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EMPLOYEE BENEFITS

Do-It-Yourself Insurance

There is a competitive market for individual insurance policies. But you may want to think twice before sending your employees off on their own.
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For more than six years, the PGA Tour searched for a way out of a vexing sand trap: how to provide health insurance to the tour's 200 caddies. Like players, caddies are independent contractors. Sure, the PGA Tour could cover them under the group insurance policy it offers its 3,000 full-time employees, but since caddies work some years and not others, that would be an administrative nightmare. And then there was the cost: an estimated $1.4 million a year.

But not covering the caddies no longer seemed like a good option either. "As an organization, we want to support the caddies' well-being," says Andrea King, the tour's vice president of treasury and administration. Indeed, the caddies' health insurance woes already had proved to be a public relations problem for the PGA, when golf legend Tom Watson's longtime caddy, Bruce Edwards, died of Lou Gehrig's disease in 2004. Because Edwards had no health insurance, Watson paid tens of thousands of dollars out of his own pocket for his caddy's treatment. Heartwarming. But a player's generosity isn't exactly an insurance policy.

So King was intrigued when a benefits consultant suggested a new strategy last year: Give the caddies a predetermined amount of cash and let them buy their own individual policies from insurance companies. The caddies would have coverage, whether or not they were working, and the tour would avoid administrative annoyances and keep a lid on costs. "The light bulbs started popping," King says. "We started to realize that this could really work."

Individual health insurance? Aren't such policies hopelessly complicated and prohibitively expensive? Not necessarily. As the number of people without employer-sponsored insurance grows, and as so-called consumer-directed health care plans like health reimbursement arrangements (HRAs) and health savings accounts (HSAs) become more popular, insurance companies are rolling out new policies geared to people buying on their own--with little to no employer involvement. And benefits consultants are increasingly encouraging business owners to consider them.

Contrary to their reputation, individual insurance policies are often less expensive than group policies. In 2004, annual premiums for plans purchased individually averaged $2,268 for a single person and $4,424 for a family, according to America's Health Insurance Plans, an industry trade group in Washington, D.C. That's about half as much as the average annual premium for employer-sponsored coverage of individuals ($4,024) and families ($10,880). "Individuals can purchase a wide range of affordable coverage," says AHIP CEO Karen Ignagni, who expects insurers to offer more individual policies in the years to come as the trend toward consumer-directed health care gathers momentum.

Here's how it works: Companies create accounts for employees and each year fund the accounts with enough cash for employees to pay for all or a portion of their own policies. Under the plan the PGA Tour launched in 2005, caddies get an annual subsidy of $1,000 each, which should cover about half of the average single person's individual policy or about a quarter of the average family policy. The cost to the tour: $200,000, about one-seventh of the cost of the group plan. Paul Zane Pilzer, an economist and author of The New Health Insurance Solution, argues that with savings like that, employers should move toward canceling their group policies and encourage all of their employees to purchase their insurance individually.

But before you rush to cancel your group policy, there are some important factors to consider. For one, individual insurance is cheaper than group policies because, in 46 states, insurers may "medically underwrite" individual applicants--that is, examine the health of each applicant and adjust the premium accordingly. (In the four states that forbid underwriting--New York, New Jersey, Washington, and Maine--individual policies tend to be extremely expensive, even for healthy applicants.) Those who make it through the medical underwriting process--about 85% of all applicants, according to AHIP--tend to be young and healthy, and therefore worthy of a cheaper premium. They're also more likely to be willing to take bare-bones policies--hence the relatively low average premiums.

An applicant with a chronic condition or one who is at risk for developing one, on the other hand, may face what's known as an uprating--a boost in the premium of 15% to 50%. Or the applicant may face an exclusion, in which the insurer provides coverage for everything except for what's likely to be an expensive health problem. (In other words, a diabetic may be able to obtain only a policy that doesn't cover expenses relating to the diabetes.) An insurer can also reject an application and deny coverage altogether. At this point, 88% of insurance applicants are approved, about three-quarters of them without uprating or exclusions, according to AHIP. It sounds promising, but bear in mind that most brokers discourage likely rejects from even bothering to apply.

If you have employees who are older or in less-than-perfect health, they may have a problem obtaining meaningful individual insurance.

For entrepreneurs, this complicates matters considerably. If you have employees who are older or in less than perfect health, those employees may have a problem obtaining meaningful individual insurance. What will you do with employees who won't qualify for individual insurance? And how will you handle the bellyaching of those who are uprated?

Indeed, even healthy employees may face difficulties in the individual market down the road. Insurers are forbidden by federal law from "re-underwriting" people once they've been accepted into a policy. But they are allowed to reexamine them if they switch plans. A low-frills policy that looked like a bargain when you were young and healthy may be less appealing as you grow older. And no matter what, insurers are permitted to increase premiums with age--so business owners who hold the subsidy steady are in effect providing less of a benefit with each passing year.

And there's one more problem with nudging employees out into the individual market: They might not be ready for it. Two-thirds of employees with health insurance prefer that their employers select health plans for them rather than offer them a cash account option, according to a September 2005 survey from the Commonwealth Fund, a New York City-based think tank. "To the extent that your competitors continue to offer group health benefits, you may have difficulty attracting and retaining high-caliber employees," says Joe Martingale, national leader for health care strategy at the benefits consulting firm Watson Wyatt. Of course, people who don't have any insurance at all might feel differently about the matter.

At the PGA Tour, about 45 caddies out of 200 have signed up for the new plan. John Buchna, 50, who's caddied for Joey Sindelar for 22 years, was among the first to sign up. His new policy is not exactly a bargain--the premium runs $5,000 a year--but the Tour's $1,000 subsidy made it affordable for him. "It's a very kind gesture," says Buchna. "But I'm just anxious to see what they'll do next year."

Business owners worried about their own health care problems might want to wait and see how the individual market shakes out over the next few years. Martingale, for his part, remains skeptical, and says he won't recommend such policies to his clients until premiums are affordable and stable for both the sick and the healthy. "Employers look forward to the day when they can get out from under the terrible burden that providing health benefits represents," he says. "But that day is not now."

Flying Solo

Individual insurance policies are becoming easier to find--though prices vary widely from state to state. Here's a sampling of average annual premiums.

State Single Coverage Family Coverage
New Jersey $6,048 $14,403
Massachusetts $5,257 $10,126
Arkansas $3,435 $5,821
Texas $2,836 $4,940
Illinois $2,591 $4,991
Wisconsin $2,373 $4,462
Nevada $2,364 $5,096
Colorado $2,198 $4,216
Pennsylvania $1,989 $3,916
California $1,185 $3,972

Resources

To read America's Health Insurance Plans' study on individual insurance, go to ahipresearch.org. For more on Paul Zane Pilzer's The New Health Insurance Solution, including a state-by-state guide for shoppers, go to tnhis.com.

Last updated: Dec 1, 2005




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