March 4, 2004 Copyright © 2004, Greenwich Financial Management Inc., a registered investment advisor.  Securities offered exclusively through Purshe Kaplan Sterling Investments of Albany, NY, a NASD member firm.

Y OUR W EALTH

Demystifying Insurance, Part 12:

Health Insurance

            Group health insurance comes in three major types.  The old-fashioned type, called in its robust form Major Medical, reimburses individuals or their doctors for private medical bills.  The rate of repayment is generally 80% for the first $5,000 of family medical expense in a given year, and 100% beyond $5,000.  Owing to the cost to the employers, Major Medical is almost extinct.  The two chief alternatives are HMO's (Health Maintenance Organizations) and PPO's (Preferred Provider Organizations).   In both HMO's and PPO's, there is a preferred directory of physicians in your region.  If you use the services within this network, your doctors' bills are covered, minus a co-pay (usually ranging from $5 to $25 per visit).  HMO's usually require that you go to a "primary physician" first to be referred to a specialist.  A PPO, by contrast, allows certain reimbursements "out of network," normally with a percentage deductible (such as 20% of fee).  With all group health plans, there is a required open enrollment period for employees annually.  [In a "Point of Service" plan, you can go out of network like a PPO, but you have a primary physician as with an HMO.  I find the channeling system through a primary physician to be a nuisance.]

            Often, when employers offer a choice between an HMO or PPO, the PPO has an added charge.  It is worth paying for the PPO.  In the event that you face critical illness, you will want to consult with the very best specialists available, who may well be out of network. 

            In some cases, a group plan may offer integrated dental, orthodontic and vision benefits together with health.

            Most HMO and PPO programs offer a pharmacy card benefit.  A "10/20/30" card requires a co-pay of $10 for generic drugs, $20 for brand names and $30 for "exotics."  The plan "formulary" defines which drugs fall under each category.   

            As to group health plans, states such as New York and New Jersey operate under a "community rating" regime.  This means that for groups of up to 50 covered employees, there is equivalence of pricing, regardless of characteristics such as average age, sex, prior conditions, claim experience or hazards.  Such a scheme obviously benefits riskier groups at the expense of others.  However, above 50 employees, companies nevertheless are allowed to seek preferred rates based on superior risk characteristics.   In Connecticut, insurers are permitted to underwrite all groups and individuals for a variety of statistical risk factors, which often leads to lower rates. 

            Under the federal law called COBRA (1986), you have a right to continue health insurance for an interval after you leave a job, but your former employer need not subsidize the rate.  The Health Insurance Portability and Accountability Act (HIPPA) (1996) defines certain conditions under which individuals who were formerly covered by a group health plan have a right to purchase individual health insurance, which in some cases may be purchased through their state's high risk pool.  To be eligible, you must have had at least 18 months of creditable group health coverage, with no breaks in coverage of 63 days or more, you must have accepted any COBRA benefits offered and used them up, and you must not have alternative coverage from a private health plan, Medicare or Medicaid.  So if you want to be protected by HIPPA, don't let 63 days or more elapse after your COBRA coverage expires!  HIPPA also limits the length of application of exclusions for prior medical conditions by group health plans. 

            In all states, insurers must post their plans and rates with the state's insurance commissioner.  Group insurance brokers can only offer these posted rates; there is no discounting.  It's also worth noting that you will pay the same amount whether you use a group insurance broker or go directly to an insurance company.  Knowledgeable brokers may add value by advising employers on such matters as overall plan design, outsourcing of claims, total third party administration, cafeteria plan options, and other matters.  Self-insurance, with an insurance company or other third party processing the claims, is called the Administrative Services Only (ASO) model.  Depending on a host of demographic factors, groups as small as 50 to 75 employees may want to consider the ASO model; be sure to get expert guidance.  It's certainly prudent for a small business employing the ASO model to obtain a stop-loss reinsurance policy above certain loss limits per occurrence and overall. 

            In the Tri-state region, insurance companies active in health insurance include United Health, Oxford Health Plans, Anthem (in Connecticut), Horizon Blue Cross Blue Shield (NJ & NY), WellChoice (NY & NJ), Aetna, Cigna, GHI (NYC), HIP, and HealthNet (formerly Guardian). 

            Health insurance for individuals is pricey.  In Connecticut, a healthy individual may pay $450 per month, and a family about $1,200, with a typical co-pay of about $25 per doctor visit.  Out of network, expect a deductible of at least $1,000 and co-pay of 30% of any bills, with both annual and lifetime maximums.  Group rates, for groups as small as two, are much better, but there must be a verifiable employment relationship.  Insurance companies are increasingly steering away from coverage for affinity groups and professional associations, owing to the risk of adverse selection of unhealthy participants, and the insurers reserve the right to cancel existing contracts based on poor claims experience.

Andy Szabo, CFA , is Managing Director of Greenwich Financial Management Inc. , a Registered Investment Advisor, which advises individuals and companies on investments, insurance and employee benefits.  Questions or comments welcome by phone (203-531-2877) or e-mail: Szabo@GreenwichFinancial.com .