Hazardous health plans

Coverage gaps can leave you in big trouble

Last updated: May 2009

Janice and Gary Clausen

Many people who believe they have adequate health insurance actually have coverage so riddled with loopholes, limits, exclusions, and gotchas that it won't come close to covering their expenses if they fall seriously ill, a Consumer Reports investigation has found.

At issue are so-called individual plans that consumers get on their own when, say, they've been laid off from a job but are too young for Medicare or too "affluent" for Medicaid. An estimated 14,000 Americans a day lose their job-based coverage, and many might be considering individual insurance for the first time in their lives.

But increasingly, individual insurance is a nightmare for consumers: more costly than the equivalent job-based coverage, and for those in less-than-perfect health, unaffordable at best and unavailable at worst. Moreover, the lack of effective consumer protections in most states allows insurers to sell plans with "affordable" premiums whose skimpy coverage can leave people who get very sick with the added burden of ruinous medical debt.

Just ask Janice and Gary Clausen of Audubon, Iowa. They told us they purchased a United Healthcare limited benefit plan sold through AARP that cost about $500 a month after Janice lost her accountant job and her work-based coverage when the auto dealership that employed her closed in 2004.

"I didn't think it sounded bad," Janice said. "I knew it would only cover $50,000 a year, but I didn't realize how much everything would cost." The plan proved hopelessly inadequate after Gary received a diagnosis of colon cancer. His 14-month treatment, including surgery and chemotherapy, cost well over $200,000. Janice, 64, and Gary, 65, expect to be paying off medical debt for the rest of their lives.

For our investigation, we hired a national expert to help us evaluate a range of real policies from many states and interviewed Americans who bought those policies. We talked to insurance experts and regulators to learn more. Here is what we found:

  • Heath insurance policies with gaping holes are offered by insurers ranging from small companies to brand-name carriers such as Aetna and United Healthcare. And in most states, regulators are not tasked with evaluating overall coverage.
  • Disclosure requirements about coverage gaps are weak or nonexistent. So it's difficult for consumers to figure out in advance what a policy does or doesn't cover, compare plans, or estimate their out-of-pocket liability for a medical catastrophe. It doesn't help that many people who have never been seriously ill might have no idea how expensive medical care can be.
  • People of modest means in many states might have no good options for individual coverage. Plans with affordable premiums can leave them with crushing medical debt if they fall seriously ill, and plans with adequate coverage may have huge premiums.
  • There are some clues to a bad policy that consumers can spot. We tell you what they are, and how to avoid them if possible.
  • Even as policymakers debate a major overhaul of the health-care system, government officials can take steps now to improve the current market.

Good plans vs. bad plans

We think a good health-care plan should pay for necessary care without leaving you with lots of debt or high out-of-pocket costs. That includes hospital, ambulance, emergency-room, and physician fees; prescription drugs; outpatient treatments; diagnostic and imaging tests; chemotherapy, radiation, rehabilitation and physical therapy; mental-health treatment; and durable medical equipment, such as wheelchairs. Remember, health insurance is supposed to protect you in case of a catastrophically expensive illness, not simply cover your routine costs as a generally healthy person. And many individual plans do nowhere near the job.

For decades, individual insurance has been what economists call a "residual" market—something to buy only when you have run out of other options. The problem, according to insurance experts we consulted, is that the high cost of treatment in the U.S., which has the world’s most expensive health-care system, puts truly affordable, comprehensive coverage out of the reach of people who don’t have either deep pockets or a generous employer. Insurers tend to provide this choice: comprehensive coverage with a high monthly premium or skimpy coverage at a low monthly premium within the reach of middle- and low-income consumers.

More consumers are having to choose the latter as they become unemployed or their workplace drops coverage. (COBRA, the federal program that allows former employees to continue with the insurance from their old job by paying the full monthly premium, often costs $1,000 or more each month for family coverage. The federal government is temporarily subsidizing 65 percent of those premiums for some, but only for a maximum of nine months.) Consumer Reports and others label as "junk insurance" those so-called affordable individual plans with huge coverage gaps. Many such plans are sold throughout the nation, including policies from well-known companies.

