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What the Future Holds for Health Insurance

The market will be shaped by insurers, the medical profession and the government.

By Robert O’Connor

Medical care has become the new American dilemma. With most coverage being provided through the workplace, both health insurers and employers are facing severe economic pressures. Insurers, struggling to make profits, are pushing rates up sharply. Employers, who feel that they must offer attractive health packages to recruit and retain employees in a tight job market, are facing ever-higher costs.

The picture will become murkier with the aging of the Baby Boom generation. As people cross the threshold of their 60th birthdays, premiums will jump by as much as 30 percent. And as these same people retire, they will come up against tougher underwriting standards and the prospect of having to fund their own individual coverage. These older consumers, who can expect to pay more and more for less and less protection, will exert growing pressure on the political system to find ways to close the cost gap.

Nick Smith, health insurance salesman at Colorado Health Insurance in Denver, sees a major political battle shaping up between the insurance industry and the Baby Boomers as these consumers begin to retire in large numbers. Up to now, Smith said, the individually insured have lacked a strong lobby. This has helped keep their rates high.

Future problems
The extent of future problems in the medical insurance market is becoming clearer. According to the Health Care Financing Administration (HCFA), which administers Medicare and Medicaid, health care spending in the U.S. was more than $1.2 trillion in 1999. This figure, equal to 13 percent of the gross domestic product, was up 5.6 percent from the 1998 total. But HCFA did note that 1999 was the sixth straight year in which health spending increased by less than 6 percent. While the agency is not predicting that growth will return to the “very high rates of the late 1980s and early 1990s,” it does foresee an increase in the rate of expansion over the next decade.

“Health care spending,” HCFA said in a March 2001 press release accompanying the publication of the 1999 figures, “is projected to resume growing as a share of GDP in 2000, reaching 15.9 percent in 2010. The key factors behind this expected trend are recent strong household income growth, the projected slowdown in economic growth, continued advances in medical technology and the inability of insurers to sustain the initial cost savings that resulted from the shift to managed care.”

The lengthening of life expectancy suggests that coverages like disability and long-term care will become huge markets. The challenge for the insurance industry will be to get its pricing and underwriting right. The challenge for advisors will be to offer their clients the highest quality products at optimum times. Marketing will focus on the shifting circumstances of clients and be guided by an appreciation of the likely effects of political decisions on the market. Independent advisors, possibly more than ever before, will have to display skill and creativity in assembling tailored packages from different providers.

Industry involvement
The insurance industry is likely to be heavily involved in efforts to bring health insurance to those Americans who currently have no protection. According to the Washington-based Health Insurance Association of America (HIAA), almost 43 million Americans lack health insurance. “The plight of the uninsured, in our view,” said Richard Coorsh, a spokesman for the HIAA, “is the nation’s number one domestic priority. And we believe that it has to be Ôjob one’ for Congress and the administration.”

HIAA has made a number of suggestions aimed at expanding both public and private medical coverage. One would widen eligibility for Medicaid-type coverages for people at various income levels. The association also favors the use of tax credits and, in the case of the working poor, subsidies to encourage the take-up of private medical insurance.

Demographic trends underlie the potential demand for nursing home and home care. “The Baby Boomers are more aware of what it’s costing to take care of their parents and loved ones who are in need of home health care or nursing home care,” said Vickie Tapley, LUTCF, account manager at Hester & Associates in Atlanta. Hester markets its long-term care products by means of brochures and letters to existing clients.

Tapley said that people are also reading more about the subject and taking note of the experience of friends. Potential customers, Tapley said, know that if they pay for their care, that care is likely to be of a higher quality.

The buying age for long-term care coverage, Tapley said, is 55 and up. Depending on the age of the customer and the product selected, she said, premiums will range from $80 to $200 a month. Tapley notes that the minimum cost of nursing home care is about $100 a day.

