The Best Of Health - finding affordable health insurance

Kiplinger's Personal Finance Magazine, Feb, 2001 by Kimberly Lankford

INSURANCE | Finding a policy YOU CAN AFFORD when you're on your own.

WHEN JANA and Michael Bitton switched jobs, leaving them and their 5-year-old daughter, Ashton, temporarily without health insurance, Jana searched the Internet for individual coverage the family could afford. She settled on an HMO, BlueShield Access Plus, for which the Bittons, who live in Lancaster, Cal., pay $300 a month--about twice as much as they were paying for group insurance in their old jobs but $100 less than they'd pay for group coverage through Michael's new employer.

Even though they have to foot the bill themselves, having their own health insurance is liberating, says Jana, 29. "We're not tied to the whim of an employer, and we don't feel tied down to a job because of the benefits," she says. "We're in control."

Not so Rozanna Patane. Last summer Patane, a financial planner in York Harbor, Maine, learned that her health-insurance company would be pulling out of Maine by the end of 2000--becoming the third health insurer she has lost in seven years. The Blue Cross policy she picked up to cover herself and her 10-year-old daughter costs about as much as she was paying for her old policy, but carries a much higher deductible of $5,000.

If you work for yourself, retire before medicare kicks in, or don't have health insurance through your job, finding individual coverage that you can afford is as much a function of the state in which you live as it is the state of your health. It often comes as a rude awakening to look for insurance on your own, especially if you've been spoiled by years of relatively carefree coverage through your employer. But that's been exacerbated over the past ten years as states such as Maine have passed laws designed to guarantee all state residents access to coverage.

Some states chose to pass "guaranteed issue" laws, which forbid insurance companies from rejecting people based on the condition of their health. Others elected to go with a "community rating" system, which requires insurers to charge everyone the same rates, regardless of health, or otherwise limits their ability to raise premiums. But these well-intentioned laws have often backfired, forcing some healthy people to pay more in insurance premiums than the monthly mortgage on a small house. And it's even tougher to find an affordable policy if you're in poor health.

Spreading the risk

INSURANCE usually works because companies can spread their risk over a wide range of people. The healthy ones end up paying more in premiums than they submit in claims, and the difference helps to subsidize sicker people with more expensive claims. Healthy clients accept the situation because they usually pay lower premiums than higher-risk clients--and they never know when they might become sick themselves.

But when insurance companies can't reject anyone or adjust rates based on risk, they end up charging everyone more. That's what happened in Maine after 1993, when the state passed a guaranteed-issue law. "Rates shot up dramatically because insurers could no longer cherry-pick," says Tom Wright, a health-insurance broker in Yarmouth, Maine. When prices rose, many healthy people elected to take their chances and drop their coverage, while sick people stayed on. Insurers then had to raise rates even higher. "We've entered an actuarial death spiral, and it's accelerating," says Wright

As the risk pools got worse, many companies decided it wasn't profitable to do business in the state and pulled out. Two of the holdouts, including Rozanna Patane's insurer, bailed out at the end of 2000, leaving an additional 12,000 Maine residents to hunt for alternatives among the three companies still doing business in the state.

Under her old coverage, Patane also paid about $200 a month, but the deductible was $1,500. Now her deductible has more than tripled, yet "it's the only viable choice for me," she says. She could have paid about $10 less a month with a group policy purchased through an association, but the insurer had a history of rate increases. She also had the option of joining an HMO--for $445 a month.

In Maine, insurers may adjust premiums a bit based on the age of the insured. But in New Jersey, everyone has to pay the same rate for similar coverage, whether you're a 25-year-old triathlete or a 61-year-old who has had quadruple-bypass surgery. That means everyone is able to buy insurance--but hardly anyone can afford it. A case in point: A plan that picks up 80% of medical expenses after you meet a $500 deductible costs $865 a month for an individual and $2,049 a month for a family.

HMOs cost less--about $300 a month for an individual and $853 for a family--but even that can be prohibitive, especially for young people who are too old for their parents' policies but hold entry-level jobs without benefits (see "Don't Get Sick," July 2000). Some self-employed individuals have resorted to hiring an assistant to work the minimum number of hours per week that would qualify them for an employer group policy, which isn't subject to the same rules and can cost significantly less than individual coverage.