Private Health Insurance 101 High Costs, Poor Choices, No Guarantees

Health insurance in America Why insurance matters Who pays for it How private insurance works Different types of private insurance How you get it What it costs How it is regulated Why we cannot rely exclusively on private insurers to guarantee quality, affordable health care we can count on

Why health insurance matters Access to good health care Early detection/prevention Necessary health services Institute of Medicine found 18,000 Americans die each year because they do not have health insurance Protection from financial risk Half of all bankruptcies related to health care costs, in most cases borne by people who are insured but have inadequate coverage Security—if your insurance is comprehensive, it should cover the services you may need at a price you can afford Health care costs are soaring. Even important preventive care like mammograms and colonoscopies can cost a lot. And, if you end up being hit by a car, slipping and falling playing a sport or getting diagnosed with asthma, diabetes or breast cancer, your health care costs can go through the roof. Odds are you won’t need very costly care any given year. Ten percent of Americans consume 64% of all health care costs. But, we are all at risk of needing costly health care services, and health insurance should ensure our financial and health security so we do not have to gamble with our own or our families’ health.

Who pays for health insurance We are already spending what a high-quality system that covers everyone should cost – but aren’t getting it. The US spends twice as much on health care per person than every other advanced country, all of which cover all their residents. Public money–your tax dollars– pays for about 60% of the $2 trillion annual U.S. health care bill through federal and state governments. Individuals and employers pay for less than 40% percent of total US health care spending. Whether you have good insurance, bad insurance or no insurance, you are likely contributing to the cost of health insurance in America through public programs. Federal and state government already play a major role in health care. Government funds help pay for people with low incomes (Medicaid), people over 65 and people with disabilities (Medicare) and kids (SCHIP), because they are considered “vulnerable” populations. Government funds also contribute towards health care for state and federal employees, and they subsidize state and local hospitals. But, if you don’t qualify for a public program, you must also pay for your own private insurance—if you’re lucky—with help from your employer. In our $2 trillion health care system in 2006, more than 1/3 of total health care spending was financed by private health insurance. Right now, private health insurance costs are going up 8 times faster than wages. Increasingly, employers are dropping health care benefits or shifting additional costs to their employees. Private insurance costs are soaring and benefits are being cut. Insurers are reaping massive profits as they deny coverage and care, limit what they will pay for, and increasingly shift costs to you. In fact, many insurers are seeing rising profits as their member rolls drop. They make more money when they avoid insuring people with costly conditions. That could be any of us and the people we love. They cannot continue to game the system. It doesn't have to be this way. We need government to set and enforce rules that work for us; we need health insurance that guarantees quality affordable health care to all.

Where do people under age 65 in the U.S. get health insurance? Employer, Dependent 30% 67% of those under 65 has private coverage 62% have employer-sponsored covered 5% purchase individual policies 15% have Medicaid or other public coverage 18% are uninsured Uninsured/ IHS 18% Employer, Own 32% Medicaid/ Other public 15% At age 65 or if you have a disability, you generally qualify for Medicare, a federal public insurance plan. People with Medicare can choose a public fee-for-service health insurance plan that allows them to see doctors and use hospitals anywhere in America and allows them to budget for their care. But, the vast majority of people under 65 do not have the choice of a public health insurance plan. They rely on private health insurance. More than 60% of people under 65 get private health insurance at work—as a benefit from their own job or as the spouse or dependent of a working family member. About 15% are covered under public programs—mostly Medicaid, a state-run safety net program for certain low income people: children, parents of dependent children, pregnant women, and people with disabilities who cannot work. About 5 percent of the non-elderly buy health insurance on their own, in what’s called the “individual insurance market.” About 18% of the US population or almost 47 million non-elderly Americans—are uninsured. Individual Policies 5% Source: KFF analysis of Urban Institute estimates of March 2005 Current Population Survey, U.S. Census Bureau.

