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A Limited Alternative to Health Plans With Gold-Plated Price Tags

Limited-benefit medical plans, which cover some basic health care needs but not catastrophic events, can help retail and service industry employers whose hourly workers often live paycheck to paycheck.

June 12, 2007
S omewhere between not providing health insurance at all and offering the kind with a gold-plated price tag, there exist a growing number of alternatives. One of the most popular is the "limited benefit" health plan.

    Limited-benefit plans are sometimes known as mini-medical plans, a name the health insurance industry decries. They cover what most Americans refer to when they talk about health insurance: doctor visits, prescription drugs or a trip to the emergency room.

    As the name suggests, though, the health coverage is limited—to a certain number of visits to a doctor and a several thousand dollar limit on prescription drugs and hospitalizations, depending on the plan. And it is not insurance per se, since a typical limited-benefit plan would not cover a catastrophic illness as such an event would max out its hospital benefits after a few thousand dollars.

    Instead, these plans are aimed at providing what the majority of Americans use: the occasional checkup, a trip to the emergency room and prescription drugs for a cold. According to Milliman, an actuarial and consulting firm, 99 percent of Americans accrue less than $50,000 a year in health care costs.

    Limited-benefit medical plans are aimed at retail and service industry employers whose hourly workers often live paycheck to paycheck, don’t own a house or car and either can’t afford health insurance or work for a company that can’t afford to offer it.

    These workers also have little to protect them should a catastrophic event result in medical bills that would otherwise send them into bankruptcy.

    "They are less interested in protecting assets," says Eric Motter, vice president of marketing and product development for Cigna’s emerging market segment. "They’re interested in protected income."

    Monthly premiums for limited-benefit plans run anywhere from $10 a week—or about an hour’s wage for the worker making $20,000 annually to whom the plans are targeted—to $200 a month for something like the kind of major medical health coverage used by the approximately 150 million Americans who are covered by private employers.

    "When someone is making $25,000 a year, it’s hard to justify as a company paying $300 to $500 a month for health benefits," says Derek Peterman, CEO and founder of Irving, Texas-based Century Healthcare, an insurance company solely focused on limited-benefit medical plans. "But if you pay $50 to $75 a month, then it makes sense if you want to retain them."

    He says the average monthly cost is $110 and that 90 percent of the employers who purchased the plan pay at least half of that cost. Plans with higher monthly premiums of around $200 are geared toward people who are coming off a major medical plan because they or their company can no long afford it. Those plans provide "98 to 99 percent of anything that’s going to happen to you, including some catastrophic" hospital coverage of up to $25,000, Peterman says.

    "You could have that heart attack or that stroke and not be financially destroyed, so to speak," he says.

    With about 47 million uninsured Americans—most of them working people—major insurance carriers like Cigna, Aetna and UnitedHealth have in recent years acquired companies that specialize in limited-benefit health plans. After acquiring Star HRG in mid-2006, Cigna in October launched Fundamental Care, which is designed to cover all non-catastrophic events, Motter says. Employers must pay 25 percent of the premium for this plan—in part to ensure participation and keep healthy employees from dropping out of the risk pool. Cigna now covers 200,000 lives and 1,400 employers through its Star HRG subsidiary.

    Ratner Cos., a Vienna, Virginia-based chain of hair salons, has 14,000 hairstylists who make an average of $25,000. They are young, mainly women and work in salons like the Hair Cuttery, Bubbles, Salon Ciello and Color Works at 1,000 locations along the Eastern Seaboard and in Illinois, Indiana and Wisconsin.

    At one point Ratner offered its hairstylists a major medical plan, but even with the company paying 50 percent of the cost, the majority could not afford it and did not enroll. The 10 percent who did enroll were the sickest employees and tended to spend the most on health care. The result was a spike in health care costs, and the company decided to stop offering major medical benefits. Now, the company offers a limited-benefit plan and pays the premiums for those who work 25 hours or more a week. The low cost of the premium has allowed many part-time workers to enroll too. Eighty percent of workers now have health insurance and the company’s health care costs have remained steady, says Candice Mendenhall, senior vice president of human resources.

    "What’s important to us is that if we spend the same dollar amount and we’re able to cover 80 percent of our people rather than 10 percent of our people, that’s what we wanted to do," Mendenhall says.

    Peterman, whose company sold Ratner the health insurance policy, says Century offers employers several ways to curtail costs. For employers that cover employees but not dependents, the company offers a health plan for dependents only. The company also says its plans may appeal to employers who are looking to limit or end retiree health benefits.

    Critics have pointed out that limited-benefit plans may cause some confusion for those who believe they will be covered in the event of a serious illness or event.

    "Certainly, I think plans are very aware that when they have a product that has a front end and no back end, it’s absolutely in their best interest to be as clear as possible," says Jill Yegian, director of research and evaluation for the California Healthcare Foundation.

    "One of the things we have found is that these products are quite easy to attack because they are not comprehensive, but it’s also important to think that this is a product that may meet a need of a population that doesn’t get value from the current system."

    Mendenhall says the plan is a better alternative to some of the more popular options, like health plans with high deductibles.

    "What is going to be the most helpful to them?" she asks. "They don’t have $3,000 in their pocket. They’re living paycheck to paycheck. And this plan gives them first-dollar coverage."