Consumer Reports Examines ‘Traps’ in Individual Health Insurance Market
Attempting to purchase individual health insurance requires "entering a perilous market in which good advice is scarce," according to a new report in the September issue of Consumer Reports. The study, "The Unraveling of Health Insurance: The Perils of Buying Your Own Policy," examines several "traps" in the individual insurance market and how they impact coverage decisions and premiums. Many insurers do not offer coverage on the individual market, and those that do often "devise strategies" to limit their financial risk and consumers' ability to receive coverage for needed care. The following summarizes the four "traps" as defined by the report.
- No coverage for existing illness: Individual insurance policies are "medically underwritten," meaning insurers examine an applicant's medical history and deny coverage to those who "pose too much risk," such as people with cancer, diabetes or multiple sclerosis, according to the report. If a policy is offered to an applicant with a pre-existing condition, it is often a waiver that excludes coverage for that illness. Insurers also will require a surcharge for covering applicants with "potentially expensive conditions," which may increase premiums by 20% to 100%.
- Gaps in state regulation: Some insurance carriers appear to offer group coverage by creating a group discretionary trust in states that have little or no regulation over the types of policies that can be sold. These policies are then sold in other states but are governed by the regulations of the state where the trust is located. Plan members may "get into trouble" with such policies because the insurer may "selectively target" policyholders for rate increases if they file claims.
- Underfinanced risk pools: Those unable to find coverage in the individual market may qualify for coverage in a state's high-risk pool, but the premiums associated with such coverage are often unaffordable, according to the report. In addition, some of the pools cap enrollment, creating a waiting list. The report said that lack of funding is the "root" of the high cost and restrictive coverage associated with the pools.
- Falling through the cracks: Although the Health Insurance Portability and Accountability Act of 1996 required states to provide a "safety net" for individuals to purchase insurance, states are permitted to create their own regulations on what insurers may charge or who must be offered policies of "last resort." As a result, many applicants may find the rates of a guaranteed-issue policy are "out of reach."
Given that the individual insurance market does not "spread the risk" of coverage costs, the report said that "[p]iecemeal reforms" will not help reduce the number of uninsured. "What's needed is coverage for everyone in a pool that spreads the risk -- and the funding to make that feasible," the report concludes (Consumer Reports, September 2002). The report is available online.
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