Why private insurance doesn’t meet our needs Only want to cover the healthy and divide the population into small groups, driving up costs Do not want to cover costly services Cover different services varying conditions and pay different amounts. Can change many terms of coverage whenever they please. The insurance industry has been able to break up the population it covers into thousands of different categories—male smoker, 60-year old waitress, chemical worker, Montana logger, Florida drinker, cancer survivor, you name it. And, it can charge different amounts for each different group and for all the costs associated with fragmenting the population and pitting men against women, Californians against Iowans, rural farmers against urban businesspeople. While insurers must treat all employees of a company equally in terms of what they cover and what they charge, they are allowed to treat everyone else differently. They do everything in their power to avoid having to cover people with costly conditions because they want to avoid risk. But taking on the risk of a group is the reason insurance was created. Insurers end up making health care very expensive for people who need care; we all end up at risk since none of us knows when and if we will need costly care. If we spread risk across a large swath of the population, as Medicare does, we would all have the security of knowing that if we needed costly health care, it would be available and affordable. But, in most states, insurers have the power to set their rates and the terms of their coverage; and they are making good profits. That's why they like the system the way it is. www.healthcareforamericanow.org

Getting a balanced mix of sick and healthy members Called “Risk-Spreading” Why is it important? Equity Efficiency Security If health insurance works the way it should, it pools many people together to share (or spread) the costs (or risk) generated by a small number of people. Over the long run, risk pooling makes sense because almost everybody, eventually, needs expensive health care. It’s more manageable to pay an average amount (or premium) every month than to get hit all at once by medical bills that reach tens or hundreds of thousands of dollars.

Concentration of health spending by Americans, 2003 Most of us are healthy most of the time, but sooner or later, there will come a time when almost all of us will we need costly health care. The healthiest 50% of the population accounts for just 3 percent of total health care spending, in any given year. Just one percent of the population accounts for about 25% of all health care spending in the US. The sickest 5 percent of people account for half of total spending. So, while it is a good bet that you will not use your health insurance much, it’s also important for your health and financial security to have good health insurance. Source: KFF calculations using data from Agency for Healthcare Research and Quality, Medical Expenditure Panel Survey, 2003.

Why private insurers don’t do it Most insurers try to get only healthy members Rejecting sick (high-risk) people Excluding coverage of pre-existing conditions Charging people more if they are high risk Design benefits so that people with costly conditions either do not want to join or must pay high costs for their care. The healthier their members, the higher their profits All insurance spreads some risk, but insurers try to avoid risk and keep people with costly conditions or predisposed to them getting covered in order to maximize their profits. Individuals who are healthy in turn sometimes go without insurance especially if they are young, assuming that they will not need health care and saving money on insurance premiums. This leads to what is called adverse selection. If more people in the pool are sick, the higher the “average” cost of coverage will be. To discourage people from waiting to get coverage until they are sick, insurers medically underwrite policies—charging a lot more for people who are sick or who are likely to become sick or refuse to sell policies to high-risk applicants (for example, people with diabetes.) If states allow it, insurers also will avoid covering pre-existing conditions—health problems people had before they bought the policy. Or, if states allow it, insurers will charge premiums based on an individual’s likely health care needs, called risk-based rating. Under risk-based rating, somebody who already has diabetes would be charged more than somebody with no health problems. The difference in premiums would reflect the difference in expected health care costs for each policyholder. Some states require community rating, the opposite of risk-based rating. With community rating, each policyholder’s premium is based on the average cost of the entire pool—healthy and sick mixed together. Insurers will also design their benefit package to try to avoid people with costly conditions. Policies that don’t cover maternity, mental health, or prescription drugs will be less attractive to people who need such care. Similarly, policies with high deductibles and other cost sharing may be more attractive to healthy people than to sick patients. Insurers want a healthier-than-average risk pool. That’s called “risk selection” or “cherry picking”. An insurer can make bigger profits if its risk pool is healthier than the competition’s. That’s why it can be very hard for individuals who need costly health care to get or keep insurance. The thousands of different insurance plans around the country, fragment the risk pool. The larger the risk pool, the better its ability to spread the risk. The smaller the risk pool, the more expensive insurance becomes. So risk spreading in health insurance involves tradeoffs. Coverage that is sold to people when they are sick and that covers all the care that sick people will need, tends to be more expensive. Conversely, inexpensive coverage is likely to not be sold to people who are sick and is likely to provide far less coverage for health care when it is needed.

