Terms and Limits

Terms and Limits

Most health insurance policies limit coverage to services that the insurance company defines as both “reasonable and necessary.” These terms are key to understanding the policy’s benefits because they define whether particular services are within the scope of coverage.

Insurance companies carefully determine what they consider to be “reasonable” costs of medical services. To do this, an insurance company gathers statistics on what health care providers in a particular area typically charge for identical or similar services. That information helps the company determine the amounts it considers to be reasonable. For example, many insurance policies cover payment for an office visit to a doctor. If 90 percent of the doctors in a particular geographical area charge $60 or less for an office visit, an insurance company might logically decide to limit its policy’s coverage of office visits to the first $60 in charges. When a particular patient’s doctor charges $75 for an office visit, the insurance company may send the patient a bill—known as a balance billing charge—for the additional $15. Some benefit programs, such as Medicare, may not hold patients responsible for balance billing charges.

Insurance companies also determine what they consider to be “necessary” medical treatments. Health insurance contracts limit coverage to services that are considered important to maintaining sound health. For example, services such as cosmetic surgery usually are not considered necessary except in specific circumstances, such as after a disfiguring accident.

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