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Health Insurance for Self-employed

January 1, 2010

Taking a smarter approach in 2009

Self-employed people consistently cite concerns about health insurance among their biggest business worries. Health care costs continue to rise every year and a multitude of new laws change the health insurance field almost monthly. It is clear that the strategies we used in the past to manage costs and find better coverage do not work as well now. Here are some fresh ideas to help you make better health insurance decisions over the coming year.

Recognize that you are not alone. Health insurance is a "big deal" to businesses of every size. Starbucks Corporation says that they spend more on health insurance than on coffee beans. For a one person business, health insurance is likely to be one of your largest business costs. Health insurance is almost certainly going to be your fastest growing cost; increasing at more than twice the rate of inflation. Fortunately, there are some health insurance firms and advisers who are sensitive to the issues facing self-employed persons and can offer some common sound solutions. Groups ranging the American Medical Association and the U.S. Chamber of Commerce have joined in the cause to support a number of innovative reform proposals to address the problem.  These measures are collectively referred to as "consumer-driven health care". Take a cue from the measures adapted by larger firms and do not be afraid to follow some of today's innovative consumer-driven health insurance trends. The expansion of uninsured health benefit plans like HSAs, HRAs and PPO discount plans that separate routine health care from the insurance companies are one example of trends that are working to cut costs and improve benefits. Another cost-saving trend is to allow the selection of a separate health plans for each individual member of the household.  Using the same health insurance plan to cover everyone in the family does not make sense in today's market. Most consumer-driven health plans today allow each person should select the health plan that provides the best value on an individual basis.

Develop a Realistic Budget Perhaps the biggest mistake that self-employed people make is to improperly budget for health care.  Large firms will spend $6,000 to $10,000 per employee this year for health benefits. Smaller firms tend to spend much less, typically between $3,000 and $4,000 per year.  Despite these realities, many self-employed people budget more for their auto expenses than for health care expenses. It is possible to trim health insurance costs without affecting quality of care, but be realistic in considering your personal medical care needs as well as the business' cash flow and the real cost of health insurance and out-of-pocket expenses. But if you are looking for full-priced health coverage for a family that costs less than your car payment, then you are likely to be disappointed. If your business is just starting out or experiencing cash problems, then develop a less expensive short term health insurance strategy until you have the option to consider more comprehensive long term solution.

Understand the law. Most people are surprised to learn that health insurance is almost entirely controlled by state law and that those laws vary dramatically from state to state. A self-employed person in Delaware, for example, might be able to buy a catastrophic health insurance policy for less than $100 per month while a similar business person a few miles away in New Jersey must spend more than $400 for the even the lowest cost minimum coverage insurance.  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. Start by knowing the law in your state that relate to your own medical conditions. Links to the various state insurance departments are posted at www.MedSave.com. Do not assume that all laws apply to all types of health insurance. International health 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 the laws that apply to businesses with more than one employee are entirely different than the rules that apply to one person businesses (or husband and wife businesses). 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 pre-existing medical conditions, make sure that you understand the provisions of federal law known as HIPAA and COBRA.  Finally, it is also necessary to consider a "worst-case" scenario in your planning. Almost of all bankruptcies are directly caused by catastrophic medical costs, and more than half of these people are covered by health insurance! Asset protection and retirement planning are intimately connected to health insurance in sound financial planning today.

Develop a strategy before shopping. The old strategy of calling every insurance agent in the local phone book and then surfing the Web for hours for quotes is unlikely to help you find the best health insurance unless you narrow the focus to the type of coverage that will work best in your unique situation. Start by developing a sound strategy based on sound business principles.  First, consider that insurance works best when it covers rare events that could be financially devastating. Many people use health insurance to cover small routine bills and wind up paying more than necessary for their health care. If you are using health insurance to cover recurring small bills, doctor visits and prescription medications, then you are not getting the best health insurance value for your money. Remember that it costs an insurance company about $1.75 to pay every $1.00 of small claims. Who pays that additional cost? You do, of course, in extra premiums. To get the most value from your health insurance, it is necessary to raise the deductible to a range of $1,000 to $5,000 depending on your personal situation.  Second, make sure that you are getting the best prices on all of your medical services. Just because your doctor gives you a bill for $120 does not mean that $120 is the price paid by most patients. Actual payments tend to run from 50% to 65% of billed amounts. Most people know that medical providers belong to Preferred Provider Networks that negotiate the payments in advance with each provider and that health insurance companies pay this lower price.  But many people do not know that is it possible to pay the lower price without being a member of the health plan. If you have significant out-of-pocket expenses for medical, dental, prescription, chiropractic care, then it makes sense to find a way to pay PPO prices instead of cash-payer prices.   Next, make sure that all of your medical payments are made on a pre-tax basis. If you are a C-corporation or have employees, this means making payments through a Health Reimbursement Arrangement (HRA). If you are a sole proprietor, this usually means making payments through a Health Savings Account (HSA).  While both of these are relatively new to the health care field, they are already mainstream with large corporations and will soon be the norm for businesses of all sizes.

Avoid the gimmicks. Unfortunately there are a few perennial "bad guys" in the health insurance market for self-employed people and any number of new gimmicks that come and go at the speed of the Internet. Self-employed people tend to be more isolated in terms of health insurance purchase decisions and are therefore more susceptible to scams and lower quality offerings. Avoid the policies marketed by the NIFB and similar associations.  Many of these are insured by Mega Life or its affiliates. If age-based or tier rating is a concern, avoid Golden Rule Insurance Company and the Fortis / Assurant Insurance companies if possible1. Make sure to identify plans that are limited benefit coverage 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. MedSave.com offers a number of additional resources that may help refine a strategy and provide more information about low cost high quality health insurance plans. MedSave.com was launched in 1997 primarily to help members of the building construction and remodeling industry. Since then, over 40,000 people in all 50 states and many occupations have used the service to enroll in coverage online, access personal enrollment support by telephone or stay informed about these important issues through our opt-in OnlineAdviser newsletter.

Additional Resources:

"Finding Health Insurance to Cover Pre-existing Medical Conditions"

"Surviving a Layoff"

Ehealthdiscountplan.com

Healthsavingsaccount-hsa.com

Footnote:

1 MedSave.com relies primarily on user feedback as the basis for these comments, so it may be best to check directly with an independent consumer protection agency before selecting a health insurance company.  See www.NAIC.org or www.BBB.org for additional information.


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