Private health insurance varies All health insurance is different. There is no standard for health benefits. Employer-sponsored coverage: Increasingly less comprehensive Different benefits covered as well as different costs Individually-purchased policies: Typically still less comprehensive Less coverage of maternity, mental health and prescription drugs Can have caps on needed services, high copays and high deductibles as well Health insurance is not treated like any other consumer product. There’s no standard federal definition of what health insurance must cover. A few states define standardized policies that must be sold. More often, states pass mandated benefits laws that require specific services—such as mammograms—to be included in policies. But insurers have flexibility to design the benefit package overall. It is virtually impossible to compare different insurance policies. While you will know your benefit package, that will not tell you under what circumstances the insurer will pay for particular treatments or how much the insurer will pay. Different insurers cover different treatments under different circumstances and pay different amounts and you cannot compare them. You have little idea what you are getting. There is no standard for health benefits that covers what people need to keep healthy and to be treated when they are ill. That’s why insurers are able to get away with denying and refusing to pay for so much necessary care. Health care benefits should cover all necessary care, including preventative services and treatment needed by those with serious and chronic diseases and conditions. “Typical” employer-sponsored health benefits are generally better than individual and small group coverage, with coverage for hospitalization, physician care, maternity care, prescription drugs, and so on. However, not all employer-sponsored plans are “typical” or “average.” For example, 20% of employers offer an option with a high-deductible of at least $1,000 per person. Some cover all drugs for a modest copay while others require you to pay out of pocket for half the cost of the most expensive medications and some cap prescription drug payments. Individual health insurance varies tremendously. Individual policies tend to offer far less coverage for maternity care, mental health care, and prescription drugs. Annual deductibles of $1,000 or higher are typical.

Types of private insurance Indemnity, fee-for-service “Managed Care” Preferred Provider Organization (PPO) Health Maintenance Organization (HMO) Point of Service (POS) High deductible/high cost health plans It used to be that most people had indemnity policies, which reimbursed you for covered services regardless of where you received care. You were not restricted to a network of specific providers. Now, most people with private insurance have some form of “managed care,” meaning that your out-of-pocket costs are lowest when you see a doctor in a specified network. In a standard HMO, care provided outside the network may not be covered, except in emergencies. In a PPO, you may have coverage outside the network but would have to pay more out of pocket. Different plans also have different rules about whether you need to see a primary care physician, need pre-authorization, how much you pay and more. High-deductible or high-cost health plans, euphemistically called “Consumer Directed” Health Plans generally make you pay more upfront for your health care before your coverage kicks in. Today, people have far less choice than before: less choice of doctors, less choice in health providers and less choice in health plans.

Private plans: No guarantees Insurers can change terms of coverage as largely as they please : raise premiums, deductibles and copays from one year to next Change networks of doctors and other providers at any time. Decide what services they pay for and how much they pay at any time Two million people lose health insurance every month More than 70 million people have inadequate coverage 47 million uninsured in 2007, vs. 80 million uninsured over two-year period Choice of doctors, what’s covered and what you pay can change with… Marriage, divorce, spouse’s death Loss or change of job Birthday (e.g. 19th) Move Change in health status People’s health insurance is constantly changing. People switch health insurance, lose health insurance, get new health insurance all the time when they change jobs, marry, divorce, move or get sick. About 2 million Americans lose or change coverage every month. Most of them will be uninsured for at least 30 days, before they obtain new coverage. However some will not get insurance again for a year or longer. People in poor health are twice as likely to go without coverage for a long time. There are 47 million uninsured in one year, but 80 million people may lack coverage for at least one month over 2-year period. While only 5% of people buy insurance in individual market, 1 in 4 adults will try to buy individual coverage during a 3-year period.

