Medical Insurance for Prepared American Families, by Pat C.

The American healthcare system is collapsing and it will continue to do so no matter what comes out of the current debates in Washington. As a result, healthcare in the United States will continue to rise in cost. Worse, healthcare will become difficult to obtain; specialty care is already scarce in some areas and many rural counties do not have even one doctor who will accept Medicare patients. There are many reasons for these developments that are too complicated to outline here but it’s important to be aware of these trends because they will affect your ability to obtain care when you need it.

Directly related to the healthcare system is the health insurance system which is equally a mess. Following are what I’ve learned in the past 30 years as a health insurance broker in a western state:

Why You Need Insurance

As an insurance broker, I constantly meet people who tell me that they don’t need medical insurance. Most often I’m told “I’ll just go down to the emergency room where they gotta treat me no matter what”. While this is technically accurate it doesn’t mean you’ll necessarily get the care you need. A lot depends on the tax base of the city, county, and state where you live. If your region is financially solvent, the local hospital will probably take good care of you. However, if your local government or state are in trouble, healthcare is the first thing that gets cut, leaving hospitals underfunded and understaffed. Compounding the problem is the fact that reimbursements from HMOs, insurance companies, and the various federal and state entitlement plans (Medicare, Medicaid, county welfare, et cetera) are in many cases lower than the actual cost of delivering care. As a result, the system is starved for funding and providers are in revolt. Older doctors are simply retiring and dropping out of the system. Many of the physicians that remain in practice are canceling their contracts with insurance plans and government schemes and moving to cash-only business models. (In a major city in my state, it’s getting very difficult to find a pediatrician who accepts insurance. Most are now cash only.) As for emergency rooms, it’s becoming difficult for some hospitals to staff their ERs, especially with specialists and surgeons because the outside docs have no assurance that they’ll be paid for treating the un-insured. This results in delays in critically needed treatment as ER directors frantically try to find doctors who will provide care to injured but un-insured (or government-insured) patients.

These trends are causing a serious physician shortage that’s going to get worse as more doctors exit the system. As mentioned, many of the physicians who stay around are limiting their offices to patients who pay cash or have insurance that adequately reimburses them for their time and expertise. A group of surgeons in my town recently constructed their own private hospital about two miles away from the regional medical center. Since it’s private and does not accept government funds, the doctors can limit who gets in. If you don’t have insurance, they send you over to the medical center.

The fact is that the US healthcare system can no longer afford to provide care to everyone who needs it. Most federal, state, and county systems are hopelessly bankrupt and there are 50 million baby boomers now entering their highest-cost years of healthcare needs. In the coming years, who gets treated will be primarily be decided by a person’s ability to pay the bill and private, comprehensive insurance will be one of the few keys that will get you the care you need. Like it or not, in the future the people who have insurance will get treated and those that don’t will be sidelined to long lines for tests, appointment with specialists, and needed surgeries.

How to Get Covered

Aside from cost, the biggest problem with private medical insurance is getting approved. Most states allow insurance plans to decline individuals who have prior medical problems. The debates going on in Congress now include guarantee-to-issue mandates for insurance carriers. However, these mandates – if approved – are years way from implementation. Meanwhile, people with existing medical conditions need insurance now.

Some states in the eastern US mandate guaranteed coverage for all applicants but most states don’t. If you have a pre-existing condition, the only way to get medical insurance is to be part of a group plan, either as an employee or as a business owner. The regulations vary from state to state but most states require insurance carriers to issue group coverage to eligible businesses no matter what the health of the participants. In other words, insurance companies cannot refuse to cover employees of a legitimate group. However, you can’t just call yourself a group and get covered – eligibility for a guaranteed group plan is strictly defined. In most cases, eligibility requires an established business (typically in operation at least 3-to-6 months), with two or more W-2 status employees, working at least 30 hours per week, for at least the local minimum wage. All of these requirements must be satisfied to qualify and carriers require detailed verification of these parameters in the form of business records and payroll reports. So you can’t just call yourself a group and get coverage – you have to have a real business with at least two people on a legitimate W-2 payroll.