Frank C. Hall, with Future Benefits in Memphis, Tenn., said that the widespread recognition that people are living longer is helping to sell long-term care policies. He adds that potential customers tend to start thinking about long-term care when they are confronted by events in the lives of people who are close to them. Hall said that many people are only “semi-aware” of the need for long-term care. He recalls getting a good response at a recent seminar on long-term care from an audience made up mostly of people in their 40s. “But if someone hadn’t talked to them about it,” Hall said, “they probably wouldn’t have thought about it.”

Christy Welshons, office manager with American Financial Concepts in Jeannette, Pa., agrees that more people are looking at long-term care products. American Financial Concepts relies heavily on referrals from existing clients

Placing long-term care risks
Denial of long-term care coverage can be a serious matter. “At the moment,” Tapley said, “if we’re denied by two or three different companies, we can’t give them that coverage. It’s just not available to them.”

Hall believes that underwriters appear to be trying to do major business in the long-term care market. But he noted that a lot of them have tightened up on their underwriting to the point at which some people can’t qualify for coverage. He added that diabetes and obesity are key reasons for turning people down. Applicants are often not aware of these restrictions when they come to buy the health coverage. “It can be a surprise,” Hall observed.

Hall said that his use of a variety of insurers can make it easier to place difficult, long-term care risks. He can normally get someone insured, he said, but sometimes clients have to accept less coverage than they would like. “Long-term care is like life insurance,” Hall said. “You can buy a whole lot of it, or you can buy a smaller amount of coverage. And sometimes they have to settle for a smaller amount versus nothing.”

Welshons finds that underwriters are attuned to the long-term care market. And she is confident about getting coverage across the three classes of long-term care business: preferred, standard and Class One. Preferred, or healthy clients, are very easy to cover. Standard would include people who might have had a health condition in the past. And Class One would indicate a continuing health condition. “We can pretty much write anybody,” Welshons said, “even with a health condition.”

Long-term care is not an easy sell. People may be confused with the choices available, or even frightened by the prospect-however distant-of being unable to look after themselves. Such attitudes may appear to be inexplicable to a trained advisor, who is acutely aware of life’s risks. Sometimes one member of a family might want to buy, while another will resist, according to Ronald S. Ochipa, CLU, ChFC, a State Farm agent in Miami. “Usually,” he said, “it’s a two- or three-interview sale.”

These interviews are likely to involve detailed explanations of the various categories of long-term care, home health care and Medicare supplements. “Each case is different,” Welshons said, “depending on any medical underwriting requirements.”

Marketing strategies
An obvious marketing strategy is to focus on the needs of wives. Given their longer life expectancy, women are more likely to need long-term care than men. Another approach is to stress that a policy can help protect a couple’s assets, to the financial benefit of heirs and the surviving spouse. Hall said that church groups, retirement homes and associations for retired people offer good possibilities for seminars. The success of a seminar, Hall said, “depends upon the timeframe that you have. I will do a slide presentation or a video.”

Welshons said that American Financial Concepts generates “quite a bit of business” from its website. She added that this business is drawn from within Pennsylvania and within driving distance-up to two hours. “We like to meet with all of our clients personally,” Welshons pointed out.

Welshons also mentioned that customers for long-term care tend to be middle aged-in their “late 40s [or] early 50s.” Ochipa draws his long-term care business from his existing client base, targeting customers who are aged 45 and up. He also benefits from State Farm’s national advertising. Ochipa noted that Florida offers a friendly environment for long-term care. “And it’s a good tax state if you’re going to die here,” he said.

Publicity about government decisions can increase interest in insurance products, she continued. She said that the changes in the Medicare rules at the beginning of this year, which shifted people to health maintenance organizations (HMOs), spurred calls from clients asking about Medicare supplement coverage. Such a plan allows a patient much more leeway in choosing a doctor.

American Financial Concepts tries to keep its clients abreast of Medicare developments. These contacts not only pinpoint sales opportunities; they also serve to strengthen relationships with the firm’s customer base.