Aetna’s Affordable Health Choices plans, for example, offer limited benefits to part-time and hourly workers. We found one such policy that covered only $1,000 of hospital costs and $2,000 of outpatient expenses annually.

The Clausens’ AARP plan, underwritten by insurance giant United Health Group, the parent company of United Healthcare, was advertised as "the essential benefits you deserve. Now in one affordable plan." AARP spokesman Adam Sohn said, "AARP has been fighting for affordable, quality health care for nearly a half-century, and while a fixed-benefit indemnity plan is not perfect, it offers our members an option to help cover some portion of their medical expenses without paying a high premium."

Nevertheless, AARP suspended sales of such policies last year after Sen. Charles Grassley, R-Iowa, questioned the marketing practices. Some 53,400 AARP members still have policies similar to the Clausens’ that were sold under the names Medical Advantage Plan, Essential Health Insurance Plan, and Essential Plus Health Insurance Plan. In addition, at least 1 million members are enrolled in the AARP Hospital Indemnity Insurance Plan, Sohn said, an even more bare-bones policy. Members who have questions should first call 800-523-5800; for more help, call 888-687-2277. (Consumers Union, the nonprofit publisher of Consumer Reports, is working with AARP on a variety of health-care reforms.)

United American Insurance Co. promotes its supplemental health insurance as "an affordable solution to America’s health-care crisis!" When Jeffrey E. Miller, 56, of Sarasota, Fla., received a diagnosis of prostate cancer a few months after buying one of the company’s limited-benefit plans, he learned that it would not cover tens of thousands of dollars’ worth of drug and radiation treatments he needed. As this article went to press, five months after his diagnosis, Miller had just begun treatment after qualifying for Florida Medicaid. A representative of United American declined to comment on its products.

Even governments are getting into the act. In 2008, Florida created the Cover Florida Health Care Access Program, which Gov. Charlie Crist said would make "affordable health coverage available to 3.8 million uninsured Floridians." But many of the basic "preventive" policies do not cover inpatient hospital treatments, emergency-room care, or physical therapy, and they severely limit coverage of everything else.

The Wild West of insurance

Jim Stacey

Compounding the problem of limited policies is the fact that policyholders are often unaware of those limits—until it’s too late.

"I think people don’t understand insurance, period," said Stephen Finan, associate director of policy at the American Cancer Society Cancer Action Network. "They know they need it. They look at the price, and that’s it. They don’t understand the language, and insurance companies go to great lengths to make it incomprehensible. Even lawyers don’t always understand what it means."

Case in point: Jim Stacey of Fayetteville, N.C. In 2000, Stacey and his wife, Imelda, were pleased to buy a plan at what they considered an "incredible" price from the Mid-West National Life Insurance Co. of Tennessee. The policy’s list of benefits included a lifetime maximum payout of up to $1 million per person. But after Stacey learned he had prostate cancer in 2005, the policy paid only $1,480 of the $17,453 it cost for the implanted radioactive pellets he chose to treat the disease.

"To this day, I don’t know what went wrong," Stacey said about the bill.

We sent the policy, along with the accompanying Explanation of Benefit forms detailing what it did and didn’t pay, to Karen Pollitz, research professor at the Georgetown University Health Policy Institute. We asked Pollitz, an expert on individual health insurance, to see whether she could figure out why the policy covered so little.

"The short answer is, 'Beats the heck out of me,' " she e-mailed back to us. The Explanation of Benefit forms were missing information that she would expect to see, such as specific billing codes that explain what treatments were given. And there didn’t seem to be any connection between the benefits listed in the policy and the actual amounts paid.

