Insurers sell products to fill the gap

By L. M. Sixel
The Houston Chronicle, Dec. 8, 2010

As employees face higher co-pays, deductibles and health care premiums, a relatively new insurance product has become increasingly popular.

It’s known as “gap” or “bridge” insurance, and it covers some of the out-of-pocket health care costs that are becoming more difficult for employees to shoulder, such as annual deductibles that are rising to $1,000, $2,500 or even $5,000.

Families that live paycheck to paycheck can’t absorb the increase in costs, said Brad Peak, vice president of products and marketing with the insurance carrier Assurant Employee Benefits in Kansas City, Mo.

The trend is moving toward the $2,500 deductible, Peak said. Assurant views that as the “sweet spot” that makes gap insurance attractive to employees on a budget.

Some employee benefits experts, however, question the value of gap insurance. It can be expensive for what it offers. Some limitations on coverage for pre-existing conditions can make it useless for someone with a chronic medical problem. And the rules may be prohibitively restrictive, such as limiting reimbursement to patients whose conditions require hospitalization.

(Brett Haugh, a partner with Employee Benefit Solutions in Houston) said the policies can be pricey, with about 50 cents of every dollar going toward the broker’s commission.

It was inevitable. First in the individual market and then in the employer-sponsored insurance market relief from skyrocketing insurance premiums was gained by switching to high-deductible plans. Although this slowed the acceleration of premium increases, actual health care access was impaired for many because of the often-inappropriate financial disincentives of the  deductibles and other cost sharing. This financial barrier opened the doors for the insurance industry to sell protection against the deductibles by offering an additional insurance product to fill the gap in the primary insurance product – an insurance policy to insure against the adverse effects of another insurance policy.

If it sounds familiar, it is. Medigap policies are purchased by the majority of individuals covered by the traditional fee-for-service Medicare program. Medigap plans are private insurance products that cover the gap for deductibles and other out-of-pocket expenses that Medicare beneficiaries would otherwise face when they have health care needs.

We already know how lousy these products are. Medigap plans offer the worst value of commonly available insurance products. They impose a second wasteful administrative layer on top of the primary Medicare coverage. They typically have medical loss ratios of about 65 percent, meaning that they consume 35 percent of the Medigap premiums for their own intrinsic purposes. Yet seniors buy these plans because of fear of facing financial hardship just when health care needs are greatest.

In a bit of irony, the Patient Protection and Affordable Care Act requires that the Medigap plans be revised to “include nominal cost sharing requirements that encourage the use of appropriate Part B physician services.” Thus Congress, in its wisdom, wants Medicare beneficiaries to experience price sensitivity by establishing deductibles for the supplemental Medigap plans that pay the deductibles for the traditional Medicare program. What?

Now we have a market of similar private gap plans that cover private insurance plans, with all of the same inefficiencies and excesses as Medigap plans, except that they’ve added the market innovation of using half of the premiums just for the insurance brokers’ commissions (if you believe Brett Haugh, quoted in the Houston Chronicle article above).

This is so unnecessary. Deductibles have been proven to result in harm by causing patients to forgo appropriate care, yet they have very little impact in reducing our total national health expenditures. The administrative waste of gap plans can be avoided by simply eliminating the deductibles and other cost sharing. Then you wouldn’t need the gap plans at all.

In a recent response to a New York Times blog on how higher deductibles cause families to delay or forgo medical care I explained why the cost of eliminating deductibles is not that great. It is response # 23 at this link: