SEARCHING FOR COVERAGE AT 63 After a decade of paying steeply rising premiums for a health-insurance policy, Carolyn Weaver has been shut out of the market for a major-medical policy. She has written to many members of Congress but has gotten no response, not even a form letter. Photo by Bill Minarich.

If you live in the wrong state, have any type of illness, or are too young (for Medicare), too rich (for Medicaid), or too broke (to pay steep premiums), you might be shut out of the health-insurance market. None of those factors will stop you from getting group health insurance through most employers, but they can entrap the 16 million or so Americans who buy their own policies. This group includes the self-employed, employees of small firms that don't offer medical insurance, people between jobs, young adults moving off their parents' policies, widowed or divorced people who have lost their spouse's group coverage, and people who retire early and lose their group health coverage before they're 65 and old enough for Medicare.

If you need to buy your own individual or family policy, you're entering a perilous market in which good advice is scarce. This report will tell you about the traps you'll face and how they can affect your premiums and coverage.

The companion piece, Shopping for your policy, gives guidance about choosing coverage, based on a Consumer Reports study of policies available in six U.S. cities, funded by The Commonwealth Fund, a New York-based philanthropic organization. If you're turned down by insurance companies, you can consult the table in State safety-net options for information.

Needing to buy your own health insurance makes you one of the unwanted children of the insurance marketplace. Consider the case of Carolyn Weaver, who over the last decade has fallen into virtually every trap in this market. In 1992, Weaver bought her own health-insurance policy from Washington National Insurance Co., under an arrangement called a "group discretionary trust" (see "Trap 2," below). With a deductible of $500, the policy cost $1,665 a year and because a test revealed that Weaver had a blood factor that might lead to rheumatoid arthritis, it excluded coverage for arthritis and for most diseases of the spine.

Shortly after Weaver got the policy, Washington National hiked her premiums almost 64 percent, attributing the increase to the higher cost of medical care. Premiums kept rising and Weaver had to increase her deductible to $5,000, to afford the policy. By this year, because of Weaver's advancing age (she is now 63) and rising health-care costs, the annual premium had reached $18,500. The final straw: Washington National has canceled her coverage because it is leaving the individual-health-insurance market.

Weaver has been scouring the market for new insurance, but because other health problems have developed, she has had a tough time finding a carrier willing to insure her at a price she can afford. She may have to settle for a policy that covers some basic hospital and surgical care but not routine office visits or drugs.

Few insurance carriers want to insure people like Weaver. In employer group policies, healthy and sick people are mixed in the same pool, and premiums paid by healthy people help cover the claims of those who are ill. But with individual insurance, there's no one to subsidize those who need care. As a result, insurers say that even high premiums are often insufficient to cover the cost of care when policyholders get sick.

Many companies avoid writing policies in the individual market, or, when they do write them, they devise strategies that limit the company's risk and the consumers' ability to obtain coverage for the care they need. "It's a difficult market to manage," says Susan Morisato, senior vice president at Bankers Life and Casualty, in Chicago, which is also getting out of the business of selling individual major-medical policies. Other companies have found ways to take advantage of gaps in state regulations and offer policies that seem to be good deals. The good deals often vanish when people get sick or injured and begin to file claims.

These strategies create traps for consumers, who may have to struggle to stay insured.

Most individual policies are medically underwritten. That means carriers look closely at an applicant's medical record and turn down people whose conditions pose too much risk. Most companies deny coverage to people with serious conditions such as cancer, diabetes, coronary artery disease, or multiple sclerosis. But they may also turn down applicants with ailments like hay fever and ear infections. To underwriters, covering people with medical problems is like insuring a burning house.

"We have to have enough money to cover everyone's claim," says Ray Haase, senior vice president of Trustmark Insurance Co., in Lake Forest, Ill., another company that has left the individual-policy market. "One way to do that and keep the premiums lower is to exclude coverage for conditions people already have."

