Managing Health Insurance in a Recession

TA | June 3, 2008

(Updated 3/13/09 to include information on the COBRA subsidy provisions of the American Recovery and Reinvestment Act)

Summary: If you are among the millions of Americans whose health insurance is threatened by the current economic recession then take immediate decisive action to cut expenses and maintain protection. If you expect to get back to an employer-proved health plan in the future then use short term medical insurance now to preserve eligibility to takeover benefits. Permanent renewable coverage is available to this who will work as subcontractors or be self-employed. Those who cannot afford traditional major medical insurance may enroll in a low cost limited benefit insurance plan to ensure continued primary care and provide partial protection.

Record numbers of Americans are concerned about their health insurance and health care costs. Employer benefit cutbacks, increased layoffs and the generally rotten economy affects almost all of us. The latest statements from U.S. Treasury officials and top economists indicate that many of us we will have to endure continued economic difficulties for at least the rest of the current year and into 2010. While the recent passage of the American Recovery and Reinvestment Act of 2009 gives temporary help to some people, the majority of us still need other more effective solutions.

The simple key to addressing our health care concerns remains in finding the balance point between the medical care we expect and what we are willing to pay for our medical care. At today's prices for health care services, most of us find that we can cover most of our medical risks through insurance, but very few even attempt to achieve full coverage. This article focuses on strategies for managing your health insurance through an economic recession and points to a few specific low cost insurance plans that are available in many states. These options can make it easier to get through the economic crisis by preserving cash while remaining important protection until better health insurance options become available.

Be proactive

Many people wait too long before taking action to address concerns about their health insurance. Some people, for example, hope that a new job with employer-provided coverage will come along before their current COBRA coverage runs out. Some even bet on finding a new job before the first COBRA premium is due. Others know they have a cash flow problem but wait until money runs out before making sharp cutbacks on their insurance and other bills. Some unfortunate people wait until after a medical problem surfaces and are then surprised to learn that insurance will not help with the bills for immediate medical care. Procrastination is your enemy in a recession. It is easy to take a "wait and see" approach toward finances but this is usually the wrong approach. Take proactive action now to minimize the effects of the economic crisis. But if you are uninsured now or unable to meet all of your bills - including the high cost of health care - then each month that passes by is working against you. As soon you investigate your options and resolve to take action, you put a "lid" on the problem that otherwise continues to grow.

Recognize that emotional issues play a significant role in health insurance decisions. If you are married, your spouse's ideas about health insurance  may be significantly different than yours. This emotional factor increases the risk of poor decisions or further procrastination. If you are out-of-work, experiencing health problems or going through a divorce, your ability to make rational financial decisions is likely to be even more impaired. Many people have a family member or professional adviser who has a special knack for helping with solid advice in the way of a "Suzie Orman" or "Dr. Phil". If you have a source advice from a person known to be a "straight shooter" when it comes to personal finances, now is the time to tap that person for advice.

In any event, it does not make sense to base your health insurance planning on a policy that is unaffordable.  

Shorten the planning horizon

Financially successful people tend to manage their finances with a focus on achieving of long term goals. In normal economic circumstances it often it makes sense for individuals and businesses to spend more today for a better return in the future; spending some money now to effectively invest in your financial future. This is not a time to use a long term planning strategy. Your mission is to achieve immediate financial stability, cut expenses, improve cash flow and minimize risk. Recognize that the strategies you may use now in a recession may be different and fundamentally opposed to the way you normally manage affairs.

Short term health insurance is available in most states to span from 1 to 36 months. The cost is about half of the amount of longer term policies. These are simple, easy and affordable major medical policies with high coverage limits primarily designed to cover unexpected catastrophic medical expenses. The most important feature is that coverage under these policies is counted as "creditable coverage" when, in the future, it comes time to switch to a permanent type group or employer-sponsored insurance that covers pre-existing medical conditions. Note that this type of insurance is not suitable for those who have significant medical risks or expensive ongoing medical treatments.

Develop a realistic budget

In good times and bad, we underestimate the cost of health care. This is partly due to the long inflationary trend and partly because this part of the national economic budget is largely "out-of-sight" for most Americans. We know that large businesses spend far more on employee health care than their employees realize. Self-employed people and small businesses spend far less, probably because decision makers have to personally wrestle with, balance budgets and justify the real economic value of every expense when they write a check.

