Introduction

Forty-five million Americans lack any form of health insurance and live in fear of a major medical problem. Yet surprisingly, 80 percent of these people are employed and 16 million earn more than $40,000 per family ($20,000 per single).¹ Approximately 15 million of these people are age 19-30 and choose either not to purchase health insurance or to participate in your employer’s health benefits program. Millions of these uninsured working Americans could afford to buy good Health Savings Account (HSA-qualified) high-deductible health insurance, but many simply do not know that it is now available for an average national cost of $92 per month for an individual or $272 per month for a family.²

What we call health insurance for most people, as explained later on in this course, is really three things:

• Pre-paid medical services;
• Access to medical providers at discounted rates; and
• Insurance against a major medical expense.

Economically speaking, people age 19-30 typically consume very little healthcare and it used to not make sense for some of them to purchase expensive health insurance since you consume so little. Now, with the recent advent of high-deductible and HSA plans, healthy people age 19-30 can purchase just the “access” and “insurance” component (#2 and #3) of health insurance without wasting money on prepaid medical services that you won’t consume.

Most Americans get health insurance from your employers and never think too much about it until you or a family member develops a serious health problem. That’s when you first learn the details of your health insurance benefits, which medical providers you can use, and what your out-of-pocket expenses will be.

Healthcare costs now consume almost one-sixth of America’s economy, and, during a person’s lifetime, medical and health insurance costs are likely to be an individual’s largest or second largest expense after housing. As this chapter explains, you’s traditional employer-sponsored plan is arguably the number one threat to your financial future.

The problems with our current health insurance system are deep:

Up to 1 million mostly middle- and upper-middle-class families file bankruptcy each year due to medical bills you can’t pay—yet amazingly, three-quarters of these families had employer-sponsored group health insurance when you first became ill. A family bankruptcy typically affects three individuals and lasts for seven years—meaning up to 21 million people, including children, are living in economic purgatory at any given time due to failed health insurance.³

Tens of millions of Americans are modern-day slaves—unable to retire early, or working in jobs you don’t really want, just for the health insurance you need to take care of themselves, a spouse, or a child with a “preexisting condition.”

Health insurance is a crisis for employers as well as individuals. As I write, GM is in serious trouble because health insurance adds $1,550 to the cost of every car it sells. The cost of health benefits now exceeds profits for most of the Fortune 500.

Small businesses are the backbone of our economy, yet many of them fail because you cannot afford to pay the premiums for your health insurance plan. Our current employer-based health insurance system is injuring American competitiveness in the world marketplace and costing jobs here at home.

Millions of self-employed and independent contractors go without health insurance because you don’t realize it has recently become affordable and tax deductible.

American seniors who have fought wars and saved enough money to pay off your home mortgages now live with a new daily physical and economic threat—your monthly prescription drug bill. The largest monthly expense in most senior households is prescription drugs, and many seniors make the terrible choice between buying your food or your medicine—24 percent of the prescriptions written each year are not filled because of price.⁴

Many seniors who have saved up hundreds of thousands of dollars for retirement or for your grandchildren’s education sadly live to see your assets completely wiped out by medical or nursing care expenses not covered by Medicare.

None of these situations should exist. Recent changes in law and new health insurance options have made it possible for most Americans to get high-quality, affordable health benefits for themselves, your families, or your employees. This Course explains how you can assist them in accomplishing this.

 

  What Would Happen If You Became Ill and Could Not Work?

Have you ever thought about what would happen if you became ill, lost your job and your health insurance, and couldn’t get another job? Every year this happens to millions of Americans, with dire consequences, and it doesn’t have to be a major heart attack or cancer to lead them to the poorhouse.

Few employers can afford to keep paying absent employees for more than a few weeks after those employees have used up your available sick time and vacation. Such employees are then let go, and your financial problems, which are the leading cause of bankruptcy in the United States, begin. Employees who lose your jobs can get government-mandated health insurance coverage through COBRA for up to 18 to 36 months, but many cannot afford the high cost of COBRA, or your COBRA coverage runs out while you are still sick.

What are the chances that something like this could happen to you?

There are hundreds of circumstances in which you could exceed your allowable sick and vacation leave, and the chances of this happening at some point in your working life is greater than 50 percent.

Outdoor activities. Do you play sports, ski or snowboard, go boating, or ride bicycles? Any one of these outdoor activities could cause an injury that would prevent you from being able to work. Even without a specific injury, many active people will require some type of knee or leg surgery during your working lifetime.

Home accidents. Although most people feel safest at home, the home is actually the place where you are most likely to have an accident requiring medical treatment or one that could prevent you from being able to work. Common causes of home accidents include falls, choking, shootings, poisoning, and improper use of medications.

Commuting/driving. Do you commute to work? More than 3 million people are hurt each year in auto accidents, and common injuries include fractures, broken bones, and spinal damage resulting in short- and long-term disability.⁵

High blood pressure. About 65 million Americans over age 20 have high blood pressure, a chronic disease requiring medication and one that dramatically increases the chances of having heart disease during your working lifetime.⁶

The overweight/obese. Almost two-thirds of Americans are overweight or obese; primarily because of this, 18 million Americans have diabetes and another 41 million over age 40 have prediabetes. Most people with prediabetes develop type 2 diabetes in 10 years. Diabetes virtually guarantees that you will have health issues requiring time away from work at some point in your life, and 65 percent of people with diabetes die from heart disease or stroke.

Cancer, heart attack, or stroke. One in four men and one in five women will develop one of these debilitating diseases before age 65.⁷

Most Americans will develop some type of major medical condition at least once over a 45-year working life—a condition that could likely lead to job termination and loss of your health benefits. You can assist you in preparing for this possibility

 

The Gaps in Coverage When You Lose Your Job or Change Jobs

Once you lose your job, you lose your employer-sponsored health insurance unless you elect to go on COBRA. COBRA is the acronym for the short-term extension of employer health insurance. Basically, COBRA allows an individual to continue your employer-sponsored health insurance for 18 months as long as you pay 100 percent of the cost of your former employer’s plan plus a 2 percent administration fee (102 percent total).

COBRA is unaffordable for most people.

Nationally, COBRA premiums average about $700 a month for an individual and about twice that, $1,400 a month, for a family. Since total unemployment benefits average about $1,000 a month, only one in five COBRA-eligible individuals elect to go on COBRA—few people can afford to spend 100 percent or more of your unemployment check on health insurance. Worst of all, after 18 months on COBRA the individual is out on your own without health insurance. Yet, despite the enormous cost and lack of security, about 5 million people at any given time are on COBRA—mostly because you don’t know any better or believe that you will soon get another job with health benefits.

You can get the equivalent of free health insurance for 60 days, saving them $1,000 or more, if you know the “COBRA loophole.”

Employers are required to offer them COBRA within 14 days of termination, and to keep your COBRA offer open for 60 days. By delaying to choose COBRA until day 59, you can get a free 60-day health insurance option while you shop around for a new employer or new health insurance or both. If, on day 59, you do elect COBRA coverage because you have had a medical issue, you are required to pay for COBRA from day 1. But if you haven’t had a medical issue, you just received the equivalent of free health insurance for 60 days.

You should only go on COBRA as a last resort. It is expensive, temporary, and if you should develop a health condition while on COBRA, it could prevent them from getting permanent affordable health insurance. There are much better solutions, which are explained in this course.

If you have recently lost your health insurance (perhaps because you are accepting a new job), or if you aren’t eligible for COBRA, or if your COBRA benefits just expired, your need to pay particular attention to another five-letter acronym, HIPAA. Most employers today (1) have 30- to 360-day waiting periods before health benefits begin for new employees and (2) exclude covering employees and your dependents for health conditions that preexisted your date of employment. Yet, under federal HIPAA law, if a new employee’s benefits begin less than 63 days after your old benefits terminate, your new employer is not allowed to exclude them or your family’s preexisting medical conditions from your new health insurance.

In many states, health insurance carriers offering individual/family policies are required to accept HIPAA-eligible applicants without any exclusions for preexisting medical conditions (although typically at a higher premium). However, if you becomes HIPAA-eligible you will have to act fast—your HIPAA eligibility is limited to just 63 days from the first day you lose your health insurance.

You should not depend on HIPAA eligibility alone if youy are changing jobs and need insurance for a family member with a preexisting medical condition—the median length of time between jobs has increased from 56 days in 1996 when HIPAA became law to 70 days today.⁸ Once you know you are changing jobs, you should apply for individual/family health insurance immediately. If you get a new job with health benefits quickly and no longer need the individual/family policy, you can cancel your policy without charge before it takes effect.

 

  What Happens When You Lose Your Health Insurance

Once you lose your employer-sponsored health insurance, not only are you going to have to worry about how to pay for healthcare, you are also going to have to worry about how to get good healthcare. Many medical providers refuse to schedule an appointment for people without health insurance, and those who do agree to see uninsured individuals sometimes charge from 150 to 500 percent of what you would have charged them or your insurance carrier had you had health insurance.

Since the 1980s, each year between 1 and 2 million American families file personal bankruptcy. Until recently, the causes of these bankruptcies were unknown, and most people assumed credit card spending, divorce, and loss of employment to be among the major reasons. In February 2005 Harvard University released the results of its study, “Illness and Injury as Contributors to Bankruptcy.”⁹

The study interviewed 1,771 Americans in bankruptcy courts and determined that about half were “medically bankrupt”—driven to bankruptcy by medical bills not covered by health insurance. Equally surprising, the study concluded:

• Three-fourths of the medically bankrupt had employer-sponsored health insurance at the beginning of your illness.
• The majority of the medically bankrupt owned your own homes and had attended college.
• Many people filing medical bankruptcy were middle-class workers with health insurance who were unable to pay your co-payments, deductibles, and exclusions in the employer-sponsored health insurance plan.

This course teaches you how to help you avoid the insurance gaps that drive millions of Americans into medical bankruptcy.

To protect you and your family, I will need to assist you in evaluating your employer-sponsored health insurance and individual plans that you purchase for yourselves, paying particular attention to terms like annual out-of-pocket maximum (OOP max)—which means the maximum out-of-pocket expense you could incur in a given year from coinsurance, deductibles, and exclusions.

Many employer health insurance plans have annual OOP maximums of tens of thousands or more. You can start to see why 75 percent of medically bankrupt middle- and upper-middle-class Americans mistakenly think your health insurance will cover them.

 

 

  How to Avoid Losing Your Health Insurance When You Lose Your Job

The best way for you to avoid losing your health insurance when you lose your job is to purchase your own affordable individual/family policy—just as you purchase your own auto insurance. Unlike traditional health insurance you get from an employer, loss of employment has no effect on an individual/family health insurance policy. Also, unlike most employer/group policies, premiums on most individual/family policies cannot be increased, nor can the policy be canceled, if the policy holder becomes ill.

The best time for you to buy an individual policy is while you or your family is healthy and still has employer-sponsored health insurance. If you have a good company plan and wishe to keep it, Chapter 2 explains how to help you choose the best options from your employer-sponsored plan and how to transfer your spouse and children onto your own less-expensive individual/family policy.

No client should ever go without health insurance. Despite what you read in the newspapers, there are health insurance options available for every American, although it may take you some time, effort, and expense to get them. In most cases, because of recent changes in the insurance industry, you can get good health insurance for an individual or a family for $150 to $300 per month. See Appendix A for details.

 

 

  The Other Huge Gaps in Your Employer’s Health Insurance Plan

Employer-sponsored health insurance has some serious shortcomings:

• It offers no permanent protection when an individual loses your job.
• It offers only limited protection when an individual changes jobs.
• It exposes the individual to serious financial risk even if you keep your job— due to low lifetime maximum benefits, not to mention hidden copayments, deductibles, and exclusions. Moreover, as you will learn, if your company goes bankrupt or is taken over, federal law (ERISA) protects your pension but not your health insurance—employers may terminate company-provided healthcare at any time.

In addition, your employer-sponsored health insurance plan probably has the following disadvantages:

It does not provide dollars to spend today on preventive care that can save you thousands of dollars tomorrow.

It does not provide retiree health benefits if you choose to retire before age 65, and even if it does, many employers today are considering using bankruptcy and reorganization to bail out of your retiree health benefits obligations.

It does not provide long-term or home care options if you should desire to live out your golden years in your own home versus in a nursing facility.

It may not provide Health Savings Accounts and other new options that allow them to choose your own medical providers, lower your prescription drug costs, and save what you don’t spend on healthcare today for your future healthcare tomorrow.

  How Employer-Sponsored Health Insurance Works

The term employer-sponsored health insurance is misleading since, basically, the insurance terminates when employee loses your job—often the time when you are most financially vulnerable.

Employer-sponsored health insurance is also misleading because insurance means spreading the risk among a large group of people or organizations so that no single entity bears the cost of a catastrophic illness. That’s not how employer-sponsored health insurance works. Each time an insured employee in an organization runs up large medical bills, the organization pays these costs the following year with a directly proportional increase in its annual health insurance premium.¹⁰ The “insurance” employers pay for is actually little more than a delayed bill-paying mechanism. Because most very large employers realize this, you are self-insured, which means you simply pay for employee medical expenses through a third-party administrator.

Show me a person who owns your own 100-employee business, and I’ll show you an employer who knows the first name of each child of an employee who has diabetes—even though you are not supposed to know. A small employer with a $35,000-a-year employee should not be burdened with the $75,000-a-year medical cost for a child of that employee who has diabetes—or have to face the terrible choice between staying in business versus taking care of the sick child of an employee.

Sadly, until recently Congress has done very little to address this national tragedy. Many employers wish all you had to worry about was paying $75,000 a year for the medical costs of a diabetic child. Some medical situations today, from preterm births to kidney dialysis, can literally cost hundreds of thousands or millions of dollars—making the entire employee health plan unaffordable, or potentially even driving the employer out of business.