One of the most effective marketing strategies for advisors is to try to make people understand just how expensive long-term care can be. “I think people right now are somewhat in a fog about the cost of medical expense,” Ochipa said. “Those costs rise every day.”

Ochipa added that the cost of assisted care for an elderly person can drain all of that person’s resources, and then some, before death. When Ochipa tries to convey this reality, the frequent reaction is: “It can’t be. Medicare will take care of it.”

But Medicare, Ochipa responds, will pay for only 20 days of acute care. He then lays out some figures: A bed in an assisted-living facility can easily cost more than $5,000 a month. And it is not just the elderly who might need such care. An auto accident can mean that a young person will need lifetime care. Ochipa said that a client can benefit by buying the long-term care product at a relatively younger age. Not only will the premium be lower, but the price will not rise as the customer gets older. “The only time the rate would change,” he said, “is if a carrier had poor experience and then had to end up raising the level of the premium for that whole class of policies that were sold.”

Varying costs of care
Ochipa said that geography can affect premiums. He estimates the average per-day cost of long-term care in the Miami area at around $150, compared to as much as $250 in the New York area. Ochipa said that a healthy 45-year-old male in the Miami area could expect to pay an annual premium of $587 for a basic policy with a 90-day wait. The annual premium for a 65-year-old, he said, would be $1,824. Ochipa said that such numbers are “doable, but they [potential clients] don’t think that they’re going to get sick.”

Hall stresses that the range of a long-term care policy would depend on the product selected. It might cover home care only, for instance, or nursing home and assisted living. Or it could pay for all of them. “I’ve got clients who pay as low as $20 a month who get the coverage under [age] 50,” he said. “And I’ve got clients who pay as much as $2,000 or $3,000 a year.”

Underwriters must grapple with uncertainty as they attack this market. If they peg their rates too low, Ochipa said, they may have to raise all of their rates when people are older. This would antagonize potential customers in this age bracket. And if the insurers are too liberal in their underwriting, they face the possibility of adverse claims experience down the road.

Product innovation
Underwriters have been “pretty good” in terms of product innovation on long-term care policies, according to Ochipa. Policies, for instance, can be written to take account of inflation. And it is possible to add a rider that would reinstate coverage if the customer, in his older years, forgets to make a payment. A married couple can also obtain cheaper rates by going on the same policy. And a customer can lower his premium by accepting a longer waiting period. “The newest thing”, Ochipa said, “is if you don’t use it [the policy], you get a portion of your money back. I don’t know whether that will fly or not.”

Hall said that the government appears to be aware of the potential problems in the long-term care market. He points to the plan, to be launched next year for government employees, and to broader-based efforts to “implement tax-qualified, long-term care programs.”

Tapley believes the disability market has significant potential. The major sales challenge, she said, is getting “people to understand what disability can do for them.” She noted that a disability policy will pay a client up to 60 percent of his or her income or more, depending upon occupation and the choice of insurer. The best approach, Tapley said, is to explain to customers “about the different people you have run across in your lifetime who have suffered disability and have lost financially because they did not have disability [insurance]. It makes them think a little bit more deeply.”

Major medical coverage offers a broad market. The key barrier to expansion, Hall believes, is price. Welshons said that individual customers might be college students, the self-employed, or people who have left employment-related plans.

Welshons added that there is interest in voluntary health care products, such as prescription plans. “A lot of people look [to see] if it’s included with their package,” she said. “But a lot of people won’t pay extra for it.”

Smith said that the increasingly strict medical underwriting standards on individual coverages are putting more and morepressure on the programs that are guaranteed by the states and designed for difficult risks. Smith added that the current wave of consolidation among the underwriters is evidence of the difficulty the insurers are having in making money.

Working with doctors
Insurance companies must manage their relationships with doctors, not the easiest of tasks. Doctors have a reputation for being prickly at the best of times, and they naturally resent having to answer in any way to nonmedical people. There is an in-built tension between doctors, who want to use the latest in expensive technology to treat disease, and underwriters, who want to keep costs as low as possible. In recent years, doctors have been more willing to take their grievances to court, arguing that HMOs were acting against the interests of patients.