Contacted for comment, a spokeswoman for HealthMarkets, the parent company of Mid-West National, referred us to the company Web site. It stated that the company "pays claims according to the insurance contract issued to each customer" and that its policies "satisfy a need in the marketplace for a product that balances the cost with the available benefit options." The spokeswoman declined to answer specific questions about Stacey’s case, citing patient privacy laws.

One reason confusion abounds, Pollitz said, is that health insurance is regulated by the states, not by the federal government, and most states (Massachusetts and New York are prominent exceptions) do not have a standard definition of what constitutes health insurance.

"Rice is rice and gasoline is gasoline. When you buy it, you know what it is," Pollitz said. "Health insurance—who knows what it is? It is some product that’s sold by an insurance company. It could be a little bit or a lot of protection. You don’t know what is and isn’t covered. Nothing can be taken for granted."

How to protect yourself

Jeffrey E. Miller

Seek out comprehensive coverage. A good plan will cover your legitimate health care without burdening you with oversized debt.

"The idea of ‘Cadillac’ coverage vs. basic coverage isn’t an appropriate way to think about health insurance," said Mila Kofman, Maine’s superintendent of insurance. "It has to give you the care you need, when you need it, and some financial security so you don’t end up out on the street."

What you want is a plan that has no caps on specific coverages. But if you have to choose, pick a plan offering unlimited coverage for hospital and outpatient treatment, doctor visits, drugs, and diagnostic and imaging tests. When it comes to lifetime coverage maximums, unlimited is best and $2 million should be the minimum. Ideally, there should be a single deductible for everything or, at most, one deductible for drugs and one for everything else. And the policy should pay for 100 percent of all expenses once your out-of-pocket payments hit a certain amount, such as $5,000 or $10,000.

If you are healthy now, do not buy a plan based on the assumption that you will stay that way. Don’t think you can safely go without drug coverage, for example, because you don’t take any prescriptions regularly today. "You can’t know in advance if you’re going to be among the .01 percent of people who needs the $20,000-a-month biologic drug," said Gary Claxton, a vice president of the nonprofit Kaiser Family Foundation, a health-policy research organization. "What’s important is if you get really sick, are you going to lose everything?"

Consider trade-offs carefully. If you have to make a trade-off to lower your premium, Claxton and Pollitz suggest opting for a higher deductible and a higher out-of-pocket limit rather than fixed dollar limits on services. Better to use up part of your retirement savings paying $10,000 up front than to lose your whole nest egg paying a $90,000 medical bill after your policy’s limits are exhausted.

With such a high deductible, in years when you are relatively healthy you might never collect anything from your health insurance. To economize on routine care, take advantage of free community health screenings, low-cost or free community health clinics, immediate-care clinics offered in some drugstores, and low-priced generic prescriptions sold at Target, Walmart, and elsewhere.

If your financial situation is such that you can afford neither the higher premiums of a more comprehensive policy nor high deductibles, you really have no good choices, Pollitz said, adding, "It’s why we need to fix our health-care system."

Check out the policy and company. You can, at least, take some steps to choose the best plan you can afford. First, see 7 Signs a Health Plan Might Be Junk, to learn to spot the most dangerous pitfalls and the preferred alternatives.

Use the Web to research insurers you’re considering. The National Association of Insurance Commissioners posts complaint information online at www.naic.org.

Entering the name of the company and policy in a search engine can’t hurt either. Consumers who did that recently would have discovered that Mid-West National was a subsidiary of HealthMarkets, whose disclosure and claims handling drew many customers’ ire. Last year, HealthMarkets was fined $20 million after a multi-state investigation of its sales practices and claims handling.

Don’t rely on the salesperson’s word. Jeffrey E. Miller, the Florida man whose policy failed to cover much of his cancer treatment, recalls being bombarded with e-mail and calls when he began shopping for insurance. "The salesman for the policy I bought told me it was great, and I was going to be covered, and it paid up to $100,000 for a hospital stay," he said. "But the insurance has turned out to pay very little."