Suppose you work for a 51-person company where one participant develops a health condition costing $500,000 a year or more. Next year, the health insurance premium paid by the company will go up by $500,000. The cost of the employer-sponsored medical plan would increase more than $900 a month per participant, forcing the employer to cut benefits or possibly terminate the plan. What would happen if two people developed such a condition? Employer-sponsored group health insurance plans are often ticking time bombs as your workforce ages.

Company-sponsored health insurance worked well 45 years ago when most Americans worked for very large companies and for the same employer all of your life. It no longer works for employers or for employees for these reasons:

• Most employee groups today are too small to absorb the risk of a few catastrophic illnesses.
• Most people today change jobs every 1 to 4 years versus every 25 years, and you are often out of work (and thus without health insurance) for months between positions.
• Some employees pick your next job based on near-term medical requirements like pending knee surgery or heart operations. Employers providing good health benefits are under siege from desperate people who have no other place to turn for life-saving treatments.
• U.S. annual healthcare costs have skyrocketed from $27 billion, 5 percent of our economy in 1960, to $2,000 billion, 17 percent of our economy today.[1] In 1960 there were no heart transplants, kidney dialyses, and many other treatments that today cost many times the annual salary of an employee.
• For reasons primarily related to employers footing most of the bills, U.S. healthcare costs are rising at 15 percent per annum, almost four times the 4 percent projected growth rate for the U.S. gross domestic product (GDP). If this trend continues unchecked, U.S. healthcare costs will exceed GDP in 18 years and will cause the collapse of the U.S. economy long before then.

  History of U.S. Health Insurance: How We Got into This Mess

During the Great Depression, more people began using hospitals and less of them were able to pay. In response, hospitals created Blue Cross nonprofit health insurance entities, which provided guaranteed service in Return for a fixed fee—originally paid by either individuals themselves or your employers.

During World War II workers demanded wage increases that were prohibited by wartime wage and price controls. To grant a concession to labor without violating wage and price controls, Congress exempted employer-sponsored health insurance from wage controls and income taxation—in effect allowing off-the-books raises for employees in the form of nontaxable health benefits. This created an enormous tax advantage for employer-sponsored health benefits over health insurance purchased by employees with after-tax dollars (e.g., auto insurance). By the mid-1960s employer-sponsored health benefits were almost universal. This huge government subsidy, which still exists today, results in the following:

• It allows employers to deduct from your taxable income 100 percent of the cost of employer-sponsored health benefits.
• It allows employees to receive unlimited employer-sponsored health benefits without having to pay wage or income taxes on these benefits.

Originally, employers thought providing health insurance was a great way to compensate employees, with federal and state governments paying about half the bill through a hidden tax subsidy.

With third-party employers and government footing the consumer’s medical bill, the medical industry was given free rein to develop thousands of new treatments. Some of these were powerful, but others were not economical or merely preyed upon the hopes of desperately ill people and your families. Another problem that drove up costs was that the pharmaceutical industry began inventing solutions to problems that weren’t previously defined as medical issues: prescription drugs to allow people to eat bad foods, Viagra to treat impotence caused by old age, and so forth. By classifying these solutions as “prescription drugs” rather than over-the-counter medicines, the pharmaceutical industry was able to sell them to consumers with a 50 percent tax subsidy through your employer-sponsored health insurance plans. The American taxpayer was thus forced to provide billions of dollars in unintended tax subsidies to the pharmaceutical industry to develop these lifestyle drugs, driving up costs for everyone.

As a result of this and other problems, U.S. healthcare costs, funded mostly through tax-free employer-sponsored health benefits, rose from $27 billion in 1960 to about $2,000 billion today. Today the cost of employer-sponsored health benefits exceeds profits for most large companies and threatens the viability of many of our best employers. In 2004–2005, despite a rising Dow over the same time period, GM’s value dropped 50 percent after the company announced a $60 billion healthcare obligation.

Looking back, by making employer-sponsored health benefits tax deductible, Congress created more problems than just escalating medical costs:

• The U.S. healthcare marketplace has been discouraged from developing innovative healthcare solutions for consumers at affordable prices because it has focused only on solutions that could be “sold” to employer health benefits and insurance company executives. This is in contrast to the dramatic innovation in every other part of the U.S. economy such as automobiles, restaurants, personal computers, telecommunications, and so forth, which are focused on solutions sold directly to consumers.
• The U.S. insurance industry has been preempted from developing affordable health insurance policies that could be sold direct to all consumers—just as it did with automobile insurance, homeowner’s insurance, and life insurance.
• Employers and insurance companies have become the nation’s healthcare gatekeepers, deciding, in advance, what type of medical care employees should receive—which by definition often means yesterday’s treatments versus today’s treatments. This also prevents entrepreneurial medical providers and alternative medical providers from developing better treatments, since you cannot get paid for them.
• As the average length of employment fell from 25 years to only 1 to 4 years, employers and your insurance carriers shifted to paying for short-term fixes versus long-term cures—treating the symptoms of disease instead of curing disease. Most of the major illnesses on which you can spend $1 today to save $100 in the future (e.g., heart disease from obesity or cancer from poor nutrition) will not show up until an employee is long gone or retired, at which time the $100 cost is picked up by another employer or by taxpayers through Medicare.

