The Problem With Limited Medical Plans

By Gene Leis

Oct. 7, 2008

They’re growing.

No longer the fringe temporary benefit coverage they once were, limited coverage medical plans have gained enough ground to become a proven tool in the HR arsenal to reduce medical costs. There are now some 30 carriers peddling these offerings, and big-name retailers and restaurants are buying.

But despite past growth in this market, the future may be more complicated for limited medical plans and the employers that use them.

The concept of limited medical plans is simple. The best plans usually (but not always) allow the employee to go anywhere for care and have low co-payments.

There are generally no pre-existing condition limits and no physicals. Like any group plan, limited medical plans must comply with HIPAA and COBRA to be offered as group coverage. The products are fully insured and have monthly premiums in the $100 range.

With employers spending on average $7,000 in health care costs per employee annually, the prospect of offering coverage for under $2,000 is something that has made limited medical plans a growth product for health insurance companies.

As of two years ago, there were more than 1 million holders of these plans, and experts estimate the market to grow as much as 20 percent annually in coming years.

There is a catch, though. These plans have total annual coverage limits as low as $1,000 but more typically in the $5,000 to $15,000 range.

There’s a shell game in how plans define their maximums, but in general, an employee with a stomachache or a broken leg will probably be covered by these plans. If an employee has a heart attack or a bone marrow transplant, he will quickly hit the policy limits, and will owe doctors and hospitals one heck of a lot of money.

As Phil Wheeler, president of the advocacy group Citizens for Economic Opportunity, told the Hartford Courant newspaper in 2006, “These plans are designed not to be there when you need them. It’s like having an empty fire extinguisher on the wall.”

The history of limited medical plans reflects the market niche they were created to fill. They were designed for part-time employees, and to provide coverage to new full-time employees before they become eligible for coverage under the employer’s traditional medical plan.

If an employee had coverage with a prior employer, the cost of COBRA during this interim period could be a deterrent to changing jobs. A limited plan with a $5,000 cap is generally sufficient short-term coverage, and cheap with its $100 premium.

Offering this as permanent coverage to part-time employees has merit for those employers that previously offered nothing to such workers. It doesn’t adversely affect the employer’s compensation cost structure, and it extends coverage beyond the full-time employee group. It all seems quite noble.

But fast-forward to the present. Managing health care costs is redefined as controlling your increases. Let’s face it: The only way to save money is to spend less money. That means someone out there has to receive less money. Who’s it going to be? Limited medical plans play several roles in bringing costs down, but as their impact increases, so do the consequences.

Some employers, especially those with high turnover, are increasing the waiting period before new hires are eligible for health care coverage to 12 months and are offering them limited medical plans during that period. Some are scrapping their traditional plans altogether and replacing them with these limited offerings for full-time employees.

That’s where I see a long-term problem.

This is like rolling out an “un-welcome mat” to job seekers with disabilities or those with sick family members—a group for whom benefits are particularly important. Do limited medical plans sound like an Americans With Disabilities Act violation?

They’re not, says the Department of Labor, at least not yet. In a candid chat with a DOL official in October, I was told that the agency is looking at these limited benefit offerings, but it can scrutinize them using only existing laws and standards.

If agency sees equal coverage for maternity, fully disclosed plan limits and HIPAA and COBRA compliance, the plan is OK. Some states, like Massachusetts, have determined that limited coverage medical plans do not meet their minimum coverage standards and have refused to license carriers to sell these plans, but at the federal level the coast is clear.

After all, there is no fundamental difference in a $1,000 or a $1 million maximum coverage limit. These are simply limits chosen by employers, as is their right under ERISA.

So what’s my problem with these plans? As more employers reduce their coverage to limited benefits, employers who do not follow suit are going to look like the Statue of Liberty to job seekers with health concerns: “Give me your tired, your poor, your huddled masses yearning to breathe free, the wretched refuse of your teeming shore … ” and we employers will pay their medical bills. The underwriting term here is “anti-selection,” and the cost goes far beyond simply paying for medical coverage.

Healthy young workers are much less concerned with benefits and more with wages. This vital segment of an employer’s population will move toward companies that offer slightly higher wages because their compensation structure is linked to these low-cost limited plans. Older workers, who use more health care, as well as those with chronic conditions, will migrate to companies offering better benefits.

This could potentially affect millions of employees. As carriers hard-sell their limited products, this shift will become a measurable statistic affecting the cost of disability, life insurance, dental, vision, absenteeism and other costs.

As if that’s not enough, you can’t honestly believe that workers earning $10 an hour are actually going to pay a $50,000 or $250,000 medical bill. As more bills go unpaid, prices will rise for those who do pay.

A counter-argument is that by covering people who previously weren’t covered, employers help to reduce the number of people who are uninsured. Obviously if you are providing limited medical insurance to someone previously uninsured, you’re helping. But if employers looking to cut costs choose only to offer limited medical plans to employees, where does that leave people with chronic health issues?

Sick people covered by traditional plans will be less likely to leave those jobs through normal attrition. This would be a double whammy few employers could afford.

The upshot of these plans is that employers who recognize the flaws of limited medical plans may nonetheless have little choice but to embrace the plans or be left to insure chronically sick employees who have no other way to receive health insurance. If this trend were to continue, companies with more comprehensive coverage would have to scale back to limited plans to avoid becoming the employer of choice for the chronically ill.

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