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We’ve been getting questions from people confused about how the Affordable Care Act (ACA) will affect Medicare and related health care plans in the months ahead. This confusion is understandable. In this column, we’ll try to clear up the confusion and show how a smart consumer can navigate Medicare-related coverages.

First, a quick review of how Medicare, Medicare Supplement and Medicare Advantage plans work.

Medicare is, of course, the federally-administered health care benefit program that provides coverage to most Americans over age 65 (and millions of younger people with long-term health issues). The program is organized into four parts:

• Part A covers inpatient hospital care;
• Part B covers outpatient medical services;
• Part C offers an alternative, a combination of hospital and outpatient services structured along the lines of a managed-care plan;
• Part D covers the cost of outpatient prescription drugs.

About three-quarters of American seniors use Parts A and B, which together operate something like an indemnity insurance plan that offers flexibility in choosing doctors and/or hospitals; the remaining quarter opts for Part C, which—as we’ve noted—operates in a manner similar to an HMO or other managed-care plan.

If you’re eligible for Medicare and opt to use the more-flexible Parts A and B, you are subject to many out-of-pocket fees and expenses. Also, things like dental, vision and long-term care (LTC) coverage aren’t offered. For these reasons, a vibrant market in private-sector Medicare Supplement insurance has grown up around the government program. (This supplemental insurance is often called “Medigap” coverage; but some professionals who work in the market find that term derogatory. So, we’ll try to avoid it.)

Medicare Supplement policies are offered by private insurance companies; but they are heavily regulated by the federal government. All Supplement policies must match one of six coverage templates designed by the Department of Health and Human Services; these templates are named Plans A through F, with A offering the least additional coverage and F offering the most.

A quick note: Medicare Parts A through D and Medicare Supplement Plans A through F do not correspond with one another in any way. They are two totally different groups of coverage that only share, somewhat confusingly, a lettering system for naming their various elements.

The key part of buying Medicare Supplement coverage is timing: If you’re going to buy it, you need to do so during the first six months that you’re eligible for Medicare (usually, though not always, starting the day you turn 65). This six-month window is called the Initial Enrollment Period; during it, your acceptance is guaranteed and the insurance company is required to waive any pre-existing condition exclusions or limits.

If you don’t choose the supplement coverage during your Initial Enrollment Period, you will be subject to medical underwriting and may be subject to pre-existing condition exclusions. These underwriting standards aren’t impossible…but they can be difficult. And they can limit the amount of supplemental coverage you can buy.

If you’d rather avoid the expense and complexity of Medicare and Medicare Supplement coverage, you can choose a Medicare Advantage plan instead.

Like the supplemental coverage, Medicare Advantage (formerly called Medicare+Choice) plans are issued by private-sector insurance companies. These private insurers are paid a monthly fee by the government in exchange for providing managed-care type medical services to eligible consumers. As of last year, the average monthly per capita payment was a little over $900.

If the services provided by the company cost less than the payments collected, the company keeps some profit and rebates the rest to the consumer in the form of a credit that the consumer can apply to buying additional coverage. Through last year, the average annual rebate was about $1,000.

In most cases, Medicare Advantage coverage offers first-dollar coverage (that is, no out-of-pocket fees, deductibles, etc.) in exchange for limiting your selection of doctors and hospitals to those who have agreed to be part of the insurance company’s provider network.

Like Medicare Supplement coverage, Medicare Advantage has a limited Initial Enrollment Period. If you don’t enroll at that time, you’ll have to wait until the next Annual Enrollment Period—which is usually a six-week window from mid-October to early December. And, when you enroll, coverage doesn’t begin immediately; it starts a few weeks later, on January 1.

So, that’s the recap of the basic mechanics. Now, to answer the most common questions….

Can you change your Medicare Supplement plan (that is, your selection from the A to F menu of additional coverages)?

Yes. Most insurance companies will require that you do this during the Annual Enrollment Period. And you may be subject to new health underwriting—so, if your health has declined, you may have trouble switching to a Supplement plan with more coverage.

Can you change your Medicare Advantage plan?

Yes. Again, you’ll need to do this during the Annual Enrollment Period—but, as with other types of managed-care coverage, underwriting standards are usually more relaxed when you’re changing between Advantage plans.

Can you change from a Medicare Supplement package to a Medicare Advantage plan?

Yes. There’s just one big caveat here: the Annual Enrollment Period for Supplement plans and Medicare Advantage are not always the same. To transition smoothly, make sure those enrollment periods match.

Can you change from a Medicare Advantage plan to a Medicare Supplement package?

Yes. But this is the most difficult transition. First, there’s the timing issue on the enrollment periods; then, the Supplement carrier will usually require new health underwriting—so you’ll be subject to a physical and may have some exclusions or restrictions written into the policy.

Does the Affordable Care Act eliminate Medicare, Medicare Supplement or Medicare Advantage plans?

Here’s where things start to get confusing.

The simple answer: The ACA does not eliminate Medicare and Medicare Supplement plans. In fact, the Feds have given several breaks to Supplement insurance companies that suggest their products will do very well in the near-term future (although the long-term prospects aren’t so clear). So, they’re not going away.

However: The ACA will cut—and cut substantially, by 2017—federal funding of Medicare Advantage plans, which will probably leave Medicare Supplement plans as the only available choice for seniors who want to get more comprehensive coverage than Medicare Parts A and B offer.

The main cost-saving element of the ACA, worth an estimated $240 billion in the first 10 years, is…cuts in Medicare Advantage funding. According to a report released in the spring of 2011 by members of the House Ways and Means Committee, “it is estimated that more than seven million seniors will lose their Medicare Advantage plans, resulting in a massive migration of seniors to Medigap plans.”

So, the ACA favors Medicare Supplemental packages over Medicare Advantage plans?