In December 2000, Aetna announced that physicians participating in its health care networks would be given greater choice in their use of Aetna’s various plans. Physicians will now be able to opt out of an Aetna product line. The reversal of Aetna’s “all-products” policy, said Dr. John W. Rowe, chief executive officer of Aetna, “reflects our commitment to work as a partner with physicians in providing patients with access to quality, affordable health care.” Aetna is the U.S. health care market leader, with more than 19 million health care members and 11 million group insurance clients.

Colorado Health Insurance offers a number of plans. An individual plan, Smith said, might include a basic standard preferred provider network (PPO), a $500 deductible and co-insurance to $5,000. The policy would effectively involve an annual outlay by the client of $1,500. Smith said that sharp and steady increases by one insurer can drive customers away, creating the demand for brokers to find alternative providers.

The rise in rates for employee health plans has already sparked a political battle between the insurers and their business customers. There is particular pressure, Smith notes, on small businesses with fewer than 10 people covered. Although medical insurance costs are tax deductible, a business must make the initial outlay before claiming the money back at the end of the year. This can create financial strains on organizations that have little spare capital.

There have been suggestions, Smith said, that smaller businesses should group themselves into associations and establish self-funded, medical insurance plans. These new entities, he said, would rely on the insurance companies for expertise, but the plans themselves would have to absorb some of the liability.

The future of long-term care
The marketing of medical insurance is very localized. Smith said that differences in laws among the states make the national picture confusing. He is, for instance, licensed to sell medical insurance only in Colorado. “If I want to sell insurance in another state,” Smith said, “I’d have to take the test all over again, learn all the new specific laws. Each state has very different laws.”

Smith believes that PPOs will play a greater role in the future. He said that a trend by customers toward PPOs is being fed by a feeling among some people that HMOs are primarily health-care managed. “I get complaints from people all the time saying, Ôthis is too managed,”’ Smith said. “ÔI want to be able to go to a specialist if I think I should go to a specialist. And I will pay a bit more for a PPO to have that freedom.”’

Smith expects the Bush administration to lean more toward the insurance companies in its health policies. He contrasts this with the calls from the Clinton administration for a form of standardized national health care, “not that the last administration got anything done on that.” Smith said that he, along with other people in the health insurance industry, does not see the Bush administration’s expected posture on health insurance as necessarily a bad thing. If the government ever does produce a national health plan, he reasons, “it’s not going to be that good.” And, he added, there would still likely be plenty of room for the sale of supplementary products addressing coverage holes.

HIAA is concerned about the plight of people who have trouble paying for prescription drugs. In the near term, HIAA favors the use of tax credits and federal money, which would be given to the states in the form of block grants and targeted at people, based on income. Beyond that, Coorsh said, U.S. society as a whole will have to decide how it wants to reform the Medicare program. “We are very much aware,” Coorsh said, “that there are seniors who simply cannot afford the drugs they need, and that they need help.”

Coorsh noted that health care, and the problems of the uninsured, figured prominently in last year’s hard-fought presidential campaign. While the two major candidates had differences on the issue, he said, its high profile indicated “that there is strong bipartisan support to deal with these issues. And that’s probably the most encouraging bit of news we have been able to see for quite some time.”

Coorsh added that a number of different states have different approaches to the issues of medical care for the elderly. “But Medicare reform has to be a national priority,” he said, “because it’s a federal program.”

Medical insurance, in all its forms, will be at the center of the political and economic agenda in the U.S. for years to come. The shape of the market will be influenced by the actions of powerful entities: insurance companies, the medical profession, and government itself. Advisors who will succeed in the health care area are those who can build and service markets in a very difficult and exceedingly complex environment.

Robert O’Connor is a London-based freelance writer who is a frequent contributor to Advisor Today.

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