Employer v. individual health insurance Employer-Sponsored Insurance (ESI) Employers decide what they offer Less likely to be offered to Employees of small firms Part time/seasonal workers Low wage workers Newly hired workers Dependents Retirees Eligibility cannot be based on health status Individual insurance Purchased by individuals if available and affordable Age and health status are a determining factor in whether you can get insurance on your own Private health insurance is unlike other goods/services purchased in private market: It isn’t always available to everybody…you must be eligible for it. In our current system of health coverage many people are left out. Eligibility for job-based health insurance is largely up to employers. Employer-sponsored insurance (ESI) is voluntary. Not all employers offer it. Those that do may not offer it to all of their workers and/or dependents. For the most part, uninsured Americans are members of working families, but most aren’t eligible for job-based insurance because: They may work for a small business that doesn’t offer coverage. They may work only part time. They may be dependents of a worker whose employer provides health benefits, but not for dependents. Federal law prohibits insurers from basing eligibility for employer-sponsored health benefits on a person’s health status. This is not true in the individual market, where health insurance is medically underwritten in most states. That means eligibility is based on health status. Applicants may be denied or charged more based on their health conditions or health history.

Health conditions denied by individual market insurers Always denied n Cancer n Multiple Sclerosis n HIV/AIDS n Pregnancy n Diabetes n Stroke Often denied n Overweight n High blood pressure n Cancer history n Asthma Sometimes denied n Acne n Hay fever If you need to buy health insurance in individual insurance market, you will be out of luck if you have cancer, diabetes, MS or AIDS. If you are overweight or have high blood pressure or asthma, you also may not be able to buy coverage or will pay a premium and will likely not be able to buy coverage to treat your condition. Even acne or hay fever, relatively minor health problems, may keep you from being eligible for individual health insurance.

What does private health insurance cover? It depends and it’s not clear Covered benefits Standard policy: rarely defined in law Depends on state, insurer and purchaser Benefit limits (annual, lifetime, service and cost limits) Cost-sharing Deductibles, copays, coinsurance Out-of-pocket cost-sharing maximums, high charges on top of what the insurance pays for out-of-network care Terms of coverage Provider networks Care authorization/utilization review Condition exclusions Pre-existing conditions Other conditions based on work, history etc. Employer-sponsored insurance typically (not always) more comprehensive Individual insurance typically (not always) less so There’s no standard federal definition of what health insurance must cover. A few states define standardized policies that must be sold. More often, states pass mandated benefits laws that require specific services—such as mammograms—to be included in policies. But insurers have flexibility to design the benefit package overall. Covered benefits may be subject to limits. For example, some policies may limit mental health coverage to no more than 20 visits, or prescription coverage to no more than $800 in benefits per year. Usually cost sharing applies, such as deductibles, copays and co-insurance. There may be limits on cost sharing. Or there may not be. Other rules may restrict what’s covered or where they’ll pay for care. For example, the insurer may not cover care that was received out of network, or without proper authorization or referrals. Some policies won’t cover pre-existing conditions. Generally, you get better coverage through an employer than in the individual market, but not always.

What does health insurance cost? It depends Cost (premium) of health insurance depends on: Who’s covered (age, health status & history) What’s covered (benefits, cost sharing/ deductible, terms, pre-existing conditions, limits) Insurer profits & administration costs Subsidies (premium & reinsurance) Underlying health care costs Health Care Costs are Too High Half of all bankruptcies in the US are due to medical costs, and three-fourths of those bankrupted had health insurance at the time they got sick or injured With so much varying in health insurance policies, the “cost” of health insurance really depends on who is covered, what’s covered, as well as other things like the level of insurer administrative costs and profits, whether subsidies apply, and so on. But, even if you pay a lot for your health insurance, your health care costs may be unaffordable if you need costly services because insurers may deny care you need or cover only a small part of it and they may not limit your out-of-pocket costs.

Regulation of private insurance State is primary regulator 50 states, 50 rules Few national regulations Regulations Ensure solvency Oversee risk spreading/ risk selection Generally very limited or ineffective Best practices: Guaranteed issue: Must allow anyone to buy Community rating: Must charge everyone the same States are the primary regulator of health insurance. The rules vary across states and also vary based on individual, small and large-group markets. We regulate health insurance to protect solvency. Individuals and employers pay hundreds of billions of dollars in insurance premiums each year. They have to know this money will be managed wisely and that insurers will be able to pay claims. Insurance regulation also addresses risk spreading and risk selection. Depending on the state and market, regulation may require policies to be sold without regard to health status. This is called “guaranteed issue.” Or regulations may require premiums to be set without regard to health status. This is called “community rating.” In general the employer-based group health insurance market has greater protections against risk selection than the individual market. The federal government sets some national rules for health insurance, as well. But, overall, government has not fulfilled its watchdog role over health plans. Regulations do not assure that risk is fairly spread among all health care payers and that insurers do not turn people away, raise rates or drop coverage based on a person’s health history or wrongly delay or deny care.

