Expert Commentary

Managing Major Medical Risks Following a Job Change

By providing personal lines clients risk management services in addition to insurance, agents and brokers can significantly expand their value to clients by helping them manage all their risks rather than just those covered by the policies they sell. A real-life case study reveals the important role an agent can play in providing risk management advice to a 60+ aged couple about what medical insurance options are open to them after a change of employment.


July 2004

Personal risk management is a joy to practice because it allows an agent to overcome the three disadvantages to consumers of traditional insurance services:

  1. The consumer is only able to get help managing those risks for which the selling agent has an insurance product available to cover them.
  2. The insurance policy being sold may not be as good a choice to manage a given risk as a non-insurance strategy (avoiding, reducing, retaining, etc.).
  3. The agent only gets compensated for selling a product. There is no compensation for risk management activities.

Unless the agent is willing to offer risk management services and get compensated for those services, the consumer who wants those services generally has no place to get them.

In the initial article I wrote for this IRMI.com column, I explained the 16 commitments I personally make to clients as part of my personal risk management practice. Three of those commitments are illustrated in this column in the risk management case study. One is the commitment to across-the-board expertise in all lines of insurance, including property, casualty, and life and health. The second is the commitment to acquire expertise on state and federal laws that impact personal risk. The third is the commitment to provide counsel on insurance purchased elsewhere. The following true story illustrates how much more you can do as an agent to help your clients if you start practicing risk management in addition to insurance.

Jan and Bill's Story

A new client, Jan, age 61, called me distraught. She had recently quit her job as a floral shop manager due to job-related stress. She had "stuck it out" in this job she hated for a long time for one reason only—health insurance. Jan had various existing health problems. A few were serious enough that she was "uninsurable" from an underwriting standpoint. But a week ago, she reached the end of her tolerance and quit, putting her and her spouse at risk regarding the loss of health insurance.

Her husband, Bill, age 63, had a job as a route salesman for several years. But the small company he worked for didn't offer group health insurance. So when Jan quit her job, she took the only option she had. She exercised her rights under federal Consolidated Omnibus Reconciliation Act (COBRA) law to continue covering her and Bill on her ex-employer's health plan.

The reason she was distraught when she called me was two-fold. First, she and Bill now had just one income. Yet, the cost to continue coverage under COBRA for the two of them in their 60s was $1,500 a month—$18,000 a year! Second, what would they do for health insurance when COBRA runs out after 18 months? She would be age 63 and still be uninsurable. Bill would be 64. They would not be eligible for Medicare until age 65.

Her personal lines insurance agent had stated she could not qualify for the health insurance products he had available. Therefore, under the traditional paradigm of "insurance agent," he could be of no further help—a perfect example of why I believe so strongly in the agent/risk manager concept.

So the risk management challenge under this scenario was:

  1. How to reduce the severe financial drain of health insurance costs on Jan and Bill's limited personal assets
  2. How to cover their Major Medical risks to age 65 as affordably as possible

Agents/risk managers should look at the big picture and identify solutions that agents operating in traditional ways cannot. What is needed in this scenario is:

  • Knowledge of pertinent state and federal laws
  • Knowledge of the individual health insurance market and its products
  • Expertise in individual health insurance coverage, particularly individual Major Medical and Medigap policies.

COBRA

Federal COBRA law allows for continuation of health insurance following the end of Jan's employment up to 18 months. But Jan, as employee, and Bill, as a covered dependent, each have their own separate 18-month option they can implement independently. The COBRA law permits one person to choose to continue COBRA for the full 18 months (i.e., Jan, who is uninsurable) and permits the other person to choose something different (i.e., Bill, who is reasonably healthy, although heavy, and probably could qualify medically for a personal Major Medical policy on his own).

HIPAA

The newer Health Insurance Portability and Accountability Act (HIPAA) mandates that anyone coming off a group plan has to be offered, once the COBRA 18-month period ends, the right to continue health insurance coverage under a "portability plan"—an individual health policy that could be continued indefinitely. For Jan's benefit, this portability product could not exclude preexisting conditions if there was no more than 63 days of uninterrupted coverage in the prior 18 months. This knowledge would help solve Jan's insurability concern.