When a company does accept a person with medical conditions, chances are it will exclude coverage for those illnesses through a waiver or a rider. If you have asthma, for example, a carrier may exclude coverage for that disease, or for all lung conditions, or for the whole respiratory system. Unlike the more familiar pre-existing conditions clauses for new members of group insurance policies, which often exclude coverage for three or six months, these waivers are usually permanent. There is no coverage for as long as you hold the policy.

Sometimes insurance companies will add a surcharge for insuring a person with potentially expensive conditions. In insurance jargon, this is called rating up and may increase premiums by 20 to 100 percent. If you're overweight, an insurance company might rate you up. The more overweight and outside the norms of the height-and-weight chart, the higher the surcharge.

Recently, the Kaiser Family Foundation and the Institute for Health Care Research and Policy at Georgetown University, in Washington, D.C., asked 19 insurance companies and HMOs in 8 cities to consider what they told them were seven hypothetical applicants who had a variety of mild and serious health conditions. More than one-third of the applications were rejected. Only 10 percent were offered "clean" coverage, without exclusions or surcharges.

The study also found that in some states, like California and Indiana, which prohibit exclusion riders, carriers tended to reject more applicants outright or add more surcharges. "Simply restricting one option for companies doesn't have much net effect on peoples' health security," says Karen Pollitz, who directed the study. Insurance companies just find other ways to avoid expensive claims.

Some insurance companies sell health policies that appear to be group coverage when in fact they are not. Carriers set up a master policy under what's called a group discretionary trust, in a state that has little or no regulation over the types of policies that can be sold. The carriers then go into other states and sell health coverage, but the policies are governed by the regulations--or lack of them--in the state that holds the master policy. Many associations use this device, but legitimate ones, including professional societies, are not set up only to sell insurance.

Some insurers also use associations as a device to escape rate regulations. "These policies give the appearance of being a group product, but in reality they are individual products," says Torre Grissom, a legislative assistant at the Florida Department of Insurance. "These are the kinds of groups no one would ever think of joining. The only place you hear about them is in your insurance agent's office."

Many of these associations take on the appearance of legitimate groups by offering discounts, newsletters, and other benefits. "Sometimes it's hard for consumers to separate real associations from phony ones," says Mila Kofman, an assistant research professor at Georgetown University and an expert in association health plans.

Consumers get into trouble with some association policies when they become ill. Here's what happens: A company offers an attractively priced association policy to entice the cream of the individual market--healthier people who are not likely to generate expensive medical claims. But once policyholders start filing claims, some companies may selectively target them for individual rate increases, a practice called reunderwriting, or they may raise rates for everyone who has the same policy.

When premiums rise, policyholders who are healthy find other, less expensive coverage. For sick people left with the old policy, what insurance companies call a "death spiral" may begin: Premiums climb until policyholders are forced to drop coverage, or until the insurer cancels the policy. Those sick policyholders may have no options. "People often forget that individual coverage is a one-shot deal," Grissom says. "If their health deteriorates, they can't get it again."

Nearly 150,000 Americans get health insurance through their state's high-risk pool--the only place where those in the worst health can find a policy. In the 29 states that have such pools (see State safety-net options), the trick is getting in.

Risk-pool applicants must usually have at least one--sometimes two--rejection letters from a regular insurance carrier in the state. In some states you can qualify if a regular market carrier offers a policy with a premium that is higher than what you would pay in the risk pool.

In South Carolina, the quoted rate from a private carrier must be 150 percent of the risk-pool rate; in Missouri it must be three times the rate. Some risk pools also take people who have been offered insurance policies with exclusion riders that limit their coverage.

If you qualify for a risk-pool policy, you usually have to wait six months to be covered for a pre-existing medical condition. In some states the wait can be as long as a year.

Some risk-pool policies have low lifetime limits--the maximum a policy will pay over a policyholder's life. In California, the lifetime limit is $750,000, while in Colorado, Louisiana, Mississippi, Oklahoma, and Washington, it's $500,000.

Policies may also have low annual maximums. In California's pool, it's $75,000. Someone with a single severe illness or several serious chronic conditions could easily run out of coverage.