Yes. Another example: Citing language in the ACA, the Department of Health and Human Services has exempted Medicare Supplement carriers from so-called “rate review rules.” This means that Supplement carriers will be free to increase the rates and premiums they charge for the coverage without HHS oversight. This exemption will become important in a few years, when the ACA’s “guaranteed issue” standards are fully implemented. At that point, people will probably be paying more for Medicare Supplement coverage, even though the plans will likely cover less.

In short, the ACA “clears the field” of competition for Medicare Supplement policy carriers in the next few years, which will make it easier for those companies to raise rates.

I have a Medicare Advantage policy and like it. How much longer can I keep it?

At least another year—through the end of 2013. And maybe longer.

Although some political partisans dismiss Medicare Advantage plans as a scheme hatched by “greedy” insurance companies, the fact is that more than 12 million seniors use them. And most of those people like them. As a result, there’s been some political hedging about just how quickly Medicare Advantage is being phased out. Originally, cuts were supposed to begin in 2013—which would mean insurers would raise rates and possibly stop offering the plans, as of the upcoming Annual Enrollment Period which begins in mid-October 2012.

A few weeks before the U.S. presidential election.

So, the HHS recently announced that it would move money from a fund designed for “demonstration projects” to replace the first phase of cuts in Medicare Advantage funds. This last-minute shift of approximately $8 billion means there will be no effect on the plans through the coming year. As one pundit has noted, the move allows the current administration to “take credit for a popular program [they] really want to kill.”

The long-term prospects for Medicare Advantage under the ACA are still grim. By the time the Annual Enrollment Period for 2014 comes around, it’s likely that the plans will require out-of-pocket payments from consumers to sustain even their limited services—which effectively defeats the purpose of a managed-care-style plan.

So, am I better off moving to a Medicare Supplement package this fall?

Not so fast. Some members of congress are concerned that Medicare Supplement packages aren’t a great deal for consumers and have proposed bills requiring insurance companies that write Supplement coverage to meet higher medical loss ratios (MLRs), the percentage of premium dollars that go toward medical care as opposed to overhead and marketing costs.

But industry spokespeople have said that higher MLR standards could force carriers out of the market and make a hash of existing coverage.

…and, of course, there’s always the chance that the U.S. Supreme Court will overturn the ACA—returning the entire debate over Medicare Supplement packages and Medicare Advantage plans back to where it was several years ago. At that point, Medicare Advantage plans seemed to be in the growth position.

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We’ve been getting a lot of questions lately from people concerned about losing their current health insurance coverage before the “guaranteed” coverage provided by the Affordable Care Act (ACA) becomes available. If it actually does.

Some of these letter-writers say that their employers plan to discontinue coverage, whether or not the ACA is overturned by the Supreme Court or repealed by a future congress. These questions seem to reflect a general anxiety about the current state of the health insurance marketplace. And a few sound a bit like urban legend—most polls on the subject indicate that employers do not plan to cut health coverage this year or next. (Or, at least, they won’t admit such plans to pollsters.)

Regardless of anxiety or opinion polls, the fact is that various laws at the federal and state levels make it difficult for employers to discontinue health insurance benefits, once started. But, in the interest of clearing up confusion, we’ll answer the main question: What happens if your employer decides to cut off your health coverage? For starters, the decision probably won’t take effect immediately. The federal Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) applies to all companies with more than 20 employees and controls how insurance benefits are managed.

COBRA is most relevant to insurance consumers because it requires employers to make existing coverage available to former employees, in most situations, for between 18 and 36 months after the employee becomes “former.”

COBRA coverage isn’t free to the former employee; you have to pay your former employer the monthly premium (plus up to 2 percent more to cover the former employer’s administrative costs). This can be expensive, especially if the ex-employer has an older employee population and is paying a higher group premium. But the former employer must make the coverage available; and, for people with health problems, COBRA coverage is often a better deal than individual-coverage alternatives. COBRA rules also apply when an employer decides to discontinue health insurance benefits. Effectively, the law requires the employer to give employees advance warning of the discontinuation—and must make the benefits available for at least the COBRA-minimum 18 months available to former employees.

If you’re in good health, COBRA coverage may not be so important. You may be able to buy any of several types of individual health policy for the same price. Or less. But, as we’ve noted, if you are (or have a dependent who is) in poor health or have pre-existing conditions, keeping COBRA coverage will usually be your best strategy.

The 18- to 36-month COBRA period is intended to give you enough time to search for either a new job or an individual policy that suits your needs. The key here is to make sure that you start that search right away—especially if you have a health history that will make finding good individual coverage difficult. The goal, from the beginning, should be to have a solid solution in place well before you run out of time on COBRA. We hear from many letter-writers who wait until their COBRA coverage ends to start looking for other coverage. That’s dumb.

One last note on COBRA coverage: The federal law allows individual states to follow their own laws instead, as long as those state laws at least match standards set by the federal version. For example, Connecticut state insurance law (CGS § 38a-538) requires employers to allow “individuals to elect to continue coverage under a group plan pursuant to federal extension requirements established by” federal COBRA. And, if an employer decides to discontinue health coverage, it has to wind down the benefit over a period of at least 18 months. So, check with your state’s Department of Insurance about which laws apply. But the fact is that, because of COBRA’s long wind-down period, many employers trim away at coverage rather than eliminate it altogether. Or they pass a greater portion of premium payment to employees, often under the rubric of “cost-sharing.”  Still, if your employer does end all health insurance coverage—or if its COBRA coverage is extremely expensive—you can buy yourself additional time to find a long-term solution by using short-term or “temporary” health insurance coverage.

(At this point, some nit-picking readers may point out that all health insurance is temporary, since it’s usually set up on a one-year term. But, as we’re about to see, the insurance industry considers “temporary” to mean a policy with an ever shorter term.)