Perhaps the biggest mistake that many people make is to improperly budget for their health care expenses. The total cost of health care (insurance plus out-of-pocket expenses) is more than $1,000 per month for a typical household. Yet few households actually budget that amount. It might be possible to get by with spending significantly less for awhile, but eventually the odds of incurring larger medical expenses will catch up with you. If you are looking for full-priced health insurance for a family that costs less than your car payment, then you are likely to be disappointed.  It makes more sense to use realistic costs in your long term financial planning even if you cannot meet those expenses at the current time.

Fortunately there are more health insurance plans available this year with a wider range of coverage and pricing than ever before. The most basic insurance plans are surprisingly affordable but provide much less coverage than more traditional insurance. The most comprehensive healthy insurance plans are financially out-of-range for the majority of people. The best option for you lies somewhere in between the two extremes. Considering this issue in advance and making a search based on your own budget gives you an advantage.

For 2008, it is unrealistic to budget less than $150 per month for a young healthy person or less than $450 per month for a family with children for overall health care. This budget should covers insurance plus out-of-pocket costs. On average, the health insurance cost will likely consume about 2/3 of the total expense and the other 1/3 will be out-of-pocket expenses. Obviously the less insurance you buy, the larger the average out-of-pocket expenses and vice versa. If your long term finances do not allow for budgeting of minimal amounts for health care then realize the likelihood of an eventual need to rely on public assistance.

Longer term health concerns

Those who are unable to afford adequate health care for many years at a time face increased health risks are increased and your life expectancy decreased. Economic hardship goes hand in hand with stress and other behavioral health risks.  There is no shame in recognizing and addressing that addressing long term health care may mean revising and taking dramatic action to change your entire life plan. Dramatic changes might include a change of employment, change of residence, marriage or citizenship status, and even disposition or spending down of financial assets. 

Contrary to some politically-motivated opinions, there is no strong correlation between having major medical health insurance and receiving appropriate primary medical care. In fact the majority of Americans who reported putting off necessary medical treatment in 2007 were covered by health insurance. They simply could not afford to pay the insurance deductible of co-payment. We suspect that coverage by supplemental health insuranceincreases the likelihood of primary and preventative health care because these plans tend to cover doctors visits at 100% with no deductible and no co-pay.

Health insurance is almost entirely controlled by state law and that those laws vary dramatically from state to state. As a result, the cost and availability of coverage varies significantly from state to state. A person who is being treated for diabetes might find that they are eligible for many health insurance policies in one state and that the cost of these treatments is fully covered while this pre-existing medical condition makes it almost impossible to find coverage for diabetes expenses in another state. Understanding the law gives you an automatic advantage in the decision-making process.

It makes sense to start by knowing the laws in your state that relate to your own medical conditions. Links to the various state insurance departments are posted. One note of caution: do not assume that all of the health insurance laws of your state apply to all types of health insurance. Some health insurance is exempt from these laws. International health insurance, limited benefit insurance and short term health insurance are specifically excluded from most state laws in order to make these more affordable and easier to obtain. Also keep in mind that in some states like New Jersey the laws that apply to businesses with more than one employee are entirely different than the rules that apply to one person businesses. A two person husband and wife businesses are treated as a one person business under health insurance laws. Be aware that health insurance ties into worker's compensation law and that eligibility of most group health plans is based on an employee's treatment under other state-run disability income insurance.

If you have significant pre-existing medical conditions, also make sure that you are familiar with the provisions of federal laws known as HIPAA and COBRA that may override state law. These laws are not covered in this article, but more information is available in other articles on the MedSave.com. The free "OnlineAdviser" service is available to provide advice on specific questions on these often complicated medical insurance issues.

Consider the worst case

We do not like to think about the possibility of a severe disaster but it is smart to consider the effects of a "worst-case scenario" in your personal health care planning. Almost half of all personal bankruptcies are directly caused by catastrophic medical costs, and more than half of these people are covered by health insurance! Asset protection and planning for a comfortable retirement are intimately connected to health care today.