For most people, this is a dead end. However, there is a loophole in some state laws that can get you around most of these requirements. The insurance regulations in some states allow corporate officers to count as employees for the purposes of qualifying for group insurance. If your state has this provision you can form a corporation, name yourself and your spouse (or family member, or friend) as corporate officers and become eligible for guaranteed-issue medical coverage no matter what your health history. In my state there is no requirement that the corporation actually engage in a trade or business or have revenues, nor is there a requirement that the officers be on payroll or take a salary. All that’s required is a corporate structure and at least two officers named on the filing documents. Carriers hate this loophole but there’s nothing that they can do about it if it’s part of the state’s insurance code. It’s the law and they have to abide by it.

Cautions: The corporation must be filed in your state of residence and the officers typically have to be state residents as well. Other requirements may apply depending on where you live so discuss the details with a local attorney who works with small businesses and a local insurance broker who is familiar with the group plans available in your area. Also, don’t submit a filing with 10 or 15 family and friends named as officers because they all need coverage. Keep a low-profile. You may technically be within the law but I’ve seen carriers find one excuse after another to postpone approval of a plan because they didn’t like the group. You are much more likely to get five separate corporations approved, each with two officers, than a single filing listing 10.

In my state, creating a corporation costs about $2,000 for the legal work and filing fees and there may be annual taxes levied by the state depending on where you live. Note that these outlays do not include the cost of the insurance plan; the corporation is merely the vehicle that will allow you to obtain coverage. However, once your corporation is in place, you will be able to obtain insurance and maintain coverage for the rest of your life irrespective of your health or your employment.

Pre-Existing Condition Exclusions: Even though you can obtain guaranteed coverage through your corporation, the insurance plan will not necessarily cover pre-existing health conditions. Unless you have prior insurance in place within 62 days of the start of your group insurance (“Prior Credible Coverage”), existing medical conditions may have a waiting period before they are covered. Here’s the general rule:

A pre-existing condition is a medical issue for which you saw a licensed practitioner, had tests or treatment, or for which you took a prescription medication in the six months prior to the start of the new plan. If you did not see a practitioner or have treatment, tests, or took meds for the condition in the prior six months, then you are covered for all conditions immediately. If you did have treatment of some sort, then that condition is not covered until you have been on your new plan for six months. But after six months-plus-one day, the pre-existing condition is covered just like any other illness. And once you’ve satisfied the six-month wait you won’t have to do it again even if you switch carriers or plans as long as you move directly from one group plan to another.

Finally, don’t lie about your medical history thinking that you’ll get past the pre-existing condition exclusion. Insurance carriers investigate every claim that comes in during the first six months that a plan is in effect. They can do this because the authorizations you sign when submitting a claim allow the company to obtain any medical records about you no matter how far back. Meanwhile, you’ll likely forget that during a prior office visit with your doctor he asked you about the problem and you mentioned some treatments in the past. That will be in your doc’s notes and the insurance carrier will see the note and start tracing back. If they find out you lied on the application they’ll refund all your premiums, hand you back all your claims, and rescind your coverage. People try to cheat insurance companies every day and the carriers know every lie, every scam, and every trick that people try to pull. They’ll find out if you try to cheat them and they’ll pull your coverage if you do.

Low Cost Medical Coverage

Unfortunately, there’s no such thing as "Low Cost Medical Coverage" but there is lower-cost coverage. We tell all of our clients to select a plan with the highest deductible they can afford if they get sick. High deductible plans have lower premiums but still provide comprehensive major-medical coverage in the event of a serious accident or illness. In most states carriers now offer plans with annual deductibles of up to $5,000 and that’s what we recommend.

While $5,000 may seem like a lot to pay if you get sick, you can always work out a payment plan with the hospital once you’re on your feet again. For example, let’s say that a heart attack and bypass surgery cost you $50,000, with the insurance company picking up about $43,000 of the cost. You owe the hospital $7,000 for the deductible and various co-payments and you can’t afford to write a check for the full amount. First off, thank them for taking good care of you – the hospital’s billing people get yelled at all the time about how high the bill is. Meanwhile, the hospital’s docs and nurses probably saved your life, so be respectful and grateful. Then, offer to pay $600/month over 12 months. Another strategy is to ask for a discount in exchange for immediate payment by cash or by credit card. Providers want to collect payments and close out accounts as fast as possible so many will make a deal for quick payment. If you owe the hospital $7,000 tell them that you’ll settle the bill on the spot for $3,500. They may counter at $4,500 or $5,000, but whatever figure you settle on will be a significant discount. The key here is immediate payment – have your cash or credit card ready because it’s the only enticement you have to get a reduction in your balance.