Some common traits of short-term health insurance:

• generally lasts up to 11 months;
• may be renewable for one or two additional 11-month terms;
• some policies are structured as one-month contracts, renewable for a longer term (six to 11 months);
• even though most short-term policies have simplified applications, underwriting is strict; if you’ve ever been denied health coverage, you probably won’t qualify;
• the underwriting process will consider an applicant’s height and weight;
• generally, all insured persons must be under the age of 65;
• pre-existing condition limits and other exclusions are often strict and “look back” as much as 36 months (this varies by state);
• typical policies do not pay for routine preventative care such as physical exams, immunizations, and PAP tests;
• generally short-term policies have high deductibles, starting at $500 and going as high as $5,000 or ever $10,000;
• lower deductibles will usually be followed by 80/20 co-pay to $5,000 or $10,000, followed by full coverage;
• as of early 2012, short-term policies were available in all states except Massachusetts, New Jersey, New York and Vermont.

Though their coverage is limited, these policies have been growing in popularity over the past decade. They’ve really taken off as a low-cost alternative to COBRA coverage. By some estimates, as many as 16 million Americans have been buying temporary health insurance each year in the early 2010s. And the growth in market size has driven premiums down. A short-term health insurance policy usually operates like an indemnity plan, which means you will have the ability to see any doctor or specialist you choose. However, most short-term policies require pre-certification of treatment.

“Pre-certification of treatment” is a process whereby you have to obtain prior verbal or written authorization from the insurer for any covered:

• hospital admission;
• inpatient procedure, therapy or treatment; or
• outpatient surgery.

Here is standard pre-certification language from a short-term policy:

At the time notification of surgery is made, We will inform the Insured and his or her Provider if a second opinion is required, at the expense of the Company, before certification will be given and will assign a length of stay if it is determined that Inpatient hospital care is Medically Necessary. We may extend the length of stay upon the request of the insured or the Provider if We determine an extension is Medically Necessary. No benefits will be Provided under this Policy for expenses that are determined not to be Medically Necessary.

Treatment Provided at any time after initial certification that differs from the specific plan of care and treatment previously authorized requires re-certification by Us. While some short-term policies are renewable for 30 months or more, the insurers may refuse to issue a second or third policy if you have filed any claims under your previous short-term policy. Others may offer another policy—but will treat any injuries or illnesses that occurred during the previous short-term policy as ore-existing conditions and won’t cover treatment related to those conditions in the new term.

So, if your employer really does discontinue health coverage, your two best tools for buying time to find new coverage are: the required COBRA wind-down period; and the short-term health policy. Between them, these tools should give you from a few months to three years to find a long-term solution.

Just don’t wait until the interim options expire to start looking for that.

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Anyone who wants to buy insurance wisely needs to be familiar with the phrases “soft market” and “hard market.” The insurance market—like housing markets, energy markets and most others—follows a cyclical pattern of expansion and contraction. The periods of expansion, called “soft markets,” are characterized by:

• steady or lower rates and premiums,
• easier underwriting standards, and
• more aggressive competition among insurance companies for business and market share.

On the other end of the cycle, the periods of contraction—called “hard markets”—are characterized by:

• rising rates and premiums,
• stricter underwriting standards, and
• less competition among insurance companies, including some companies exiting certain markets altogether.

On average, a complete soft/hard cycle lasts between seven and ten years, with each part lasting about three years. (Some recent evidence suggests that these averages are trending longer.) So, the best time to shop for new or improved insurance coverage is during a soft market. And, during a hard market, you should make sure to keep whatever insurance you have in place—because if you need new or replacement coverage, it’s likely to cost more and provide less.

What factors influence turns in this soft/hard cycle? That’s hard to say. Some insurance professionals think their market follows the general economy, especially interest rates; but others think the insurance market is actually a leading indicator of where the general economy is heading. One thing experts agree on: the combination of low interest rates (which hurts insurance companies’ investment income) and slow growth encourages hard-market conditions. Changes in laws or regulations can have an effect, too.

Earlier this year, the big insurance broker Marsh released a projection for insurance market conditions in 2012. While the firm’s actuarial brains say that market conditions for the year will come up a little short of their definition of a “hard” market, they think rates will be going up.

According to David Bidmead, Marsh’s head of U.S. operations:

“Carriers are expected to be extremely disciplined in their underwriting and seek rate increases where they can. Those insureds that are able to provide carriers with complete, accurate, and quality data will be best positioned to navigate a changing insurance market and effectively differentiate themselves from others seeking critical capacity for catastrophe risks.”

“Extremely disciplined underwriting” is not generally a good thing for insurance consumers. It means lots of applicants will be turned down for the best policies. And, even if they qualify for coverage, the cost will be steep. Insurance companies have been preparing for stricter underwriting because they expect the Affordable Care Act to be either overturned by courts or repealed by Congress. And that will likely mean a flood of Americans looking for individual health insurance.

Why? In many cases, employers and employer groups have already made plans to drop health coverage for their employees as the ACA takes effect; if the law is overturned, those employers/groups will have to either:

• pay higher premiums for a shrinking level of health coverage, or
• drop health insurance as a benefit.

Even if some choose the first option, enough will choose the second that many employees will be turned loose into the market for individual health insurance policies. This move should not come as a complete surprise. The market for individual health insurance policies has been growing modestly for several years; in fact, its growth is one of the reasons that the experts at Marsh and other brokerages say the current insurance market doesn’t quite qualify as “hard.” This modest growth usually fuels the kind of competition that drives prices down. Like most sellers of goods or services, insurance companies like growth—as long as it’s steady and predictable. The flood of consumers into the individual policy market might be overwhelming, though, which could push rates and premiums up.

So, if you’re turned loose in the individual health policy marketplace, what will “disciplined underwriting” mean for you?

Health insurance underwriting metrics are the same for group and individual policies—they’re just more severe for individual policies, because there’s no risk pool to share the cost of claims. So, expect a lot of questions about your health—present and past—as well detailed lifestyle questions. And get ready for blood tests, height and weight confirmation and other para-medical examinations before you get coverage. If you smoke or drink heavily, or if you’re overweight, expect to pay a lot more than sober, non-smoking, thin people pay. Age also plays a major role in health underwriting. Since health policies tend to renew on an annual basis, you can’t usually lock in a set premium for 10 years or more, as you can with life insurance. (This may change in the next few years.) Instead, look for a policy that’s “guaranteed renewable”—this is as close to a locked-in rate as the health market currently offers. If you can find a policy that guarantees renewal, make sure you keep for as long as possible. Particularly if the insurance market remains in a hard phase for the next few years.