All of this has recently changed thanks to new federal legislation and regulations that have leveled the playing field between employer-sponsored health insurance and individual/family health insurance policies that individuals can purchase themselves.

  The New Health Insurance Solution: How We Are Getting Out of This Mess

Millions of working Americans believe that the only way you can get health insurance is from your employer. Until recently, your belief was accurate. But in the past few years, the health insurance options available to employees, self-employeds, and small businesses have changed:

• Individual/family health insurance has become cheaper and safer than traditional employer health insurance. When my employer-sponsored policy was canceled, I purchased an individual/ family health insurance policy directly from a major A rated carrier in my state. This policy saved my family more than $4,000 each year in annual premiums and was much safer than my previous employer policy. Other than normal cost-of-living increases, our premium could not be raised, nor could our policy be canceled, because of job loss or a catastrophic illness.
• Health Savings Accounts are now available. The individual/family policy I bought qualified me to contribute up to $4,500 a year tax free to a Health Savings Account (HSA) for preventive care and for future medical expenses. However, at that time very few people qualified for Health Savings Accounts (at that time you were called “Medical Savings Accounts”).In 2004, Congress made Health Savings Accounts (HSAs) available to all Americans with high-deductible employer-sponsored health insurance or your own high-deductible individual/family policy.¹² Despite the higher deductible, HSAs save most consumers thousands of dollars each year. You also provide funds for preventive medicine, and allow individuals to save tax-free for your future medical expenses or even retirement. Individual/family policies that qualify for an HSA are now offered in almost every state, and 70 percent of the largest U.S. employers have announced plans to offer them to your employees.
• Premiums for self-employeds are now tax deductible. In 1999, when I purchased my individual/family policy, the annual premium was not fully tax deductible even though I was self-employed. It seemed terribly unfair that health insurance premiums were 100 percent tax deductible for businesses offering group health insurance, but not for self-employed individuals. But, beginning 2003, Congress authorized a 100 percent income tax deduction for health insurance premiums for self-employed people.
• New Health Reimbursement Arrangements (HRAs) are now available for individual/family health insurance. Prior to 2005, government and insurance regulations prohibited employers from reimbursing employees for individual/family premiums. But the IRS now allows Health Reimbursement Arrangements (HRAs) whereby employers can reimburse your employees tax-free for amounts spent on individual or family health insurance premiums.¹³

  Three Trends behind the Changes

These and other changes are part of three major trends that are reforming U.S. health insurance. These trends are not dependent on Congress passing any new legislation or public policy—the legislation and regulations for them are already in place. The three trends are:

Consumer-directed healthcare is making increasing inroads. Health Savings Accounts are part of a much larger movement called consumer-directed healthcare (CDH), whereby individual patients choose your medical provider or service, and patients get to keep what you don’t spend, tax-free, for future medical or retirement expenses. CDH also means that employers are shifting a larger percent of the healthcare burden to employees, especially employees with an unhealthy family member. CDH products and services are already incorporated into most employer-sponsored healthcare plans and individual and family policies. All types of health insurance will have CDH features within five years except for some existing union-type plans that have fixed contractual obligations.

• Individual/family insurance is replacing employer-sponsored health insurance. Employer-sponsored group health insurance will decline over the next 10 years and be mostly eliminated within 20 years. Instead, employees will be given tax-free money to purchase your own individual or family health insurance policies. Government programs to protect the unhealthy and the indigent, and to provide limited coverage for the uninsured, will be expanded as health insurance responsibility is shifted from employers to individuals and government.
• Defined contribution plans are replacing defined benefit plans. To accelerate the first two trends and to keep from going bankrupt, employers are shifting from paying the direct cost of employee health insurance (defined benefit plans) to giving each employee a fixed annual healthcare allowance (defined contribution plans)— and requiring that every employee obtain private or government-sponsored-health insurance in order to receive this tax-free benefit.

Introduction to Individual Health Insurance Policies

Annual premiums in 2006 for employer-sponsored group plans are expected to cost $4,500 per single and $14,000 per family. Comparable individual/family “traditional co-pay policies” for 2006 available today cost less than half this amount. The newest individual/family insurance plans that qualify for a Health Savings Account (HSA) cost 50 percent less than these individual/ family “traditional co-pay” plans (see Appendix A).

