Hassle-Free Health Coverage: Annual Restoration Provision
Let's look again at the major medical plan as consisting of a bag of money-holding a large amount, possibly $1 million, $2 million, etc. This sum is the maximum amount available for claims. You incur a claim subject to the plan's deductible and co-insurance requirements (including the stop-loss point). Whatever the total claim amount, it will be deducted from the bag of money leaving a smaller sum for future claims.
Example: Scooter has a $1 million dollar major medical plan with a $500 deductible, 80/20 percent co-insurance split up to $5,000, and 100 percent coverage thereafter. He's hit by a meteorite and incurs $300,000 in hospital costs recovering. After the deductible and co-insurance are paid, $294,100 is withdrawn from the bag of money-leaving $705,900 for future claims. If Scooter has no large claims for the rest of his life, he has nothing to worry about.
But, if he's struck by lightning twelve months later, the money in the bag would dwindle to $411,800. If he breaks his back in a skiing accident a year after that, the money in the bag would be down to $117,700. And then he starts having trouble with his prostate....
The annual restoration provision puts back a certain amount of major medical dollars used each year. These amounts are generally small, such as $2,000, $3,000 or $5,000 per year.
If Scooter's plan contained a $5,000 restoration provision, one year after his claim (and, assuming he doesn't have such a hard-luck existence) the total amount available for future claims would be increased to $710,900. After two years it would be $715,900-and so forth.
The size of a claim is usually several times larger than the amount restored. Many view this as a token reassurance that some sum of money will be in the plan for claims. If the plan only has a $1 million lifetime maximum, it is possible to exhaust this sum with a major illness such as a prolonged battle with cancer. To offset this disadvantage, many insurers provide major medical plans with $2 million lifetime maximums or unlimited maximums.
A $2 million dollar maximum is more realistic with regard to the size of typical claims. Even with a major prolonged illness, it would be difficult to exhaust benefits of $2 million.
The following chart illustrates the major medical concepts we've considered so far.