As we’ve noted before, one of the best ways to save money on health insurance is to look for a high-deductible policy combined with some form of tax-advantaged savings account. The ACA limits some of the cost-saving features of the most common high-deductible policy-plus-Health Savings Account packages. But, if the law and its HSA limits are overturned, expect those packages to become popular again.

There are several other administrative and regulatory steps that will help make individual health policies more affordable. The most commonly-cited of these steps include:

• Allow individuals to claim the same tax deductions that employers and employer groups claim currently for health insurance expenses.
• Allow individuals (and, for that matter all consumers) buy health insurance policies across state lines, creating more competition.
• Loosen the rules allowing small groups (such as trade/professional associations, religious or social organizations, etc.) to establish purchasing groups or risk pools for their members.
• Create liability limits for medical malpractice and other health-care related liabilities—and make sure that those lower costs are reflected in relevant health insurance rates and premiums.

If some or all of these changes are made, a hard (or not-quite-hard) health insurance market might soften a bit. Whatever the future of the Affordable Care Act, the trend in the health insurance markets seems to be a movement toward more individual policies. In the long run, this could mean a more efficient system of allocating health care costs; in the short run, it may mean some market uncertainty and higher premiums. This is especially true if a repeal of the ACA coincides with a move to the hard end of the insurance market cycle.

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One of the most important factors in buying health insurance (either an individual or group policy) is whether the insured person has a “pre-existing condition.” Generally speaking, if you have a medical condition that has required medical attention—and you still have it at the time that you apply for new insurance—you’re going to have some difficulty buying a standard policy.

Why are pre-existing conditions such a big deal?

Most policies limit or deny coverage for people with pre-existing health problems. Politically, this is a major issue; actuarially, it’s just common sense. In the last year or two, the politics has been getting the better of the common sense. In this column, we’ll consider the matter from both perspectives, so that you can understand how to make the best insurance-buying choice. Even if you have a pre-existing condition.

It’s a central tenet of free-market insurance that any person can buy coverage—as long as that person is willing to pay high enough premiums and accept low enough coverage limits. If the premiums are too high and the coverage limits too low, a rational individual will choose to avoid health insurance and pay cash out-of-pocket for whatever (hopefully minor) medical expenses he or she incurs. This option not to buy overpriced health insurance coverage is an important signal to insurance companies about how effective their pricing models are. Take it away and prices tend to rise for everyone. Why? Because, when a healthy person chooses to opt out of the available health insurance marketplace, he or she leaves people who tend to be in worse health—on average—than in the pool of insureds. And, if many healthy people leave, a kind of negative critical mass occurs: So many sick people remain that they drive up claims costs sharply.

Economists call this “adverse selection.”

Some insurance experts argue that adverse selection causes insurance costs to rise so fast that no rational healthy consumer will ever buy available coverage. The only people left in the risk pool are those who expect to make claims greater than the premiums they pay. This leads to a counter-intuitive conclusion: If an insurance company can sign up a customer with a preexisting condition at an exorbitant premium, the insurance company probably doesn’t want that customer. Why? Because that customer has decided that the coverage he or she will receive in exchange for the seemingly-high premium will outweigh the seemingly-high cost. And will be inclined to make claims.

Some insurance experts have written that people with preexisting conditions “are better at predicting” their future medical needs than healthy people who don’t have as much experience in using health care services. But the federal government doesn’t seem to believe this theory.

Currently, the Affordable Care Act (ACA) has established a government-run Pre-Existing Condition Insurance Plan (PCIP) that offers health insurance coverage to those denied coverage because of their conditions. The program’s current financial status hints at the high costs that come from insuring people with histories of cancer, diabetes, heart attack, stroke, etc. The health care cost per participant in the PCIP is currently projected to be nearly $30,000 a year; this more than double what government actuaries projected when the ACA was passed into law.

Of course, the PCIP is merely a transitional program. By 2014, the ACA will prevent insurers from discriminating in any manner based on pre-existing conditions: by law, cancer victims and stroke survivors will be able to buy insurance at the same price as healthy applicants of the same age and gender.

In other words, under the ACA, all people are required to buy government-approved health coverage. The healthy can’t opt out; they have to subsidize the sick.

This is the scheme’s vaunted hedge against adverse selection—the so-called “individual mandate.” But this mandate blinds the health insurance marketplace to its critical pricing signals.

Suppose the Company X offers all insureds the a medical insurance policy for $10,000 per year, based on data showing that the annual medical costs of all insureds is about $8,000, on average. A consumer who expects his expenses to total just a few hundred dollars—and there are some people who have such few and minor health problems—won’t sign up. The coverage isn’t worth it.

But consumers who decide that they will use more than $10,000 in medical services each year will enroll.

Now, suppose that Company X researches loss histories for people who’ve had cancer and concludes that its average annual medical expense for each of them is $15,000. On first glance, Company X should be able to charge an annual premium of $20,000 to people who’ve had cancer and stay well ahead of the projected medical expenses. But things don’t always work so logically. In fact, rising premiums often create a so-called “death spiral.” Each time Company X raises its premiums, it chases away more relatively-healthy people and attracts an increasingly expensive set of sick insureds.

Again, this is why the individual mandate is so important to the ACA—if everyone is forced to buy health insurance, the healthy will end up paying in more money which funds the medical care provided to the sick.

