Singled Out

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http://www.nytimes.com/2004/04/18/magazine/18UNINSURABLES.html?th

 

April 18, 2004Singled OutBy JODY MILLER and MATT MILLER

 

It was simple enough -- or so we thought until the letter came. A local broker

had suggested we consider obtaining our health insurance as individuals. We had

been covered in a group plan thanks to Matt's fellowship at Occidental College,

a post he held while at work on a book. But the two of us were increasingly

structuring our work lives as entrepreneurs. Jody worked part time in venture

capital, served as lead director of a public company and was thinking of

launching her own business; Matt had added consulting to column and book writing

and his weekly radio show. The agent we had spoken with had recommended getting

into the individual market for health insurance while we were in our early 40's

and healthy. That way, he said, we could pursue such freelance lives with the

assurance that we would always have health coverage. Once you are in the system,

he said, you will only be subject to the annual premium increases the insurers

apply to everyone. But trying to move from group

coverage into the individual market when we were older might be much harder. If

you think you are headed in an entrepreneurial direction, he concluded, it's

best to make the shift as soon as you can. It seemed straightforward.

 

Until it didn't. The letter from Blue Cross of California was three pages of

dense boilerplate, but the message was clear: ''Enrollment Declined.'' We might

want to apply to the state's ''major risk'' insurance program. Here were phone

numbers we could call for more information. Oh, and P.S., Blue Cross would be

pleased to offer coverage to our 6-year-old daughter.

 

Both of us paced around the kitchen that night after putting our daughter to

sleep. There had to be some mistake, we said. We're healthy people! We'll get

this fixed, but what a ridiculous hassle it's going to be. At least we have

Cobra until we straighten this out, we thought. But it's $1,300 a month! And

what if we don't get this reversed . . . ? That's when the sinking sensation

began.

 

For starters, one of us might need to hold down a ''real'' job with an employer

who offered health benefits. (So much, we thought, for our entrepreneurial

ambitions.) But beyond that, we felt the disorientation of being relabeled. We

had always thought of ourselves as healthy people -- scratch that, we were

healthy people -- and suddenly we had been informed that by official standards,

no, we were not in fact healthy at all. We presented undue risks that the

company could not afford to bear. A wave of self-doubt came over us, as if we

had had a secret exposed and the image of vigor and health we had been

projecting to the world had been revealed as a fraud.

 

Maybe there really was something wrong with us. We had been judged uninsurable

-- branded with a Scarlet U. by one of the most reputable firms in the business.

And the fact that we were reasonably well off financially couldn't help us fix

this problem.

 

It was only when we got past the shock and focused on the reasons we were being

denied coverage that anxiety turned to anger. Though the insurance company

hadn't asked us to take physicals, it had asked us to disclose every conceivably

relevant aspect of our medical histories on the application form. Now, it

seemed, the most innocuous-seeming facts had been turned against us.

 

Jody's Flonase? She used that nasal spray for sinus problems before flying --

like a million other people. Her skin creams? They were totally cosmetic -- and

she paid for them herself anyway. Her neck spasm, which she woke up with one

morning a few months earlier, went away with minor treatment. Most people think

Jody is much younger than she is. Blue Cross made her sound as if she were

falling apart.

 

And Matt's eye? It was true: Matt had a weird episode three years earlier. A

little wispy something in his field of vision. Nothing major, but annoying

enough when reading to have checked out. It turned out to be a tiny blood clot

behind his retina, which went away by itself. He takes a baby aspirin every day

as a precaution. Our doctors say it's fine. Now Blue Cross said it meant it

couldn't offer him insurance. If that's the case, we thought, could it be

offering insurance to anyone who is over 35?

 

 

We decided to appeal, though the signs were not promising. We had mentioned in

our application, for example, that Jody had briefly observed some extra hair

coming out in her hairbrush. Our doctor said this was not uncommon for women in

their 40's. On our denial letter this became the ominous-sounding ''hair loss

with etiology undetermined'' -- part of the catalog of Flonase-like infirmities

that made Jody a walking time bomb. On one call, a 40-something female Blue

Cross rep was sympathetic, telling Matt that she had experienced a minor hair

episode herself.

 

''So are you uninsurable?'' Matt asked her.

 

''With Blue Cross of California, probably!'' she said cheerfully.

 

Blue Cross's responses to our appeal left us downhearted. Matt's eye episode had

been labeled a ''retinal vein occlusion'' and, we were told, this meant he would

never be eligible for any form of coverage under its guidelines. But it did ask

for more information on Jody, which gave us some hope. After three months of

going back and forth -- and plenty of gallows humor around the house about which

of us had really dragged the family down -- our places switched. An

ophthalmogist's letter, along with a three-page handwritten note from our

primary care physician, had swayed the underwriting supervisors: Matt's eye had

been reconsidered, and he was being offered the P.P.O. plan for which we had

applied.

 

But no such luck for Jody. The most Blue Cross would offer her was its

''basic,'' or catastrophic, plan. It didn't cover prescription drugs, maternity

costs or many professional services -- and we were not interested in such a

slimmed-down policy.