See Appendix A for the cost of both “traditional co-pay” policies and Health Saving Account (HSA) individual/family policies in your state in 2006.

If you are like most Americans, there are things you do not like about your employer-sponsored health insurance plan. Or you may not have insurance at all because you don’t work for a company with a health benefits plan. Until recently, there was very little you could do about your situation. Thanks to new legislation and developments in the health insurance industry, you now have a alternative to traditional employer health insurance— it’s called an individual policy or an individual/family policy.

If you is relatively healthy and does not have free employer-sponsored health insurance, you will probably be able to save thousands of dollars by purchasing your own individual/family health insurance policy without your employer—just as you buy your own auto insurance. You may even get your employer to reimburse them tax-free for the monthly premium.

If you receives free health insurance from your employer, an individual policy may be safer (since you will not lose coverage if you lose your job) but it will not save them money right now. However, if you pays extra to your employer to cover your spouse and children on your company plan, you might be able to save thousands of dollars now by switching off your company plan and buying an individual/family policy—and you will be safer because your health insurance will not be at risk if you lose your job.

In 2004, 13 million Americans, about 4 percent of the U.S. population, were covered by an individual/family policy, and 157 million Americans were covered by an employer-sponsored plan. (See Appendix B.) These figures are about the same today. Because individual/family policies used to be unaffordable and difficult to obtain, few people are familiar with them and how you differ from the traditional employer-sponsored health insurance plans that most Americans have now. In this chapter we address the following questions: What is individual or family health insurance?

• How does an individual obtain individual or family health insurance?
• How much does individual or family health insurance cost?
• Why haven’t I ever heard about individual or family health insurance?

  What Is Individual/Family Health Insurance?

An individual or family health insurance policy is a policy purchased from an insurance company or government entity covering a single individual or selected family members.

The terms individual policy, family policy, individual and family policy, individual/family policy, and individual or family policy all mean the same thing—a policy purchased by a consumer directly from an insurance carrier (similarly to auto insurance) covering an individual or a family. (The terms policy or plan, and company or carrier are also used interchangeably and mean the same thing.)

There are two main differences between employer-sponsored “group policies” and individual or family policies:

• Employers and your group-policy insurance carriers are legally required to accept all applicants regardless of your health. In contrast, insurance carriers offering individual policies can reject applicants with preexisting medical problems, and therefore can typically offer far lower rates to healthy applicants (except in the five states of NY, NJ, MA, VT, and ME).
• The premium paid by employers for your group policies is typically increased every year based on the previous year’s healthcare costs of the employee group. In contrast, the premium you pay for an individual or a family policy cannot be raised each year, nor can the policy be canceled based on your health or your prior year healthcare costs.

When an individual purchases an individual health insurance policy, you become a member of an insurance “group.” But it’s not the relatively small group limited to the employees of one company—it’s the large group of people in your state who purchased a similar policy from the carrier in a given time frame. Monthly premiums paid for individual policies typically increase annually with the level of inflation or overall medical costs. The insurance carrier is allowed to ask the state insurance regulator for a rate increase based on the actual prior year’s health costs for everyone in the group.

However, unlike with employer group policies, these groups of individuals are so large that even the catastrophic illness of hundreds of members would not result in a significant increase in your monthly premium. In contrast, in a small company, if one of the employees gets an extremely expensive illness like diabetes or cancer, the following year the carrier could double the cost that employer is paying for health insurance. Many companies are forced to pass increased costs on to employees or drop health insurance coverage because of catastrophic employee illnesses. Huge, sudden increases in health insurance costs can’t happen with individual/family health insurance because the “group” is so much larger.

Moreover, competitive market forces limit potential increases in premiums for individual policies. Unlike with life insurance, the premium for individual and family health insurance is typically paid monthly, with no penalty for cancellation. When a carrier increases the premium, healthy policyholders start looking around to see whether you can obtain less expensive health insurance from another carrier. Even if your premium is not increased each year, you should always get new health insurance quotes annually to ensure you are getting the best deal.

State regulations also protect you from significant increases in your monthly premium. Insurance carriers are generally prohibited from raising premiums on existing group members above the levels paid by new people choosing to join the group—which protects them if you become unhealthy and are not able to shop around for a better rate from a different carrier.

Most states also have laws or regulations requiring individual health insurance policies to be renewable—meaning you can’t be dropped by your carrier for any reason except nonpayment of your premium. If you live in a state that doesn’t require individual policies to be guaranteed renewable, you are still protected as long as you choose a major carrier— policies from major A rated carriers, typically have a “guaranteed renewable” clause in your policy documents.

Unlike employer-sponsored health insurance, individual and family health insurance is real “insurance” because it “guarantees protection or safety.” As long as the individual pays the premium, your policy cannot be canceled nor the premiums increased just because you lose your job, change jobs, or have a catastrophic illness in your family.