Consider what would happen if you could not work, your income dried up and your medical expenses ran into catastrophic amounts over a period of years. The odds of financial disaster triggered by a chronic health problem are not are remote as many might assume. What would you have left? How can you protect your family and your most important assets? We believe that everyone - regardless of health current condition - should address these difficult questions. On a side note, it makes sense to incorporate this type of thinking into your estate planning. Even a simple durable power of attorney and living will can immensely help your family during periods of medical crisis.

Finally, consider that in the event of an extended recession leading to a worldwide depression, the safest health insurance products are likely to be those underwritten by LLoyd's of London. These insurance policies are available to U.S. residents through Multi-national Underwriters Inc. Surprisingly, at lest one of this company's insurance products called "Amigo Medical" is known as a low cost leader in several of the states.

Avoid the gimmicks

Unfortunately there are some companies who prey on people who know little about health insurance and any number of new gimmicks that come and go at the speed of the Internet. These scams tend to increase during a recession. A number of state insurance departments have stepped up efforts to make the public more aware of the increased risk. Be wary of the policies marketed as out-of-state group insurance pools. If age-based or tier rating is a concern, avoid companies that use "tier-based" renewal rating system. Make sure to distinguish between major medical insurance and limited benefit plans that would not provide adequate protection in the event of a serious medical problem. Finally, make sure to avoid the plans that sound "too good to be true" that are usually not health insurance at all. The worst offenders are marketed by e-mail with outrageous claims like "health coverage for the whole family; all pre-existing conditions covered for $89.95 per month". Regulators and consumer advocates are trying to shut down these offenders, but in the end every self-employed person must make purchase decisions with a buyer beware mentality. The simple adage to follow is that "if it sounds too good to be true, then it is". The confirmation of the quality of the plan of your choice an independent enrollment adviser can be invaluable in the health insurance selection process. A well-informed health insurance buyer can cut costs while improving overall benefits.

Cutting Costs

If you must cut back on health insurance costs, consider that different approaches to cost-cutting result in different risks. The three basic strategies are 1) use a shorter duration policy, 2) increase out-of-pocket costs and 3) reduce maximum benefits. Recognize the risk and choose the approach that is most comfortable.

The easiest way to save money without cutting back on overall protection is to change to a short term medical insurance plan. Short term medical insurancehas high coverage limits and liberal coverage for ordinary and necessary medical costs. Treatment These policies typically expire after 6 to 36 months but cost about half of the price of renewable coverage. According to one company that is prominent in the self-employed market, the average duration a renewable health insurance policy is about 13 months. Since so many self-employed people change health insurance plans every year anyway, there is little value gained in paying for the renewability feature. If you elect this route, just make sure that there is an open enrollment plan available in your state in the event that a medical condition continues beyond the maximum coverage period of your policy. Short term medical insurance is counted as "creditable coverage" when switching to group health insurance that covers pre-existing medical conditions.

Raising out-of-pocket costs by increasing the policy deductible, co-insurance and co-pays is the most common approach to trimming health insurance costs. Consider that now it is possible - and often most effective - to set the deductible and co-pay for prescription drugs separately from other policy features. The trouble with this approach is that the premium savings diminish as the risk increases. At a certain point - usually at about $5000 maximum out-of-pocket risk - it is not worthwhile to assume a larger financial risk in return for only a small savings in premium expense. If you are healthy and a high deductible policy sounds like the right approach, consider a Health Savings Account policy from Celtic Insurance if you are middle age or Golden Rule Insurancethat offers additional tax savings.

Another way to get affordable coverage is to purchase insurance with limited maximum benefits. These policies simply allow you to buy less protection at a lower cost. These policies often have no deductible or co-payment which means more "up front" coverage which helps offset the lower overall benefit levels. Core Health Insurance, Value Benefits and Basic Health Insuranceare all examples of this limited benefit approach to lower priced insurance. These policies are tempting to young people who may over value the up-front benefits and under-estimate the risks of catastrophic medical expenses. Ideally, these policies should be combined with a catastrophic major medical insurance. We are likely to see this type of insurance expand in the future as employers move toward offering only catastrophic health insurance while leaving the responsibility of covering smaller medical bills up to each employee.

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