Pollitz advises anyone with questions about their policy to ask the agent and get answers in writing. "Then if it turns out not to be true," she said, "you can complain."

7 signs a health plan might be junk

Do everything in your power to avoid plans with the following features:

Limited benefits. Never buy a product that is labeled “limited benefit” or “not major medical” insurance. In most states those phrases might be your only clue to an inadequate policy.

Low overall coverage limits. Health care is more costly than you might imagine if you’ve never experienced a serious illness. The cost of cancer or a heart attack can easily hit six figures. Policies with coverage limits of $25,000 or even $100,000 are not adequate.

“Affordable” premiums.There’s no free lunch when it comes to insurance. To lower premiums, insurers trim benefits and do what they can to avoid insuring less healthy people. So if your insurance was a bargain, chances are good it doesn’t cover very much. To check how much a comprehensive plan would cost you, go to ehealthinsurance.com, enter your location, gender, and age as prompted, and look for the most costly of the plans that pop up. It is probably the most comprehensive.

No coverage for important things. If you don’t see a medical service specifically mentioned in the policy, assume it’s not covered. We reviewed policies that didn’t cover prescription drugs or outpatient chemotherapy but didn’t say so anywhere in the policy document—not even in the section labeled “What is not covered.”

Ceilings on categories of care. A $900-a-day maximum benefit for hospital expenses will hardly make a dent in a $45,000 bill for heart bypass surgery. If you have to accept limits on some services, be sure your plan covers hospital and outpatient medical treatment, doctor visits, drugs, and diagnostic and imaging tests without a dollar limit. Limits on mental-health costs, rehabilitation, and durable medical equipment should be the most generous you can afford.

Limitless out-of-pocket costs. Avoid policies that fail to specify a maximum amount that you’ll have to pay before the insurer will begin covering 100 percent of expenses. And be alert for loopholes. Some policies, for instance, don’t count co-payments for doctor visits or prescription drugs toward the maximum. That can be a catastrophe for seriously ill people who rack up dozens of doctor’s appointments and prescriptions a year.

Random gotchas. The AARP policy that the Clausens bought began covering hospital care on the second day. That seems benign enough, except that the first day is almost always the most expensive, because it usually includes charges for surgery and emergency room diagnostic tests and treatments.

“Affordable” premiums

Want better coverage? Try running for Congress

President Barack Obama says Americans should have access to the kind of health benefits Congress gets. We detail them below. Members of Congress and other U.S. government employees can receive care through the Federal Employees Health Benefits Program. Employees choose from hundreds of plans, but the most popular is a national Blue Cross and Blue Shield Preferred Provider Organization plan. Employee contributions for that plan are $152 per person, or $357 per family, per month.

Plan features Covered services
  • No annual or lifetime limits for major services

  • Deductible of $300 per person and $600 per family

  • Out-of-pocket limit of $5,000 per year with preferred providers, which includes most deductibles, co-insurance, and co-payments
  • Inpatient and outpatient hospital care

  • Inpatient and outpatient doctor visits

  • Prescription drugs

  • Diagnostic tests

  • Preventive care, including routine immunizations

  • Chemotherapy and radiation therapy

  • Maternity care
  • Family planning

  • Durable medical equipment, orthopedic devices, and artificial limbs

  • Organ and tissue transplants

  • Inpatient and outpatient surgery

  • Physical, occupational, and speech therapy

  • Outpatient and inpatient mental-health care

The real cost of illness can be staggering…

Few Americans realize how much care costs. Coverage gaps can leave you in debt.