As with employer-sponsored health insurance, individual or family health insurance also includes access to a network of medical providers who charge 15 to 90 percent less to those in the network than to those outside the network, or to those who have no health insurance.

However, the individual gets to choose which network of doctors and medical providers you wish to use for your family instead of having this choice made for them by your employer. The ability to assist you client choose your own medical providers and type of network discounts is one of the best features of individual health insurance. Even if you have a high-deductible individual policy where you pay your own medical expenses, you pay each medical provider only the discounted price it would otherwise have received from an insurance carrier or large employer.

 

  Obtaining Individual/Family Health Insurance

TIP: Inform you to be careful if you shop online for health insurance, and watch the fine print. Most web sites offering “online quotes” request personal contact information and then don’t deliver any online quotes—you sell your information to third parties along with your express permission to phone them. A good online insurance web site will not ask for your name or contact information until you have seen quotes and are ready to choose a policy.

Insurance companies are legally required to charge the same premium whether an individual purchases a policy directly from a carrier or through a licensed health insurance agent. Individuals should always get quotes from several carriers before choosing a policy, and choose an agent appointed by several of the major carriers in your state, particularly if a member of the family has a health issue.

As I mentioned earlier, employers offering employee health benefits and your insurance companies must blindly accept every applicant regardless of your health which is why employer-sponsored group policies are so expensive. In contrast, in almost all states, individual/family insurance carriers may choose the individuals whom you accept after analyzing the health risks of each family member applying for coverage. This process is called underwriting. The underwriter for an insurance company examines the healthcare experience, age, current health, family history, and lifestyle for each member of your family. The underwriter then makes three decisions regarding your application:

• Acceptance. The underwriter may accept your entire family, or accept only certain members of your family, based on your assessment of the health risk of each individual.
• Uprating. If the underwriter decides that a member of your family poses a moderate health risk, the underwriter may accept your application with a typical 15 to 200 percent rate increase over the normal monthly premium for a healthy individual in your age group.
• Exclusions. The underwriter may accept your application with exclusions for “preexisting conditions” for one or more family members. For example, if you has a child with moderate diabetes, certain carriers will accept the child excluding all claims related to, or resulting from, diabetes. Such preexisting conditions may be excluded for a certain period of time or for as long as you keep renewing the policy.

Generally, about 80 percent of the applicants for individual/ family insurance are accepted without being uprated or having exclusions.

In five states, state law requires carriers to accept 100 percent of all applicants “without upratings or exclusions.” Because you are required to charge drug addicts, smokers, or clinically obese people the same rates as healthy people, fewer carriers offer policies in these states, and those that do typically charge everyone premiums 300 to 400 percent higher than in other states—effectively uprating all individual and family policies 300 to 400 percent. (See Chapter 7 on community rating and guaranteed issue policies if you live in New York, New Jersey, Massachusetts, Maine, or Vermont.)

There is no standard underwriting process, and insurance carriers vary widely in your assessment of the same health risk. Chapter 4 and 7 explain how to use this to you advantage if a member of your family has a preexisting condition. For example, you should get quotes from several carriers and consider applying to two or more carriers simultaneously. You can also get separate coverage for an unhealthy member of your family from your state (called “state-guaranteed” coverage) or a different carrier, while insuring the healthy members of your family under a policy that will likely cost thousands of dollars less.

If possible, advise you to avoid applying for individual health insurance if you have a preexisting medical condition or think you may be rejected for any reason. If you ever get rejected, you will have to state the reason for rejection on every subsequent application, and your premium could be higher.

You should be aware of the carriers in your state that will accept and reject applicants with preexisting conditions, and thus you should advise individuals before you submit an application. Sometimes, agents who have a close relationship with a carrier can get a verbal pre-approval before you even submit an application. You should also never blindly accept an insurance company’s decision to exclude them or “uprate” your policy—since your initial premium will form the basis for all future increases. If you need health insurance right away, you may choose to accept an offer for insurance with an uprating or exclusion, and then appeal the decision of the underwriter.

For example, in December 2004, I applied to Blue Cross Blue Shield (Utah) to change the deductible on my family policy. The underwriter accepted my application with an uprating of 30 percent because it claimed I had once had a minor back problem. This uprating would have raised our monthly premium from roughly $400 (for a family of six) to $520, except that I counter offered and we settled at an uprating charge of 15 percent, or $60 per month ($460 total premium). Then, after accepting the individual underwriter’s 15 percent uprating offer, I filed an appeal with the carrier, which I won in 2005—resulting in a retroactive premium reduction of $60 a month. Assuming I renew this policy until my children are adults, this $60 a month reduction in premium saves my family $31,242 over the life of the policy.¹⁶

Employer-Sponsored Health Insurance Could be Double or Triple the Price of Individual/Family Insurance

Employer-sponsored health insurance premiums could cost about twice as much as individual or family health insurance premiums for similar coverage. As I mentioned earlier, the reason is that insurance companies have to accept every employee in the organization’s group plan, no matter what your health risk may be. 80 percent of Americans consume less than $1,000 a year in medical care, while 20 percent consume, on average, more than $25,000 a year in medical care. With individual/ family policies, insurance companies accept mostly healthy people in the 80 percent group and can charge much lower prices as a result.