 

Worse, the ''guidelines'' the agent kept citing during a surreal hour on the

phone seemed as if they had been hatched in some underwriting Twilight Zone.

Jody's cholesterol was two points too high, and this inherited trait (which our

doctor said was not a concern) meant she was ineligible for any kind of

noncatastrophic coverage, period. Recently, Jody had also spoken with a doctor

about a jaw ache, which came from some teeth-grinding at night when a company

she was advising faced a crisis. Because the doctor had scribbled the letters

TMJ (temporomandibular joint) in a file, she was again ineligible -- even though

the ache had gone away in three days and was never diagnosed as TMJ. If her jaw

went symptom-free for six months, we were told, she could reapply. But there was

a catch: thanks to that single complaint, if she were approved, she would be

stuck with a 20 percent higher premium -- not to mention the 50 percent that

would be tacked on because of the cholesterol! Occasional

Flonase use meant a further 20 percent markup. And Jody's neck spasm (which

went away with one treatment of steroids) meant that she shouldn't bother

reapplying in any event for at least two years.

 

Even more incomprehensible was the fact that Blue Cross had forgiven Matt his

one-time eye episode but would not forgive Jody her one-time episode of jaw

pain. Much as we hate to second-guess the second-guessers, everyone (including

our doctors) seems to agree on one thing: a tiny blood clot behind the eye is a

more ominous sign than a little stress-related teeth grinding at night. Though,

to be fair to Blue Cross, Matt's circulatory woes would probably kill him

instantly (and inexpensively) at some point via a stroke, while Jody's stress

would make her a chronic and costly albatross for some insurer down the road.

 

But we could worry about the insurance company's rationality only up to a point.

That point came when an imperfection showed up on Matt's colonoscopy that we

would rather not discuss. He's fine, but there's no way it would have passed the

vigilant actuaries at Blue Cross. At that point, we made the obvious choice to

proceed with the group coverage that was available through a think tank Matt had

joined while our appeal was under way. The affiliation was not only exciting for

professional reasons but had also come to seem medically essential.

 

Who coordinates our coverage in Los Angeles for the Washington-based think

tank's insurer? Blue Cross of California.

 

As our experience makes plain, people enter the market for individual health

insurance at their peril. Yet some 15 million Americans buy their coverage in

that market. They include the self-employed (both rich and poor), workers whose

firms don't offer benefits and young adults and children. (Many parents who may

not be covered themselves find that their healthy kids are easy -- and

relatively cheap -- to insure.)

 

As big firms cut back on coverage and more and more workers leap from one

benefit-free job to another, the individual market is clearly growing. One

survey found that 1 in 4 adults had looked for coverage on their own in recent

years. It is not surprising, then, that politicians are giving fresh attention

to the issue. President Bush has called for new subsidies to help people seeking

coverage on their own, as have some Democrats.

 

It is hard to judge how typical our own experience was; the insurance companies

have the relevant data, but they are not sharing. Some studies suggest that with

enough patience, a relatively healthy individual is likely to find an insurer.

But in 2001, Karen Pollitz of Georgetown University and other researchers asked

19 insurance companies and H.M.O.'s in eight markets to consider the

applications of seven hypothetical coverage-seekers. Only 10 percent of the

responses were ''clean offers'': that is, offers that did not link benefit

limits or future premium increases to the medical history of the applicant. Some

35 percent of the responses were outright rejections. One fictional applicant,

Alice, was a 24-year-old waitress in perfect health whose only ''ailment'' was

her hay fever: she took Allegra to control the sneezing. Alice received only

three clean offers out of 60 applications; five insurers simply turned her down.

Pollitz's conclusion: ''Don't think, even if you believe

yourself to be healthy, that you're going to be able to just walk out and get

coverage.''

 

How did things come to such a pass? Insurers start with four facts:

 

1. Buying health insurance is voluntary.

 

2. Twenty percent of the population incurs 80 percent of health costs.

 

3. In order to set premiums that reflect actual costs, insurers need between

20,000 and 75,000 people in a pool to generate the necessary predictive models.

 

4. People who have reason to believe they will have higher health costs have

stronger incentives to buy coverage.

 

In the individual market, these facts create a risk of what insurers call

''adverse selection'' -- that is, unless the situation is somehow managed, the

pool of the individually insured will become overstocked with sicker, costlier

people. In extreme cases, adverse selection creates a classic insurance ''death

spiral'' in which the higher costs associated with a sicker pool force insurers

to raise premiums, which leads healthier (often younger) people to drop

coverage, which in turn makes the remaining pool even sicker and costlier on

average, driving premiums up again, and so on. The vicious cycle continues until

premiums are sky-high and only the sickest are insured, at exorbitant rates.

 

No one thinks this is a good result. So from the insurers' point of view,

serving the individual market is a balancing act. As several executives told us,

they are trying to keep prices as low as possible, but lower prices depend on

insurers' ability to keep higher-risk individuals out of the pool or at least

price their coverage in ways that reflect higher costs. When you toss in the

fact that the individual market is more costly to serve than group markets --

the cost of administering and selling policies can come to 35 percent of premium

dollars versus 5 percent for larger groups -- you see why insurers might reject

even marginal risks (like us) or offer policies with fewer benefits as well as

higher deductibles and co-pays.