The origins of the ACA’s tools against adverse selection reach back almost 50 years. In December 1963, Stanford economist Kenneth Arrow published a paper in the American Economic Review titled “Uncertainty and the Welfare Economics of Medical Care.” Arrow identified five principal “distortions” in the market for health care insurance:

1. Uncertainty of Demand. People’s needs for health care are unpredictable, unlike other basic expenses—like food and clothing.
2. Expected Behavior of the Physician. You can’t just set up shop on the side of a road and practice medicine; you need a license to be a physician—and getting that license requires years of training. And physicians want to be compensated for that.
3. Concepts of Trust and Delegation. Trust is a key component of the doctor-patient relationship; the patient must trust that the surgeon knows what he or she’s doing.
4. Supply Conditions. Doctors usually know far more about medicine than do their patients; therefore, the consumer of medical services is at a disadvantage relative to the seller.
5. Pricing Practices. Patients don’t see the bill until after the non-refundable service has been provided, so they’re rarely able to shop around for medical services on price and value.

Arrow argued that the only good solution to these pricing problems was to force everyone to buy the same, basic coverage.

Recently, the Forbes magazine columnist Avik Roy wrote a lengthy article in The Atlantic magazine which argued that there are several free-market solutions to the issues Arrow raised all those years ago. Specifically:

Arrow’s prescriptions for addressing health care’s distorted market involve…further distortion. [Y]ou can’t shop for health care when you’re unconscious, or when you’re in acute or emergent situations. Does this justify nationalizing the health care system? No. At most, it justifies nationalizing a subset of health-care decisions that take place in acute settings. …it seems to me, those who strongly believe in the shopping argument for socialized medicine should adopt a hybrid approach. Let’s have a free market for the 70-plus percent of health care where market forces can most directly apply, and let’s have universal catastrophic insurance for those situations where market forces work less well.

Until that day, U.S. already has a hybrid market: Medicare/Medicaid for the old and the poor and a relatively free market for health insurance for the younger and employed. While the status quo has flaws, it couldn’t be worse than the Feds at communicating important pricing signals.

Photo credit: http://www.sxc.hu/profile/Mattox

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The recent controversy involving “free” contraception advocate Sandra Fluke, talk radio host Rush Limbaugh and the role of “Obamacare” is instructive—but probably not for the reasons you think. If you look past the political posturing of the people and groups involved, the controversy offers some useful insights into how health care reform works and how the kind of coverage you choose affects the cost that you pay.

There are bound to be more controversies involving the implementation of the Patient Protection and Affordable Care Act. And, since this is an election year, these controversies are bound to be used to advance various political agendas. This column isn’t interested in partisan politics—but it is interested in how public policy and laws affect the choices available to consumer of health insurance and medical services.  That is, the choices available to you.

You might be surprised to know that the word “contraception” doesn’t appear anywhere in the body of the Affordable Care Act. What does appear, many times, is the phrase “preventive services.” The Act states repeatedly that “preventive services” include:

1)     diagnostic tests for chronic conditions such as diabetes (which is, essentially how Medicare defines the phrase),

2)     regular check-ups, fairly standard screening tests like mammograms and well-baby visits for small children, and

3)     any other services or items as defined by the Secretary of Health and Human Services.

The Act also makes repeated use of the term “no cost-sharing”—mostly in the negative  (as in, “there shall be no cost-sharing for _____”). In this context, “cost-sharing” means co-payments, co-insurance fees, deductibles or other out-of-pocket payments borne by the patient.

Combining these concepts, the Act states more than once that there “shall be no cost-sharing” for “preventive items and services.” And it creates several task forces that are involved in defining terms like “preventive items and services” in greater detail. These task forces suggest administrative rules, ultimately issued by the HHS Secretary, which define how the Act is implemented.

This puts a lot of power in the hands of the task forces and the HHS Secretary. More to the point, for most consumers: The HHS Secretary determines what’s covered—not only for government-run insurance but also for any private health insurance available in the U.S.

The recent dust-up involving Ms. Fluke and Mr. Limbaugh was preceded almost a year ago by HHS Secretary Kathleen Sebelius’ promulgation of an “interim final rule” that all forms of contraception would be considered “preventive services” for the purposes of the Affordable Care Act. That interim final rule was made finally final in January of this year (though at least one stakeholder complained that the process was completed in a panic: “There was a notification this morning and the rule came out around noon”).

Since the Act states that preventive services shall have no cost-sharing, Sec. Sebelius’ rule meant that all health insurance policies sold in the U.S. after the middle of next year must cover procedures like vasectomies or tubal ligations and items like hormone pills—without requiring any deductible or co-pay.

Sec. Sebelius has described the rule a victory for consumers. In an opinion column published in USA Today earlier this year, she wrote:

One of the key benefits of the 2010 health care law is that many preventive services are now free for most Americans with insurance. Vaccinations for children, cancer screenings for adults and wellness visits for seniors are all now covered in most plans with no expensive co-pays or deductibles. So is the full range of preventive health services recommended for women by the highly respected Institute of Medicine, including contraception.

That’s not exactly right: Nothing covered by insurance is “free.” Someone has to pay for every check-up administered and every pill prescribed. Directly, that someone is the insurance company; ultimately, that someone is the person paying the monthly premiums for insurance coverage.

Using deductibles and co-pays (or the lack of them) to encourage insured people to use certain kinds of medical services is an old cost-containment strategy that HMOs used a lot in their heyday some 20 years ago. Famously, one California-based HMO removed all co-pay requirements if insureds visited chiropractors or acupuncturists—because those alternative care providers cost so much less than conventional doctors.

In effect, the Affordable Care Act will compel U.S. health insurance companies to operate like one giant HMO—encouraging certain types of care by means of low or no out-of-pocket expense when people use those services. And the “no cost-sharing” rules will be the main tool for this encouraging. Sec. Sebelius made this point plainly when she told a congressional committee: “The reduction in the number of pregnancies compensates for cost of contraception.”

Of course, preventing pregnancy is different than preventing diabetes. No one wants to have diabetes; but some people want to get pregnant and have children. Sec. Sebelius’s use of the phrase “preventive health services” blurs that critical difference.