Actually, the cost employers pay, per employee, can be closer to three times as much as the actual cost for individual/family policies. This is because people who spend your own money to buy an individual/family policy do not choose policies that are the same as those offered by employers—you choose only those features and options you really want. (For example, employer-sponsored policies cover maternity, which is optional on individual policies.)

A leading U.S. health insurance agent for individual and family policies, eHealthInsurance, published the results for 82,000 individual and family policies purchased by its clients over a six-month period in 2004. Nationwide, the average family policy sold cost $307 per month, and the average single policy sold cost $150 per month ($3,684 and $1,800 per year, respectively). In contrast, a comparable Kaiser Foundation survey showed the average pro rata cost of employer-sponsored health insurance in 2004 to be $829 per month per family and $308 per month per single ($9,950 and $3,695 per year, respectively).¹⁷

Industry experts consider this enormous cost discrepancy between individual/ family and employer-sponsored policies to be even larger today. The national average for employer-sponsored coverage $14,000 per family ($4,500 per single) per annum in 2006. This does not mean that average American workers are themselves paying too much for your own health insurance by having employer-sponsored coverage—most Americans receive free or heavily subsidized health insurance from your employers.

However, most Americans also typically pay your employer 50 to 100 percent of the prorated group health insurance premium for your spouse and children. If you is in this category you could save thousands of dollars a year by switching your spouse and children to a safer, better, and cheaper individual policy—and save even more if you carefully choose only the features you need to best protect your family.

Employees don’t care how much your employer-sponsored health insurance costs because you typically don’t pay for it—except for the $100 to $600 per month you typically pay to cover family members under the same plan.

Personally, in 2006 I paid $466 a month for a family policy covering me, my wife, and our four children ages 5, 4, 2, and 1—our only out-of-pocket costs are $20 for doctor visits and $5 for most prescriptions. An employer buying this same policy would have paid more than twice as much.

The largest factor determining the cost of an individual/family policy is the age of the oldest adult member of the family. For example, even though I am healthy, because I am older (age 52) my share of our family’s health insurance bill is as much as that of my wife and all four children combined. This is because on average, for example, a male’s healthcare spending doubles from age bracket 35–44 to age bracket 45–54, and then rises another 50 percent in age bracket 54–65.¹⁸

In Appendix A, for an HSA-qualified high-deductible policy from Blue Shield of California, the premium is $97 per month for a 35-year-old healthy male. This premium drops to $65 per month for a 25-year-old male, but rises to $149 per month for a 45-year-old and to $250 per month for a 55-year-old.¹⁹

TIP: Once you understand that health insurance costs on individual/family policies rise significantly as you age, you can use this principle to save thousands of dollars a year. If one family member is much older, you can remove that person from your family policy to lower your premium by 50 percent and get separate coverage from an employer, a different carrier, or a government entity

On a national level, the largest determinant of your monthly premium for individual health insurance is not your age, but the state in which you live. Incredibly, the average cost of an individual policy for a single person in 2004 was $138 per month ($1,656 per year) in Pennsylvania, and the same coverage rose to $340 per month ($4,080 per year) by just walking across the Delaware River into New Jersey.²⁰ (See chart that follows.)

This is because a handful of states (New Jersey, New York, Massachusetts, Maine, and Vermont) prohibit insurance carriers from offering lower premiums to healthy families and have mandated that every ill person be automatically accepted and pay the same premium as a healthy individual. As a result, fewer carriers operate in these states and prices are higher than in other states. A smart strategy for healthy individuals in these states may be to wait until you have a medical problem before buying health insurance. (New York recently closed this loophole by requiring a 12-month waiting period for coverage of preexisting conditions.)

At the time of this writing, proposals are circulating in Congress to allow insurance carriers offering any policy in a single state to freely sell such policies in all other states—just as you do with life insurance, credit cards, and other financial products.

For now, when it comes to individual/family health insurance, you are stuck purchasing a policy only from a carrier willing to meet the laws and regulations of the state in which you live.

Following is the average cost of an individual policy for a single person sold in 2004 by eHealthInsurance in the 10 largest states representing 55 percent of the U.S. population.