As the percentage of workers covered by employer health plans with deductibles of $1,000 or more has more than tripled in five years, the question of how to shield even the insured workers from unexpected medical bills has become pressing. One solution that’s gaining in popularity is the use of supplemental health indemnity plans.
Unlike conventional health insurance, these plans pay policyholders directly in cash, rather than reimbursing medical care providers. Although payments may be $1,000 per day or more in the event of hospitalization, supplemental plans aren’t intended to pay all the costs of care. Instead, they are designed to help ailing policyholders meet other out-of-pocket costs, perhaps including rent, car payments and groceries, as well as health insurance deductibles.
Health insurance deductibles constitute an increasing issue because they are getting larger—deductibles of $10,000 and even more are not unheard-of today—and also because more people have to pay them. According to The Kaiser Family Foundation Employer Health Benefits 2011 Annual Survey, in 2006 some 10 percent of employees at all businesses were covered by plans with deductibles of $1,000 or more. In 2011, that figure had grown to 31 percent. During that period, people working for small employers who were covered by high-deductible plans increased from 16 percent to 50 percent.
Although many people are familiar with Medicare supplemental policies, known as Medigap, not as many know about using supplemental policies with employer-sponsored and individual private health insurance. That’s changing, according to Randy Finn, assistant vice president in product development for Colonial Life in Columbia, S.C., one of the leading issuers of supplemental coverage. Finn says their sales of supplemental hospital confinement indemnity policies, which they market only through employers, have increased by double-digit percentages every year for the past four years.
Here are five keys to understanding and using supplemental health indemnity policies to manage and control employee and business healthcare costs.
1. Think of this as a cost-saving move. With typical monthly premiums of $20 to $50, a supplemental plan on top of a high-deductible conventional plan will likely cost less than a conventional plan with a low deductible. Most employers offer supplemental plans as an employee-paid option, but not all. “Sometimes they’re paying it themselves,” says Colonial spokesperson Jeanne Reynolds. "And they still come out ahead." (Get more tips on curbing rising healthcare costs.)
2. Don’t try to use a supplemental health plan by itself to completely substitute for traditional comprehensive medical plans, says Bonnie Brazzell, a vice president with Eastbridge Consulting Group, an Avon, Conn.-based insurance consulting firm. Supplemental plans have more limited benefits and can’t replace conventional coverage. While conventional plans are required to have unlimited lifetime benefits, a supplemental plan could have a cap of $50,000. So supplemental coverage should only be used in conjunction with conventional health insurance plans. (Here's how the environment can impact healthcare costs.)
3. You don’t need to cover the entire amount of the deductible with a supplemental benefit. “If you raise your deductible to $5,000, it doesn’t mean you have to buy a $5,000 indemnity plan; you might want to buy only a $3,000 plan,” Finn says. In fact, covering the entire gap could actually increase the company’s healthcare costs because employees won’t have the same incentive to control costs. (Read more on the dos and don'ts of offering health insurance.)
4. If you’re a single, self-employed business owner without two or more employees and can’t qualify for an employer plan, a supplemental plan can still help. “The majority of the products are written on an individual basis, which can be very attractive,” says Carolyn Goodwin, president of Goodwin Benefits in Dallas. They can even be useful for people with pre-existing conditions, because they aren’t as carefully medically underwritten as conventional plans. Often no medical history or exam is required.
5. Think about service as well as cost. That means asking the agent who’s selling you the policy how quickly the carrier pays claims. You don’t want hospitalized employees fretting over how they’re going to pay the rent and buy groceries when the supplemental policy payment is slow. It really is the follow-up service,” says Goodwin. Ask the agent or insurance carrier about the standard timeline or benchmark for paying claims. You also need to know if there is someone the policyholder can call if it doesn’t happen within that period of time.
All told, supplemental health indemnity plans represent an opportunity for an employer to offer employees a valuable benefit at low or, if positioned as an option paid by workers, even no cost. They recognize the important fact that getting sick means more than medical bills. And they take into account that even employees with health insurance can be financially stressed by illness. According to a study published in 2009 in the American Journal of Medicine, 62 percent of all bankruptcies in 2007 were medical-related, and three-quarters of those people had health insurance.
For employers who may be starting to feel the only thing health insurers have to offer are higher premiums and less coverage, supplemental indemnity plans represent a refreshing change. They are generally cost-effective and available to individuals and employees, including those who don’t necessarily have spotless medical records.
“They’re also pretty straightforward,” says Linda Sherry, a spokesperson for San Francisco-based Consumer Action, which advocates for consumers on credit, finance, HMO, and telecommunications issues. “They do one thing and they aren’t necessarily complex.”
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