Most health insurance plans have traditionally covered contraception—whether through procedures like vasectomies or tubal ligations or through prescription drugs like hormone pills. This is a rational cost-containment impulse. From a financial perspective, insurance companies would rather pay the relatively small cost of contraception than the relatively large cost of child birth (especially births which involve medical complications or specialized neonatal care afterward).

As a result, for generations, smart consumers have had to pay close attention to whether and how their health insurance policies covered childbirth. Most policies covered the costs of childbirth—or at least most of them—but some pointedly didn’t. And the policies that didn’t usually cost less.

This range of options for the health insurance that smart consumers could buy was made possible by a relatively free market in which insurance companies could offer products with different types and limits of coverage. Here’s an important point to keep in mind: The new “no cost-sharing” rules limit such consumer choice. And raises costs for everyone.

A critical distinction among different types of health coverage has always been how much an insured person has to pay out-of-pocket for various therapies and services. This is major way that an informed consumer can control how much he or she pays in premiums every month. Simply said, the healthier you are, the more cost-sharing (higher deductibles, co-insurance fees, co-pays, etc.) you want—because this usually means lower monthly premiums.

This is the equal-and-opposite rational response on the part of the consumer to rational cost-containment on the part of insurance companies.

It’s a dirty secret of the Affordable Care Act that it limits the availability of lower-premium policies—and of the rational interaction between health insurance consumers and health insurance companies. It limits consumer choice. The recent controversies further obscure this point.

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In order to shop effectively for health insurance, you need to understand how coverage is priced. Or “underwritten,” in industry parlance.

This is an essential point. But ordinary consumers don’t think much about how health coverage is priced—because they don’t think about insurance like other goods or services they buy. Which contributes to the inefficiencies that sometimes screw up the health insurance markets.

Think about how well you—or maybe your kids, if you have any—understand the pricing of mobile telephone services. People usually know how many text messages or minutes are allowed each month under their phone plans, the costs of exceeding those limits, the speed of their connections, coverage areas and many other fairly technical details.

There’s not much demand for the analogous details about health insurance. And a quick Internet search confirms this: The information available on health coverage pricing at most consumer sites is so limited that it’s not useful.

So, in this column, I’m going to pretend that the pricing of health insurance coverage is something that a precocious 12-year-old would want to understand as well as she does her phone plan. And I’ll try to explain it on those terms.

When an insurance company sets up a health coverage policy, it looks at two things:

1)    the coverage offered by a particular type of health insurance policy, and

2)    the individual (or group of individuals) being covered by that policy.

Some companies refer to these as “primary” (related to the policy) and “secondary” (related to the individual insured) underwriting factors. In industry jargon, a company “prices” the coverage and “rates” the individual insured.

A jargon warning: The terms “underwrite,” “price” and “rate” are used somewhat interchangeably in the insurance industry. Some companies use the terms strictly, separating their slightly different meanings; others use them loosely. In any case, the three terms refer to steps in the process of figuring out how much to charge for coverage.

An insurance company will usually start by pricing the coverage in question. And this is trickier than pricing other types of insurance, for several reasons.

1)    Health insurance policies do not follow industry-standard forms, as homeowners and auto policies do. Most insurance companies write their own health policies, which means there can be big differences between one company’s contract and another’s. It also means that industry-wide payment numbers and trends mean less to a specific company when pricing health coverage than when pricing homeowners or auto coverage. (Though health insurance companies do use industry-wide numbers as a “control” to compare against their own.)

2)    Payments made under an individual health insurance policy can vary dramatically, year to year. And in total. These payments are more difficult to model or otherwise predict than payments made under life or property coverages. Even when a health policy has a lifetime coverage limit (recently prohibited by the federal Affordable Care Act), most claims don’t involve payments that come anywhere near that limit in a given year. But a few do…and it’s very difficult to predict which those few will be.

3)    Government programs—primarily Medicare and Medicaid, but also others—influence the cost of medical care services paid for by private-sector health insurance. While the reimbursement formulas used by the government plans are public information, they can have unintended consequences or other unpredictable effects. And, based on where and to whom a company sells its policies, government programs have a greater or lesser effect on payment histories. In some regions, Medicare sets the market prices for all health care services.

So, there are lots of variables involved in pricing coverage. The best way to account for them all is to keep track of the various payments the insurance company has made under the various types of health policy it offers.

Historically, the most common types of health policy have included:

• traditional indemnity-style coverage
• managed-care coverage
• catastrophic or “high-deductible” indemnity coverage
• major medical coverage
• disease- or condition-specific coverage
• Medicare supplement (a/k/a “Medigap”) or other specialty coverage

Not every company offers all of these coverages; and some companies break one of these categories into multiple sub-categories.

A health insurance company pays actuaries to track its history of payments (sometimes called “losses”) made under each type of coverage. And those actuaries will cross-reference the payment histories by the type of policyholder making claims. So, for example: The actuaries can tell senior management that the company makes an average payment of $6,900 each year on an indemnity policy sold to a 50-year-old woman and an average payment of $3,400 each year on a major medical policy sold to a 30-year-old man.

This sort of proprietary payment (or “loss”) history is extremely important to health insurance companies; it forms the foundation of the company’s pricing formula. From this perspective, it’s easy to see why the insurance company considers its payment history the “primary” factor in pricing coverage.

Next comes the “secondary” factor—namely, you.

In most cases, “you” means a group of individual insureds organized by their employment with one company or entity; in some cases, “you” means an individual buying his or her own coverage. In either case, the “secondary” pricing factors include personal characteristics that are mentioned most often in simplistic consumer-advice columns:

• age
• height/weight
• location of residence
• blood pressure
• smoker/non-smoker
• alcohol use
• other health status (especially any genetic tendencies or chronic conditions)
• personal financial/credit history

If you’re buying health insurance through an employer or other group, these secondary factors are less important but may affect the amount of your monthly premiums or necessary deductibles and co-pays. If you’re buying coverage as an individual, they are more important and may determine whether you’re insurable at all.