Insurance That’s Not Insurance

I occasionally get a call from someone that goes like this: “I bought insurance from a guy and then got sick and now the hospital says I owe $30,000. What can I do?” Some insurance contracts have limits on how much will be paid for expensive care such as surgery or hospitalization but those limits are buried in fine print on the back page that no one reads. These plans typically have lower rates that the local Blue Cross/Blue Shield policies and it’s tempting to purchase the cheaper coverage. However, like anything else, you get what you pay for with insurance. Plans with similar benefits all cost about the same from carrier to carrier because they pay out about the same amount of money if you get sick. So a plan that promises lower rates for high benefits is impossible – somewhere along the way, the insurance company has figured out a way to make a profit even though they charge less than their competitors. Most of the time they do this by capping the payout in some way, usually by “internal limits” on expensive benefits. For example, a company located in the Southwest has been very successful in marketing a “special” policy designed specifically for the self-employed. Their sales people tout the great coverage and low premiums and they sell a boatload of this junk insurance all over the US. What they don’t tell you is that the policy benefits have caps on the payouts. The agent will explain that the policy will pay 80% of your hospital bill but what he doesn’t tell you is that the hospital payout is limited to $10,000. (This is an actual case that I dealt with last year. A young women was diagnosed with cervical cancer about seven months after buying insurance from this company. She now owes the hospital $37,000 because her contract limited the hospital payouts to $10,000.)

Here’s what to look for: Be very suspicious of insurance plans that are connected to some sort of official-sounding “association” or “union” for the self-employed. I’ve rarely seen a plan like this that provided good coverage. Some of these plans don’t even have a real insurance company behind them – the association or union is just a front for the sales guys who sell cheap insurance, collect a pile of money from the premium payments, and then close the plan down and skip town, leaving all their customers with no coverage. (I’ve personally seen two such "plans" in my area.) Also, do not complete an application if you have to initial every page of the form. When you initial a form it means that you have read, understand, and agreed to everything on that page and doing so is legally binding. That means that you can’t sue the agent or the company if there’s a dispute later about the terms of what you signed. That’s what happened to the girl with cervical cancer – she got stuck with a $37,000 hospital bill but couldn’t sue the agent because she had initialed the page with the fine print about the $10,000 payout cap. And because of this initial-each-page scam, that guy is still out there selling his junk policies to unsuspecting people.

Before buying insurance, read the fine print. Ask questions. Listen carefully and take notes. Talk to agents from different companies. And be very suspicious of any plan that’s not insured by a major, well-known insurance company. If it sounds too good to be true it probably is.

Premium Increases: Whatever plan you choose and whatever the monthly rate, your premium will go up every year. Yep, every year. By how much? That depends on your location but in our state it’s averaged 10% per year. Some years were higher than that, some lower, but 10% is the long-term average we’ve seen and we thing that will continue. There are lots of reasons for this – too many to discuss in this posting – but it’s a fact and you need to plan for it. In addition to the annual increases, your rate will also get bumped up as you move into higher age brackets (e.g. 20-29, 30-39, 40-49, 50-54, 55-59, 60-64). Fair or unfair, right or wrong, that’s the way the system works. The cost of healthcare and the cost of health insurance is going to rise in price every year. If you want access to good medical care you need to understand and plan for this reality.

The one offset to these increases is to raise your deductible from time to time. A $5,000 deductible was unheard of a few years ago and now is common. In a few years we’ll start to see deductibles of $10,000 or more. Moving your deductible up every few years will help control your premium outlays. But doing so will place increased importance on maintaining your health. In the coming years as medical care gets more costly and you raise your deductible your personal lifestyle will increasingly impact your household finances. If you lead an unhealthy life your medical expenses will ultimately bankrupt you unless you’re very wealthy. Therefore, a healthy lifestyle is now a financial decision. Cut out the tobacco, get more exercise, eat right, and get your check-ups. In short, do all the things we all know that we should be doing. If you follow though, you’ll be healthier and there will be less danger of you depleting your family’s monetary reserves by $10,000 per year for deductibles and co-pays because of a chronic illness.