Medicare and Medicaid Supplements

Basic Medicare contains several major coverage gaps, making the purchase of a Medicare Supplement (also known as "Medigap") policy critical. The majority of those supplemental policies have a substantial shortcoming. They do not pick up any expenses which exceed Medicare's allowed benefit for a given treatment. Therefore, to plug that coverage gap, it is important to know and recommend those Medicare supplement policies that pay the excess charges disallowed by Medicare. Finally, within 6 months of turning age 65, federal law gives Jan and Bill the right to receive the Medicare supplement of their choice, with no medical questions and no exclusions for preexisting conditions.

Health Savings Accounts (HSAs) and Major Medical Policies

To help Jan and Bill, it is important to know about the Health Savings Account (HSA) law—how it works, who is eligible. Any individual without health coverage through their employer who qualifies for and purchases an HSA-approved Major Medical policy can deposit money into an individual retirement account (IRA)-like savings vehicle called a Health Savings Account. Amounts deposited into the HSA are tax deductible (making those HSA dollars pre-tax dollars), and those HSA never-been-taxed dollars can be spent on medical expenses of almost any type, such as for dental work, false teeth, eyeglasses, or laser eye surgery, to name a few. It is important to know what constitutes an HSA-approved Major Medical policy—having deductibles ranging from $1,000 to $10,000 and offering a choice of 80 or 100 percent coverage. HSA rules let participants, such as Bill, deposit up to 100 percent of whatever deductible he chooses, plus an additional $500 a year if he is over age 55. It is important to know the insurance companies that are the best choice for HSA-approved medical products and to know that the best place to deposit HSA funds is with the health insurer who can electronically transfer HSA funds to pay medical providers, saving customers mountains of paperwork.

Putting It All Together: The Risk Management Plan

The strategy we decided on for Jan, who was medically uninsurable, was to exercise her COBRA rights for the full 18 months. Then immediately, without interruption, opt for the HIPAA portability plan which she would keep to age 65, with all preexisting conditions fully covered. At age 65, during that 6-month open enrollment period, choose the best Medicare supplement available that, by law, also would cover Jan's preexisting medical conditions. Jan's fears about losing health insurance coverage are thus permanently solved.

The strategy for Bill, who was likely insurable, was different. He would also exercise his COBRA right to continue coverage, temporarily. But I simultaneously had him apply for a Blue Cross HSA-approved Major Medical policy. We chose the $1,750 deductible option which gave the biggest discount in relationship to the amount of risk being taken. As soon as his Blue Cross policy was issued, Bill would drop his COBRA coverage. We also set up the Health Savings Account with Blue Cross to minimize claims paperwork. Bill would deposit $2,250 into his HSA—the $1,750 deductible and the $500 over-age-55 bonus amount—and write the entire $2,250 off his 2004 taxable income. Then at age 65, Bill would duplicate Jan's purchase of the best available Medicare supplement.

The Financial Impact of Risk Management

For Jan, the impact was primarily the end of her anxiety. Had she not been aware of all her options, she likely could have also faced thousands of dollars of uninsured medical bills after COBRA ended. For Bill, measuring the financial impact is easier. Had he kept COBRA the full 18 months at $750/month instead of just the 2 months until Blue Cross approved him, he would have spent $750 x 16 months = $12,000.

The price for the Blue Cross $1,750 deductible Major Medical policy was $250 a month for those same 16 months, or $4,000. If Bill had no medical treatment in 16 months, he would be $8,000 better off. If he had lots of care, the worst case would be the $1,750 deductible twice, or $3,500 plus the $4,000 premium, for a total worst-case cost of $7,500. This is still $4,500 better than the $12,000 cost prior to the application of risk management principles. (And, as an added bonus, don't forget that the $3,500 of deductible payments come from pre-tax dollars.)

What did all this relief from anxiety, coverage for preexisting conditions, and savings in just 16 months of $4,500 to $12,000 cost Jan and Bill? My added risk management fee was $300. It could have been $1,000. Still a pittance for the emotional and financial value received.

The big question I leave with you is this: Where can people like Jan and Bill seek this vital kind of personal risk management help? The unfortunate answer is, unless provided by a responsible agent, broker, or risk manager, "nowhere."


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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