But for many people, the biggest problem is the cost of the premium. "The pool is not designed to be an affordable program," says Steve Browning, executive director of the Texas Health Insurance Risk Pool. In Texas, a single person buying a policy with a $500 deductible can pay as much as $1,000 a month for coverage, depending on his or her age.

Some pools cap enrollment, creating waiting lists for those who need this insurance. California's pool had a waiting list of 7,000 until last fall, when a special $5 million appropriation from the legislature made it possible to cover those on the waiting list. Like many states, California has a large budget deficit, so no additional money is in sight. A new queue is developing and now 1,000 people are waiting for coverage. Nearly 20 percent of California's population is uninsured at some time during the year.

Pools in Illinois and Louisiana limit the number of people who can join and are currently closed to most new enrollment. Florida's high-risk pool has been closed for 10 years despite the growing number of uninsured people in the state. "Our insurers are reluctant to open the pool because they think they are going to be saddled with the costs," says Kevin McCarty, deputy commissioner for the Florida Department of Insurance.

Lack of money is at the root of the high cost and restrictive coverage of risk-pool policies. Even though policyholders pay high premiums, those premiums don't cover the cost of insuring the very sick people who are in the pool. So pools must rely on additional money from general tax revenues, taxes assessed on insurance companies, a tobacco-products surtax, or special funds such as the tobacco settlement. In most state legislatures, it's a struggle to get additional money. "Nobody wants to pay for these people," says Deborah Chollet, a senior fellow at Mathematica Policy Research, a health-policy research firm in Washington, D.C.

Chollet says risk pools can be made to work better for people if adequate funding is available. A good example is Minnesota, where nearly 30,000 people get comprehensive coverage at lower rates than are available in other pools. Minnesota caps premiums at 125 percent of the standard premiums in the state; most other states set caps at 150 to 200 percent. The lower premiums attract more people, and the larger number of people in the pool help spread the risk.

When Congress passed the Health Insurance Portability and Accountability Act (HIPAA) in 1996, it mandated that all states provide a place of last resort for people to buy health insurance--a kind of safety net for people seeking coverage. HIPAA did not, however, come close to solving the problems people face and essentially left a dismal marketplace unchanged. The law did not ensure, for example, that everyone needing health insurance could get a policy regardless of health status. HIPAA set minimum standards for providing coverage of last resort, but it let each state devise its own rules. The result has been a hodgepodge of regulations that differ from state to state and provide varying levels of assistance for consumers.

Only 11 states and the District of Columbia guarantee all residents the right to buy health insurance no matter how sick they are. Twenty-two states guarantee a policy to residents who are uninsurable simply because of their health, as well as to people who have satisfied HIPAA's complex rules. That means they must have left a group plan, paid their own premiums for COBRA (Consolidated Omnibus Budget Reconciliation Act) coverage, and applied for new coverage within 63 days after leaving the group plan (see part I of our series, Crisis in health insurance, from July 2002).

The most restrictive states--such as Alabama, Arizona, Delaware, and West Virginia--permit only residents who have satisfied HIPAA requirements to buy what is called a guaranteed-issue policy, that is, a policy you can buy regardless of any medical condition you have.

Several states limit the amount carriers can charge for policies of last resort, but even these limits produce some very expensive policies. So if you qualify for a guaranteed-issue policy, you may find the premiums--which can be as much as twice the average rates charged by carriers in the state--out of reach.

The Congressional Budget Office estimated that HIPAA would help as many as 3 million people. Although there has been no national study, it's safe to say that the total number of people helped under the law is nowhere near the original estimates. HIPAA was designed to provide a safety net. But, notes Karen Pollitz, it "hasn't quite done it yet."

NO SOLUTIONS IN SIGHT

In the individual market there are no teammates to help spread the risk of paying for care, and people who need coverage often have expensive health conditions. Insurers who do business in this market cannot sell policies at a loss. Piecemeal reforms which have been offered so far will not easily solve the problems of the growing number of people who need policies. What's needed is coverage for everyone in a pool that spreads the risk--and the funding to make that feasible.