Regulation of private health insurance alone not enough Even with good regulations, we cannot rely exclusively on profit–driven private insurers to guarantee quality, affordable health care. To rein in costs, guarantee comprehensive benefits and financial security, we need: A public insurance option that sets standards and drives accountability from private plans; and Fair regulation of private insurers. Private insurance companies always try to game the system in order to make higher profits. If you mandate that they cannot turn anyone down because of health or age (“guaranteed issue”), they market in places where healthier people frequent, like gyms. We need to make the private insurance companies compete against a public health insurance plan that sets a benchmark, offers a comprehensive benefit package with predictable costs and provides guaranteed backup coverage for people who lose their private insurance for any reason.

Regulations: Employee benefits Employee Retirement Security Act (ERISA) Federal law that precludes states from regulating employee health benefits for employers whoself-insure Allows joint federal/state regulation of insurance that employers buy Fully-insured plans Does not allow states to regulate self-insured plans ERISA is the main federal law governing employer-sponsored health benefits. ERISA stands for the Employee Retirement Income Security Act of 1973—initially it was a pension law. Federal law has national reach so consistent rules can apply nationally, different from state-based laws that can vary significantly. ERISA does not allow the state to regulate employer-sponsored health benefits if the employer is self-insured, meaning the employer is taking the risk for insuring its group of employees and paying claims with its own funds (companies that self-insure often contract with an outside insurance company to handle claims administration). Self-insured plans cover about half of all employees with job-based health benefits. However, ERISA permits states to regulate the health insurance policies that employers buy. These are “fully insured plans,” meaning they are policies employers buy from an outside insurance company that takes on the risk of insuring the employers’ workers. There can also be federal regulation of these plans. This means there can be both federal and state regulation when an employer buys health insurance—we call that a fully insured plan. But states don’t play a role in self-insured plans where the employer pays claims with its own funds. Self-insured plans cover about half of all employees with job-based health benefits.

Regulations: Keeping insurance Consolidated Omnibus Budget Reconciliation Act (COBRA) Federal law offers temporary continuation of coverage after: Loss of employment Change in family/dependent status: 36 months Disability: 29 months Applies to plans sponsored by employers with 20 employees or more Individual pays full premium and cost of administration Very costly and unaffordable for most COBRA protection is important. Group coverage cannot discriminate based on health status but individual coverage often can. Therefore, if you’re sick or pregnant as you’re about to lose your job, COBRA protections can be a lifeline source of coverage. However, COBRA only makes coverage available; it does not make it affordable. Employer premium contribution is not required under COBRA. COBRA is supposed to be a continuation. But, if you lose coverage because your employer goes bankrupt and closes the health plan, there’s no plan to continue in, so COBRA won’t help. Finally, COBRA doesn’t apply to employers with fewer than 20 workers. However, almost 40 states have adopted state continuation laws (or mini COBRAs) that offer similar protections for people leaving health plans sponsored by employers with fewer than 20 employees. These state continuation laws apply to insurers who sell coverage to fully insured employers.

Regulations: Keeping insurance Health Insurance Portability & Accountability Act (HIPAA) Federal law that protects all group plans participants Employers cannot discriminate against them based on their health or worker status Can buy individual coverage if they lose group plan coverage So long as they have exhausted COBRA protections and switch plans within 63 day window (check) of losing group plan coverage, new insurer must cover you Pre-existing conditions covered Federal law does not speak to individual insurance premiums and cost-sharing Insurance tends to be very costly HIPAA established a national floor of consumer protections in health insurance. Different floors were established for different types of insurance. Some HIPAA rules protect all participants in employer-sponsored group health plans. For example, HIPAA made the federal rule that no employer-sponsored group health plan can discriminate against members of the group based on their health status. HIPAA also made national rules for pre-existing condition exclusion periods under job-based group health plans, as well as standards for when employees and their dependents must be offered an opportunity to enroll in group health plans. For people losing group coverage, HIPAA created limited protections in individual health insurance. These HIPAA protections apply to people after they’ve lost job-based group coverage and exhausted their COBRA continuation rights. For these people, insurers in the individual market must offer policies that are guaranteed issue and impose no pre-existing condition exclusions. But, HIPAA does not dictate what an insurer can charge for these policies. They tend to be very expensive.

