HEALTH INSURANCE

Buying Your Own Health Insurance
Kiplingers.com
by Kimberly Lankford

If you work for yourself, retire before Medicare kicks in, or don't have health insurance through your job, finding individual coverage that you can afford is as much a function of the state in which you live as it is the state of your health. It often comes as a rude awakening to look for insurance on your own, especially if you've been spoiled by years of relatively carefree coverage through your employer. But that's been exacerbated over the past ten years as states such as Maine have passed laws designed to guarantee all state residents access to coverage.

Some states chose to pass guaranteed-issue laws, which forbid insurance companies from rejecting people based on the condition of their health. Others elected to go with a "community rating" system, which requires insurers to charge everyone the same rates, regardless of health, or otherwise limits their ability to raise premiums. But these well-intentioned laws have often backfired, forcing some healthy people to pay more in insurance premiums than the monthly mortgage on a small house. And it's even tougher to find an affordable policy if you're in poor health.

Spreading the risk

Insurance usually works because companies can spread their risk over a wide range of people. The healthy ones end up paying more in premiums than they submit in claims, and the difference helps to subsidize sicker people with more expensive claims. Healthy clients accept the situation because they usually pay lower premiums than higher-risk clients -- and they never know when they might become sick themselves.

But when insurance companies can't reject anyone or adjust rates based on risk, they end up charging everyone more. That's what happened in Maine after 1993, when the state passed a guaranteed-issue law. "Rates shot up dramatically because insurers could no longer cherry-pick," says Tom Wright, a health-insurance broker in Yarmouth, Maine. When prices rose, many healthy people elected to take their chances and drop their coverage, while sick people stayed on. Insurers then had to raise rates even higher. "We've entered an actuarial death spiral, and it's accelerating," says Wright.

As the risk pools got worse, many companies decided it wasn't profitable to do business in the state and pulled out.

In Maine, insurers may adjust premiums a bit based on the age of the insured. But in New Jersey, everyone has to pay the same rate for similar coverage, whether you're a 25-year-old triathlete or a 61-year-old who has had quadruple-bypass surgery. That means everyone is able to buy insurance -- but hardly anyone can afford it.

New Jersey residents could cross the Delaware to take refuge in Pennsylvania, where individuals are able to buy comparable health-insurance coverage for a little more than half as much. California -- another large state with a highly competitive health-insurance market and no community-rating or guaranteed-issue laws -- is also friendly to individuals who are in good health. You can find several options online through eHealthInsurance.com.

A buyer's guide

With state policies varying all over the map, there's no sure route to finding affordable health coverage on your own. If you happen to live in Kentucky, Maine or Washington State, you'll have few choices of any kind. In rural areas of Texas and other states, you can't always save money with an HMO because there aren't enough people to make it economical. Association plans, which sometimes offer good deals, are unavailable in several states. And your state may limit your options for raising deductibles or cutting back on coverage to lower the price.

But you have to start somewhere, so follow these steps. Depending on where you live, they may lead you to a dead end -- or to a far better deal than you have now.

Use a health-insurance broker who knows your market. Brokers not only will help you shop for price, they'll also know if a company has a reputation for raising premiums or hassling policyholders who file claims. If necessary, a broker can find a group for you to join or help you sign up for your state's high-risk pool.

Finding a broker can be a task in itself. Many life- and auto-insurance agents don't deal in health insurance because the rules are complicated and the commissions low. But they may be able to refer you to a specialist. The National Association of Health Underwriters can also put you in touch with member agents in your area.

Check out prices on the Web. In most states, eHealthInsurance.com can give you immediate quotes from several companies, including many BlueCross/BlueShield plans, and will also spell out what benefits you'll get for the price. Another site, DigitalInsurance.com, lists prices for a different group of health-insurance companies. Both sites are most useful in competitive markets such as California, but won't help much in Maine and other restrictive states. Taking a peek at the sites may be worth your while even if you're happy with your current plan.

Visit your state insurance department's Web site. You'll probably find a list of companies selling individual coverage in your state, including those that aren't handled by brokers. For example, many BlueCross/BlueShield plans -- often one of the few choices available in highly restrictive states -- prefer to deal directly with customers, or offer such low commissions that they aren't worth a broker's time. The insurance department may provide shopping tips for your state, as well as insurance-company complaint records.

Look into your state's insurance pool if you have been turned down for coverage because of your health. In Texas, for example, anyone who can't get coverage elsewhere must be covered by the high-risk pool, although prices can be steep. States with guaranteed coverage, such as New Jersey, don't have high-risk pools because regular health-insurance companies are required to cover everyone.

Consider taking advantage of federal COBRA legislation if you have left a company that provided group coverage. If your previous employer has 20 or more employees, the company is required by law to let you continue your group coverage for up to 18 months. Some states have similar laws for smaller employers. You generally foot the entire bill yourself, plus up to 2% in administrative charges, which can increase your costs considerably.

COBRA coverage tends to be a good deal if you're in poor health or in a market with few choices, or you want to stick with your current doctors. But because group plans often have more bells and whistles than you'd buy yourself, you might find a better deal by shopping on your own.

Form your own small group if that's an option. Even for tiny groups, employer group policies are often subject to different rules, are more competitive, and offer lower prices than individual policies.

In New Jersey you can form a group with as few as two employees, including yourself, as long as each employee works a minimum of 25 hours per week and you pay the employer's share of social security taxes for your workers. And group policies can cost 20% to 50% less than individual coverage, says Barbara Ziegler, a health-insurance agent in Brick, N.J. In Washington, another state with few choices in individual health insurance, self-employed people can form a group of one and have a much wider selection with more competitive prices. But you have to submit tax forms that prove you really are a business.

Join an association that has group coverage. In some areas, such as Rochester, N.Y., the local chamber of commerce offers some of the best health-insurance options around, says Alan Ziegler, an employee-benefits consultant and broker.

Association plans tend to be more attractive in states such as New York that don't have many options for individuals. In states where there's more competition, they can end up being magnets for sick people, with spiraling prices. You may not have this option at all, because some state laws are so restrictive that it's "virtually impossible" for association plans to operate, says Jessica Waltman of the National Association of Health Underwriters.

If all else fails and you don't want to go without coverage, you may have to bite the bullet and get a job that offers health insurance as an employee benefit.

How Your State Stacks Up

If you're on your own and in good health, you'll have the toughest time finding affordable coverage in New York or Vermont. Those states have guaranteed-issue laws that require insurers to cover anyone who applies, regardless of health or community rating -- which means that insurers have to charge everyone the same premiums. Such a combination adds up to little competition and high prices.

States with no guaranteed-issue laws or community rating (where affordable insurance is easier to come by): Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Illinois, Kansas, Maryland, Mississippi, Missouri, Montana, Nebraska, Nevada, North Carolina, Oklahoma, South Carolina, Tennessee and Texas.

All contents 2003 The Kiplinger Washington Editors, Inc.

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