Soaring Premiums -> Surging Underinsured

Drew Altman, Ph.D., president and CEO of the Kaiser Family Foundation, writes an excellent piece describing the serious erosion of health insurance benefits. Those who bought their own health insurance, from 2004 to 2007, still paid 52 percent of their health expenses, on average, out of their own pocket.

How is this possible? Through a clever insurance marketing tool the insurance industry refers to as a "buy-down." If insurance premiums get pushed up fast enough, the rational response of consumers is to beg for relief. Insurers commonly suggest that the increase can be mitigated or even eliminated by switching to a policy with higher deductibles or greater cost sharing, which provides less protection for the consumer. As a result, we have a surging number of Americans who are underinsured, many unknowingly. These people are a serious illness or accident away from a financial shock when they find the insurance they have been paying for provides far less protection than they need.

Imagine a family of four earning $70,000, and carrying individual coverage with a $3,500 deductible, 20 percent coinsurance to $6,000, and $40 office visit co-pay. If, in the midst of a snowstorm, their car slid into a bridge abutment, causing serious injuries to two family members, the family could be liable for two deductibles of $3,500 each, plus two out-of-pocket maximum's of $6,000 each, representing a total hit to the family budget of $19,000. How many families could come up with an amount equal to more than 27 percent of their annual income within 30 days of insurance making its payments to doctors and hospitals? And, in addition to these costs, these two individuals would be liable for $40 office visit co-pays each time they needed to see one of several physicians throughout the course of their recovery, even though they met their deductible and out-of-pocket maximum for the year. All of this is further exacerbated by the fact that the primary wage earner (or all wage earners) could be out-of-work while they recover. Not everyone has a ready supply of sick-leave that will ensure income continues uninterrupted during an extended convalescence. So, imagine having a debt of $19,000, coupled with a six week absence from work, and the pay that goes with it. Now that $19,000 debt represents almost 31 percent of the $61,923 this family would earn for 46 weeks of work.

It is generally recommended that health insurance should limit a family's medical expenses to not more than 10 percent of income, or should not include a deductible representing more than five percent of annual income. But pricing the policy described above, in Omaha, Nebraska, a relatively low cost health market, results in a premium that consumes 13.9% of a $70,000 annual income, so the tendency is to push deductibles and/or coinsurance maximums to even higher levels in order to make premiums affordable. Then, when serious illness or accident strikes, a family is suddenly liable for medical bills that represent 27 percent, or more of their income, after their health policy has paid its contractual obligation, and a family reeling from serious health problems is now burdened with an enormous financial problem.

The surge of the underinsured is not limited to those with individual coverage. Kaiser's research shows that the percentage of workers in small firms (with fewer than 200 employees) with very high deductibles ($1,000 or more for single coverage) increased from 16 percent in 2006 to 40 percent in 2009. That is far higher than the percentage of large firms (with 200 or more employees) whose employees have deductibles of this size. For large employers, those with deductibles of $1,000 or more grew from six percent in 2006 to 13 percent in 2009.

We've seen the trend in the percentage of people who are supportive of health reform growing, and the percentage of those opposed to reform declining. Certainly some of this trend results from people learning more about what the health reform proposal does contain -- an end to pre-existing condition exclusions and the rescission of health insurance policies, tax credits to make mandated healthcare more affordable, and a variety of measures to slow rising health care costs -- coupled with learning that it doesn't contain the death panels which Sarah Palin used to win the 2009 Lie of the Year.

But I also agree with Dr. Altman: Recent health premium increases -- 39 percent here, 40 percent here, and 60 percent here -- have probably done more to illustrate the cost of doing nothing, in the simple but graphic terms everyone can understand, than all the debate of the past year. That makes change more acceptable than the status quo. But Dr. Altman is also correct to point out that in the absence of health reform, these premium increases, while an enormous burden today, will be the reason many families have less comprehensive, less effective health insurance coverage tomorrow.