Private insurance: Case example All these regulations could not help Mr. Jones. Mr. Jones has diabetes. He is laid off from his job with employer-sponsored private health benefits. His unemployment benefits are $1,150 a month His rent is $750 a month That only leaves him $400 a month for utilities, food, gas and other expenses He cannot afford the cost of private health insurance: His COBRA premium is $425 a month Individual insurance plans turned him down because he has diabetes He cannot afford the cost of properly managing his diabetes: Insulin and other medications, test strips, and doctor visits cost over $400 a month As a result, Mr. Jones developed liver problems and was hospitalized: The hospital bill was over $15,000

We need public insurance option What have private insurance companies done for us? Failed to offer coverage we can count on Denied health care claims Rejected people for coverage for being too old or sick or just being a woman of child- bearing age Charged people higher premiums based on their health history Canceled people’s coverage after they got sick Left 47 million people without health insurance Left millions more in medical debt or bankrupt because their health care coverage did not meet their needs

We need public insurance option What do private insurance companies expect of us? They want to continue to decide how much they charge and keep making higher and higher profits. They want to continue to decide what services they cover, under what circumstances and how much they pay and keep their decisions secret. They want to be able to shift more of costs of care to us. They don’t want us to have the choice of a public health insurance option.

We need public insurance option Public insurance sets standards, predictable costs and benefits, transparency as to what is covered and how much is paid, reins in costs, provides safety net Public health insurance option creates competition, removes private insurer quasi-monopoly power. Exclusive reliance on private insurers gives them monopoly, even with regulation, allows them to control costs, benefits and access Medicare is best example of public and private health insurance competing. The public Medicare plan sets the rules regarding benefits covered and reins in costs through its large pool and low administrative costs. Its design, automatic coverage upon turning 65 with right to opt out, with default into public Medicare plan for people who do not elect private Medicare, ensures everyone coverage. Public Medicare program’s benefits are predictable and, with supplemental coverage, people can protect themselves from financial risk. Private Medicare plans must take all comers and charge everyone the same rate, but they still compete to avoid risk by limiting their provider networks and often not including the best specialty doctors and hospitals in their networks. They also shift costs to members with complex conditions through high copays and coinsurance and deny care arbitrarily with limited accountability. That’s why even though Congress wrongly pays private Medicare plans more per person to treat people with Medicare, nearly 80 percent of people with Medicare choose the public Medicare option.

Public insurance: Case example of how it could work Mr. Jones has diabetes. He is laid off from his job with employer-sponsored private health benefits. He automatically gets affordable insurance through a national insurance pool that gives him a choice of a public plan or private plans that guarantee him access to care he needs and covers the costs of his diabetes. Mr. Jones has diabetes and gets his health insurance from the public plan in the national health insurance pool. He is laid off from his job and his insurance continues. Mr. Jones’ premium costs are subsidized according to his income, so he gets extra help while he is unemployed. The U.S. health care system saves money in the long-term by keeping Mr. Jones’ diabetes under control.

Conclusions With private insurance, cost as well as adequacy and availability of coverage are not guaranteed As your health status changes and you get older, it often becomes increasingly expensive and difficult to get and keep private insurance Government can guarantee access to affordable, high quality health care through fair insurance regulation coupled with a public insurance option that sets standards and drives accountability The private health insurance system can work well for people, especially if they do not need a lot of health care. But, it can be very costly for people in poor health and people who are older, especially if they have to buy it in the individual market. Our health care system today does not guarantee either the availability or the affordability of private health insurance coverage that ensures us access to quality health care. In our current system, loss of health insurance often coincides with serious illness. The consequences can be devastating with health and economic consequences and often hard to recover from. With a public health insurance option, which has predictable costs and benefits, competes with private health plans and drives accountability, government can set and enforce rules to ensure that health insurers guarantee quality affordable health care for all.