So, a health insurance company has its proprietary, “primary” pricing factors in place already when you apply for coverage. It then asks you for information—by means of its policy application form and, in some cases, a blood test or physical exam—to help it gather data on “secondary” rating factors.

If you meet the minimum parameters of insurability, the company uses a formula (also created by its actuaries) that assigns various values to each of the “secondary” factors. For example, if you’re more than 20 percent over average weight for your height, the formula may add X points; if you don’t smoke, it may subtract Y points; etc.

When the total number of points related to all “secondary” factors is determined, this is converted to a secondary rating factor—often between about 2.0 and about -0.5. Then, the primary average payment amount for the type of coverage you’re seeking is multiplied by the secondary rating factor to produce a “working” or “basic” premium.

This working premium is then increased to account for statutory requirements related to required reserves, permitted profit margins, contributions to government-run insurance pools or other costs. (These increases to the working premium are how most so-called “health care reform” schemes generate the funds that they need to subsidize health coverage for the uninsured.)

At this point, the insurance company usually compares the working premium to other premiums it charges insured people or groups; and, if yours is too high or low, the insurance company may bring it back into range by adjusting required deductibles, co-pays or coverage limits.

The result of these several modifications is a final premium which you—or your employer or insurance group—have to pay.

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Hi. My name is James Walsh. The producers of this site have asked me to write a twice-monthly column on health insurance topics for consumers. This is the first of what I hope will be many useful takes on the current state of health coverage in the United States.

A few quick notes about my qualifications. For the last decade, I have been the editorial director and publisher of the Merritt Manuals, a multi-volume technical reference encyclopedia used by insurance companies, risk managers, agent/brokers and claims adjusters. The Insurance Training Collection, an educational tool based on the Merritt Manuals, helps agents throughout the United States get and keep their licenses. I’ve also written or edited consumer books on risk and insurance, including the bestsellers True Odds: How Risk Affects Your Everyday Life and Get Your Claim Paid.

But enough about me. The purpose of this column is to give you, the reader, two things:

1)    a working understanding of how health insurance policies work and the health insurance marketplace operates; and

2)    practical tips for buying the best coverage for the best price.

This column won’t promote certain companies or products; I’ll focus instead on information that will help you make the best health insurance buying decisions for yourself and your circumstances.

You know your health insurance needs better than anyone, better even than experts and professionals. The first step in buying the right coverage is to focus attention on your situation and needs. To that end, here are seven basic tips that you should keep in mind when shopping for health insurance:

1)    Know yourself and your family. This simple point is important because who you are—including your age, gender and health history—is the most important factor when it comes to setting up and pricing health insurance coverage. And “you” is not always a single pronoun; a couple has different needs than a single person…who has different needs than a family with young children.

2)    If you have a family, getting health insurance coverage for some members may be easier than for others. While it’s easiest to insure everyone under a single policy, it might be more effective to insure kids under one policy, adults under another or individuals with specific health issues separately. This requires organization on your part—but can yield better results, in terms of cost, coverage and claims paid.

3)    Know your own health history and the histories of everyone in your family. Surprisingly, some people prefer “not to know” about their overall health—especially if they have family histories of conditions like high blood pressure, cancer or genetic diseases. But this kind of “ignorance is bliss” outlook doesn’t work well for anyone in today’s world.

4)    Understand that insurance policies are contracts between you (sometimes called “the insured”) and an insurance company (sometimes called “the carrier). Most terms and conditions can be negotiated, if you are informed and determined. Finding a good independent insurance agent can help this process. A lot.

5)    Some people in the health insurance field hide behind legal jargon and tell consumers this or that request is “illegal” or “against the law.” Most insurance-related laws and regulations (leaving aside the Affordable Care Act of 2010) put requirements on insurance companies, not insurance consumers. There’s not much—short of outright fraud—that an insurance consumer can do that’s against the law. In most cases, the main risk that an aggressive consumer faces is that his or her policy gets cancelled or rescinded at some later date.

6)    Insurance, by industry tradition and design, is difficult to shop for on a comparison basis. Health policies and contracts are structured in such a way that “apples to apples” comparisons are difficult; but you can make effective comparisons by learning some essential jargon and knowing standard policy components.

7)    The health insurance marketplace is going through more radical change than at any time in the last 50 years. In many cases, even experienced professionals aren’t sure what current laws or regulations require…or what current market conditions mean for specific types of coverage. This can make some professionals (whether they work for insurance companies, broker/agents or government regulators) nervous and defensive. But the good ones will admit that industry standards are changing fast—and will work with you to answer questions or find solutions.

Clearly, the Affordable Care Act of 2010 (known in many circles as “Obamacare”) has affected—and will continue to affect, even if it’s modified or repealed—the market for health insurance coverage in the U.S. So, this column will look at that law often and from various angles. But I’m not interested in partisan politics or repeating talking points from political party or another…or one trade association or another. My only interest is in analyzing the law and related regulations for how they will affect how you buy health coverage.

There’s an old saying in the insurance industry: The best kind of insurance is the one that pays when you need it. My main goal in this column will be to help you get that kind of health coverage.

More specifically, in the coming weeks and months, this column will consider the following topics:

• getting health coverage for children and “young adults”
• how health insurance rates are regulated—and how quickly the premiums you pay can rise
• how you can measure the financial strength of an insurance company—using credit ratings and statistics like medical loss ratios, etc.
• what to do if you are turned down for health coverage by a private carrier or government program
• how standard health insurance pays for preventive care, alternative care and other non-standard therapies
• what you can do if/when your health insurance coverage is cancelled
• what you can do if your insurance doesn’t cover a specific treatment or type of care—or decides a treatment is “experimental,” etc.
• how “Obamacare” compares with “Romneycare” and other earlier versions of health insurance reform
• how to compare group health plans with individual health plans
• using and dealing with Medicare and Medicaid
• what happened to the popularity of HMOs, PPOs and other types of “managed care”
• whether Health Savings Plans or other non-traditional programs will work for you
• how hospitals and doctors consider various types of insurance coverage
• the role that cash plays in the marketing of medical care

Putting together these articles, I will be assisted by a team of researchers and writers with great experience in health insurance and health coverage issues. This team includes:

• Sheldon Lipshutz, M.D., author of the book 10 Things You Need to Know Before Your See the Doctor and a physician with more than 50 years of experience;
• Gus Herrera, a co-author and contributor to such books as Hassle-Free Health Coverage and Kids and Health Care;
• Callie Branaugh, an assistant editor/researcher for the Merritt Manuals (and daughter of the novelist Seamus Branaugh) who has also contributed to consumer insurance books such as Family Money and the Insurance Buying Guide.

