What Does "Excess" Mean in Health Insurance?

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When the cost of a health crisis burns through your insurance coverage limits, excess insurance steps in to pay more of the bills (at least, in the United States).

Preparation for the Worst

Excess insurance, in the United States, is insurance coverage in addition to a primary health care policy. Its purpose is to guard against a catastrophic event in which costs exceed insurance coverage. A heart transplant can easily break through a $1 million policy limit, for example. Excess insurance is also called stop-loss insurance or reinsurance. By whatever name, these policies are designed for the worst-case scenario.

Self-Insured Businesses

Excess insurance in the United States is common with businesses that self-insure their group health plans. In such plans, employees and their families are the group and the business pays claims out of its own pocket. Self-insured businesses can buy excess insurance policies of two types: to cover catastrophic costs for a single plan member during a given year (individual excess), or for overall costs if several employees get sick during the same year (aggregate excess). Excess insurance is like an indemnity policy: The business pays first and the insurer reimburses the costs.

Self-insurance is attractive to businesses partly because the business can pocket any money left over from a year with few claims, but largely so that employers can write a health plan designed for their own needs. For example, a software company may want carpal-tunnel syndrome covered quickly and fully; a pesticide company can insure for the specific effects of overexposure to chemicals; a construction firm may make orthopedic care a priority.

Cadillac Plans

Another definition of "excess" came into being along with the Affordable Care Act of 2010. The administration planned to impose a tax on "excess" benefits in so-called "Cadillac" insurance plans, which charge little or no premium and impose little or no deductible. The benefits serve as untaxed compensation, the administration argues.

At the time of this writing, the tax is scheduled to go into effect in 2018. It will apply to health insurance benefits that exceed $10,200 per year for individuals and $27,500 per year for couples and families. Payouts beyond those figures are called excess benefits, and health insurers and self-insured businesses will pay a 40 percent excise tax on any benefits they provide above those limits.

Medicare Excess Policies

Excess insurance is also available on an individual basis for recipients of original Medicare -- that is, Medicare recipients who haven't signed up for managed care plans under Part C (Medicare Advantage) plans. Excess expenses occur when costs exceed what Medicare approves for Part B -- nonhospital -- services. Coverage for those excess costs is available in "Medigap" supplemental insurance policies F and G, available from a number of carriers. Excess insurance covers only Part B costs.

Some supplemental policies include coverage for the so-called "donut hole" in Part D (drug) plans. The donut hole is what you pay for prescription drugs after you've shelled out $3,310 (in 2016) during one year but before you qualify for so-called catastrophic drug coverage (above $4,700 in 2015). These policies are not called excess insurance: The dollar amounts are fixed and, to a great extent, predictable.

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