Condition Treatment Total Cost
Late-stage colon cancer 124 weeks of treatment, including two surgeries, three types of chemotherapy, imaging, prescription drugs, hospice care. $285,946
Heart attack 56 weeks of treatment, including ambulance, ER workup, angioplasty with stent, bypass surgery, cardiac rehabilitation, counseling for depression, prescription drugs. $110,405
Breast cancer 87 weeks of treatment, including lumpectomy, drugs, lab and imaging tests, chemotherapy and radiation therapy, mental-health counseling, and prosthesis. $104,535
Type 2 diabetes One year of maintenance care, including insulin and other prescription drugs, glucose test strips, syringes and other supplies, quarterly physician visits and lab, annual eye exam. $5,949

…and out-of-pocket expenses can vary widely

  Massachusetts plan California plan
With its lower premium and deductible, the California plan at right would seem the better deal. But because California, unlike Massachusetts, allows the sale of plans with large coverage gaps, a patient there will pay far more than a Massachusetts patient for the same breast cancer treatments, as the breakdown below shows. Monthly premium for any 55-year-old: $399
Annual deductible: $2,200
Co-pays: $25 office visit, $250 outpatient surgery after deductible, $10 for generic drugs, $25 for nonpreferred generic and brand name, $45 for nonpreferred brand name
Co-insurance: 20% for some services
Out-of-pocket maximum: $5,000, includes deductible, co-insurance, and all co-payments
Exclusions and limits: Cap of 24 mental-health visits,$3,000 cap on equipment
Lifetime benefits: Unlimited
Monthly premium for a healthy 55-year-old: $246
Annual deductible: $1,000
Co-pays: $25 preventive care office visits
Co-insurance: 20% for most covered services
Out-of-pocket maximum: $2,500, includes hospital and surgical co-insurance only
Exclusions and limits: Prescription drugs, most mental-health care, and wigs for chemotherapy patients not covered. Outpatient care not covered until out-of-pocket maximum satisfied from hospital/surgical co-insurance
Lifetime benefits: $5 million
Service and total cost Patient pays Patient pays
Hospital $0 $705
Surgery 981 1,136
Office visits and procedures 1,833 2,010
Prescription drugs 1,108 5,985
Laboratory and imaging tests 808 3,772
Chemotherapy and radiation therapy 1,987 21,113
Mental-health care 950 2,700
Prosthesis 0 350
TOTAL $104,535 $7,668 $37,767

Source: Karen Pollitz, Georgetown University Health Policy Institute, using real policies and claims data from a state high-risk pool.

What lawmakers need to do next

Consumers Union, the nonprofit publisher of Consumer Reports, has long supported national health-care reform that makes affordable health coverage available to all Americans. The coverage should include a basic set of required, comprehensive health-care benefits, like those in the federal plan that members of Congress enjoy. Insurers should compete for customers based on price and the quality of their services, not by limiting their risk through confusing options, incomplete information, or greatly restricted benefits.

As reform is developed and debated, Consumers Union supports these changes in the way health insurance is presented and sold:

Clear terms. All key terms in policies, such as "out-of-pocket" and "annual deductible," should be defined by law and insurers should be required to use them that way in their policies.

Standard benefits. Ideally, all plans should have a uniform set of benefits covering all medically necessary care, but consumers should be able to opt for varying levels of cost-sharing. Failing that, states should establish a menu of standardized plans, as Medicare does for Medigap plans. Consumers would then have a basis for comparing costs of plans.

Transparency. Policies that insurers currently sell should be posted in full online or available by mail upon request for anyone who wants to examine them. They should be the full, legally binding policy documents, not just a summary or marketing brochure. In many states now, consumers can't see the policy document until after they have joined the plan. At that point, they're legally entitled to a "free look" period in which to examine the policy and ask for a refund if they don't like what they see. But if they turn the policy back in, they face the prospect of being uninsured until they can find another plan.

Disclosure of costs. Every plan must provide a standard "Plan Coverage" summary that clearly displays what is—and more important, is not—covered. The summary should include independently verified estimates of total out-of-pocket costs for a standard range of serious problems, such as breast cancer treatment or heart bypass surgery.

Moreover, reliable information should be available to consumers about the costs in their area of treating various medical conditions, so that they have a better understanding of the bills they could face without adequate health coverage.

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