 

But even if most insurance companies are acting reasonably, a number of their

practices are unsavory, and some may even skirt the law. ''There are a variety

of games that can be played,'' one longtime industry participant told us. ''You

know, we'll insure you as long as you're healthy and then make it so expensive

that you can't get insurance or can't afford it.''

 

A common pricing strategy, for example, is called ''durational rating.'' That

means the longer you hold your policy, the faster your rates increase every year

at renewal, and when these rates start to hurt, the insurer offers you the

option to apply for another policy that is much cheaper. For this new policy,

however, you need to go through medical underwriting again. If you can pass

muster, the insurer will let you back into a more favored pool with lower rates.

If you can't pass through underwriting, well, then you just have to stay in this

ever-costlier policy. (This stratagem doesn't run afoul of state laws because

the rates aren't being hiked on individuals but on a whole class of

beneficiaries who have had policies for some time -- a nice nondiscriminatory

way to distinguish between those who are aging expensively and those who

aren't.)

 

Many insurers rationalize their aversion to unhealthy customers by saying they

support state-run ''high risk'' pools -- the initial place that Blue Cross told

us to turn. But at least as structured today, these last-resort ghettos are no

answer at all. Only 30 states offer ''high risk'' catastrophic programs, and

funds are so scarce that they serve just 170,000 people nationwide. (Only

California and Minnesota serve more than 2,000 each.) Premiums can be nearly

double normal rates, and here's the kicker: pre-existing conditions (i.e., the

very troubles that landed you in the high-risk pool in the first place) are

typically not covered for 6 to 12 months.

 

Now there's a compelling advertising pitch to America's unluckiest souls: ''You

cover your cancer (or diabetes or heart condition) for 12 months -- we'll pick

up the rest!''

 

 

Is there a cure for these ills? Reformers on the left often champion

''guaranteed issue'' and ''community rating'' laws -- these regulations require

all applicants to be offered policies at basically the same premium, no matter

their health status. But in today's voluntary and unsubsidized markets, such

well-intended rules can hurt some of the people they are meant to help. In New

York (and elsewhere), insurers respond by setting community rates higher than

they otherwise would be, since the requirement to serve all comers means the

pool will tend to be sicker.

 

As a result, while New Yorkers in our situation today could purchase a policy in

the individual market, they owe their good fortune to a regulatory scheme that

assures that thousands of their poorer but healthier neighbors can't afford

coverage at all. Insurers love to mock the unintended consequences of

well-intended laws. ''Find out why it costs less to lease this Ferrari than get

a $500 deductible health care policy in New Jersey,'' shouts the Web site of an

industry group called the Coalition Against Guaranteed Issue.

 

But whatever free-market advocates might say, community rating, though

controversial in theory, is actually the norm in America today. Employees of

large companies enjoy it on a de facto basis, as health risks are spread among

thousands of workers. A big company is essentially a socialized health republic

in which the young subsidize the old and the healthy subsidize the sick -- and

everyone pays the same premiums for the same plans.

 

Ultimately, what is disturbing is not the idea of community rating but the idea

that millions of people are denied the community rating now enjoyed by the vast

majority of Americans -- a denial due only to the accident of where they are

employed or to health woes that are largely accidents of birth.

 

Providing a form of community rating to everyone requires two essential steps.

The first is to make sure that everybody has access to some kind of group

coverage; insurance simply doesn't work for the isolated individual. (John Kerry

wants to let individuals and small firms buy into the federal employees' health

plan; others, including some conservatives, have suggested allowing churches,

synagogues or similar organizations to establish their own insurance pools.)

Second, everybody has to buy health coverage. If states can require car owners

to buy auto insurance, why can't they require all of us to purchase health

insurance?

 

Once we require coverage and subsidize those who need help to buy it, we have

come a long way. The health insurance industry would look more like a regulated

utility than a business in which people can get rich by making sure the sickest

Americans are someone else's problem.

 

To be sure, taking these steps is not easy, and reasonable people have different

notions of how to fashion the cure. But our Scarlet U persuades us that the

ground may be shifting. As we learned once we started sharing our story, there

are a lot more upscale uninsurables out there than you would think. The trend

toward freelance work among the well-to-do means a powerful new constituency for

health reform is taking shape. It is one thing for politicians to address the

uninsured out of a liberal-minded generosity to poor workers. That makes for

nice speeches. But this is different. If even healthy members of the

professional class are just an entrepreneurial itch away from discovering they

are uninsurable, maybe they will decide it is time to really fix things. And

when that happens, perhaps they will fix them for everyone.

 

 

 

 

 

 

Jody Miller is a part-time venture capitalist and consultant. Matt Miller is a

Los Angeles-based senior fellow at the Center for American Progress and the

author of ''The 2 Percent Solution: Fixing America's Problems in Ways Liberals

and Conservatives Can Love.''

 

 

 

Copyright 2004 The New York Times Company

 

 

 

 

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