Let me end this first column with a quick story.

About two years ago, a young woman called my office asking to speak with me about one of our consumer insurance books. I was worried it might be a complaint about some fact or opinion in the book—but it was a thank-you call. The woman was a single mother who’d bought a copy of Kids and Health Care. The book had helped her get her kids insured under a state-run program. She told me: “I knew there was information on the Internet about getting them insurance. But I didn’t know where to start. I mean, this stuff is intimidating. Your book explained it well enough that I felt like I could ask the right questions.”

This column will try to make this stuff less intimidating.

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Recently, it was announced that the Obama administration is changing and improving the way customers appeal to their health insurance companies when they’re denied a claim or when their health insurance coverage gets canceled. According to an article in the Associated Press entitled, “Feds move to improve health insurance appeals,” the legislation will start in 2011, to give time to insurance companies so they can deal with its complexities.

The new protections will apparently protect at least forty million people when they take affect next year. The downside is that these protections don’t cover plans that were already in effect when the new health care legislation took place, as most of these are employer-provided health insurance plans. These are mostly meant to help those who are mandated to get individual health insurance over the next several years. However, Assistant Labor Secretary Phyllis Borzi said rules for appeals under employer-based health insurance plans will be getting revised as well in the future.

So how does the new process work? First, customers are required to appeal directly to their health insurance company. If they’ve denied for a second time, they will then have the option to take their appeal to an independent, third-party reviewer, whose decision will be binding.

States have until next July to bring their laws in line with these federal guidelines, so they have a year to get their act together. Personally, I can’t really see a downside to consumer protections such as these. Allowing the customer to have another avenue of appeal for their claims — one that’s legally binding — can only help customers who having issues with their insurance companies. One would also hope that this would make insurance companies more accountable for their actions so as to avoid this appeals process altogether. It’ll be interesting to see how this plays out once it takes effect.

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With our economy the way it is these days, sometimes people forget that the backbone of our economy are small businesses. Small businesses not only grow into large businesses, they also do quite a bit of the hiring as well, something that is desperately needed in today’s economy. Sadly, according to a story in the Los Angeles Times entitled, “Health insurance rate hikes hitting California small businesses could hurt state’s economic recovery,” small businesses are facing yet another hurtle that, as the title of the article says, could hurt the economic recovery of not just business in California, but elsewhere as well.

According to the article, health insurance companies are raising their rates anywhere from fourteen to seventy-six percent depending on the companies involved. This is causing small businesses to either stop hiring altogether, or to lay off workers if they wish to keep health insurance coverage, while some companies are getting rid of insurance altogether, which doesn’t help make them more competitive when they ARE trying to hire new talent.

The result of health insurance companies raising their rates — which is happening for a variety of reasons, such as inflation, claiming to have priced plans too low before, so they now need to raise rates, or losing money on other plans — could be that small businesses either stagnate or go out of business entirely. This is a real problem if we want to start seeing economic recovery, which will rely on more small businesses hiring workers, which they can’t do if they can’t afford health insurance for more employees.

According to the article, health insurance premiums have risen 180% cumulatively over the last decade for small businesses, while they have only risen 146% for larger businesses. This is a serious problem that, if left unchecked, could hamper not only growth in California, but other states like Texas, Ohio, Florida and so on. Sadly the article doesn’t talk about any solutions because small businesses usually can’t negotiate their terms, similar to individuals.

Hopefully the situation will come to a point where small businesses can afford insurance, enough that they can also afford to hire new people. With our economy in such dire straights, small businesses need to be supported, not gouged.

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We don’t usually cover COBRA related topics here, because honestly it doesn’t pop up in the news that often, but that’s likely to change in the coming months, especially with how the recently-signed health care reform law changes things for COBRA recipients. The story we’re looking at today, “Health Insurance Dilemma: COBRA Subsidies Will Soon Run Out for Many” from DailyFinance, talks about how COBRA is about to run out for many people, and what people can do once they do lose coverage.

COBRA, if you’re unaware, COBRA stands for the Consolidated Omnibus Budget Reconciliation Act, and was passed in 1986. It’s a federal program that grants individuals who have lost their jobs health insurance coverage. Back in February, 2009, President Obama signed the American Recovery and Reinvestment Act, which increased government subsidies on COBRA to 65% of the premium, greatly decreasing what recipients would have to pay. This, in turn, saw nearly a doubling of enrollment into COBRA.

Well, at the end of this month, those subsidies will run out, leaving a lot of people using COBRA what to do next. Sadly, people leaving COBRA have few options under current law, even fewer if you have pre-existing conditions. Many health insurance companies currently won’t take people with pre-existing conditions — though that is changing, thankfully. Certain people are also eligible, under the Health Insurance Portability and Accountability Act, or HIPAA, to purchase individual health insurance policies despite pre-existing conditions, but only within sixty-three days after their COBRA policies expire.

Another wrinkle is that people are only eligible for COBRA for eighteen months. After that, you’re on your own. Options such as high-risk pools — which begin next month — will be available, and state-run Medicaid programs are available for those who qualify. Though some people may find more options once the health care reform legislation fully takes effect, for right now this causes an odd situation for a lot of people.

The main crux of the article is not to sit idly by and wait to make a decision. With hard deadlines for coverage, people under COBRA need to move now, not May 31st when the coverage runs out.