specified coverages

Interest

Just as with life insurance, interest is a major element in establishing health insurance premiums. A large
portion of every premium received is invested to earn interest. The interest earnings reduce the
premium amount that otherwise would be required from policyowners.

Expenses

Every business has expenses that must be paid and the insurance business is no different. Each health
insurance policy an insurer issues must carry its proportionate share of the costs for employees' salaries,
agents' commissions, utilities, rent or mortgage payments, maintenance costs, supplies, and other
administrative expenses.

Secondary Premium Factors

• The benefits provided under the policy

• Past claims experience

• The age and sex of the insured

• The insured's occupation and hobbies

Benefits

• The number and kinds of benefits provided by a policy affect the premium rate

• The greater the benefits, the higher the premium. To state it another way,
  the greater the risk to the company, the higher the premium.

Claims Experience

• Before realistic premium rates can be established for health insurance, the insurer must know
  what can be expected as to the dollar amount of the future claims

• The most practical way to estimate the cost of future claims is to rely on claims tables based on
  past claims experience

• Experience tables have been constructed for hospital expenses based on the amounts paid out
  in the past for the same types of expenses

• Experience tables have also been developed for surgical benefits, covering various kinds of
  surgery based on past experience

Community Rating

This concept requires health insurance providers to offer health insurance policies within a given geographical area at the same price to all individual or group plans without medical underwriting, regardless of their health status.

►HEALTH INSURANCE PREMIUM FACTORS

Premium Mode

Health insurance policies are typically paid monthly, quarterly, semi-annually, or annually. Single premium is not used when paying for health insurance policies.

Morbidity

Whereas mortality rates show the average number of persons within a larger group of people who can
be expected to die within a given year at a given age, morbidity rates show the expected incidence of
sickness or disability within a given group during a given period of time.

Age and Sex of the Insured

As discussed earlier, experience has shown that health insurance claims costs tend to increase as the
age of the insured increases.

Occupation and Hobbies

• Some types of work are more hazardous than others, the premium rates for a person's health  insurance policy may be affected by occupation

• The same holds true for any dangerous hobbies in which the insured may participate

►TAX TREATMENT OF HEALTH INSURANCE PREMIUMS AND BENEFITS

Taxation of Disability Income Insurance

• Premiums paid for personal disability income insurance are not deductible by the individual
 insured, but the disability benefits are tax-free to the recipient

• When a group disability income insurance plan is paid for entirely by the employer and benefits
 are paid directly to individual employees who qualify, the premiums are deductible by the
 employer. The benefits, in turn, are taxable to the recipient

• If an employee contributes to any portion of the premium, the benefit will be received tax-free
 in proportion to the premium contributed

Taxation of Medical Expense Insurance

• Incurred medical expenses that are reimbursed by insurance may not be deducted from an
  individual's federal income tax

• Incurred medical expenses that are not reimbursed by insurance may only be deducted to the
  extent they exceed 7.5% of the insured's adjusted gross income

• Benefits received by an insured under a medical expense policy are not included in gross
  income because they are paid to offset losses incurred

• For self-employed individuals, 100% of their health insurance premium is tax deductible

►MANAGED CARE

Policy Design

The design or structure of a policy and its provisions can have an impact on an insurer's cost
containment efforts.

• A higher deductible will help limit claims and contain costs

• Coinsurance is another important means of sharing the cost of medical care between the
 insured and the insurer

• Shortened benefit periods can also prove beneficial from a cost containment standpoint

Medical Cost Management

Defined as the process of controlling how policyowners utilize their policies. There are four general
approaches insurers use for cost management: mandatory second opinions, precertification review,
ambulatory surgery, and case management.

Mandatory Second Opinions

• In an effort to reduce unnecessary surgical operations, many health policies today contain a
  provision requiring the insured to obtain a second opinion before receiving elective surgery

• Under the mandatory second surgical opinion provision, an insured typically will pay more out-
  of-pocket expenses for surgeries for which only one opinion was obtained

• The mandatory second surgical option provision can help contain the cost of a group medical plan

Precertification Review

• To control hospital claims and prevent unnecessary medical costs, many policies today require policy
  owners to obtain approval from the insurer before entering a hospital for elective surgeries

• A pre-hospitalization authorization program (pre-certification) determines whether the
 requested treatment is medically necessary

• In an emergency situation, hospital pre-admission certification typically requires notification be given after
the patient is admitted to the hospital

• Pre-admission, pre-hospitalization, and pre-certification are all common names used for this
 particular type of managed care

• Pre-admission testing usually involves evaluating an individual's overall health prior to being hospitalized for surgery

• Preadmission testing helps control health care costs primarily by reducing the length of hospitalization

• Failure to obtain a preadmission certification in non-emergency situations reduces or eliminates the health care provider's obligation to pay for services rendered

Concurrent Review

Concurrent review sometimes called (“utilization review”) is part of a managed care program in which health care is reviewed as it is being provided. It involves monitoring the appropriateness of the care, the setting, and the length of time spent in the hospital. This ongoing review is directed at keeping costs as low as possible and maintaining effectiveness of care.

Ambulatory Surgery

The advances in medicine now permit many surgical procedures to be performed on an outpatient
basis where once an overnight hospital stay was required. These outpatient procedures are commonly
referred to as ambulatory surgery.

Case Management

• Case management involves a specialist within the insurance company, such as a registered nurse,
 who reviews a potentially large claim as it develops to discuss treatment alternatives with the insured

• The purpose of case management is to let the insurer take an active role in the management of what
 could potentially become a very expensive claim

• Concurrent review is a case management provision used to monitor and evaluate a patient’s length of stay in a hospital

Point-of-Service Plans

A point-of-service (POS) health plan is best defined as a plan that combines indemnity plan features with those of HMO's. It allows the insured to choose either a network or an out-of-network provider at the time care is needed.

• With in-network coverage, the insured receives care through a particular network of
  doctors and hospitals participating in the plan

• All care is coordinated by the insured’s primary care physician, which includes referrals to specialists

• An insured receiving out-of-network care usually pays more of the cost than if it had been
  in-network (except for emergencies)

Backdating

Backdating on an insurance policy is the practice of making the policy effective on an earlier date than the present.
The purpose of backdating is to use premiums based on an earlier age. If an applicant can be treated by the insurance company as being a year younger, the result can be a lifetime of slightly lower premiums.