Commentary | Jobs and Unemployment

Insured … and broke

A recent Harvard University study found that 62% of personal bankruptcies resulted in part from medical costs and some 78% of those people who filed for bankruptcy had health insurance, in most cases private coverage.

It is an alarming statistic, underscoring why health care reform is needed not just for the millions of Americans who do not have health insurance, but for many others who are insured.

Following are some of the major reasons that health insurance seems to provide little financial insurance against bankruptcy:

Job loss While the Consolidated Omnibus Budget Reconciliation Act (COBRA) was designed to help people who lost their jobs retain their employer-provided health insurance by paying for it themselves for 18 months, the proposition is prohibitively costly for many who have lost their incomes. Since the cost of employer-provided insurance is usually shared between the worker and the employer, COBRA premiums tend to be significantly higher – often double, triple, or more – what individuals pay when they are working. Average monthly COBRA payments for a family typically exceed $1,000, while the average monthly unemployment insurance payment, calculated from weekly average payments, is $1,425.15.

The economic stimulus package Congress approved in February provided for the government to temporarily subsidize 65% of those premiums, and also increased weekly unemployment benefits by $25, but that still means most families’ monthly health insurance bills exceed $350, a significant amount that many cannot afford on a tight budget.

And while many laid-off workers are able to pick up coverage when they find a new job, allowing coverage to lapse even temporarily can be costly. According to the Harvard study, the single most important predictor of medical bankruptcy was a gap in health insurance coverage for any family member. As long-term unemployment rises, these lapses in employer-sponsored health coverage are likely to last longer as well.

High out-of-pocket costs The New York Times recently profiled a couple whose health insurance provided for $150,000 a month in “hospital coverage,” but excluded nearly all the routine care that hospital patients typically receive such as tests, medication, and operating room care, essentially meaning that the insurer treated hospital stays like hotel visits, covering room and board but very little treatment. In the Harvard study on medical bankruptcy, the average out-of-pocket medical costs incurred with those who had private health insurance was close to $18,000.

Rescission, or customer dumping This widely-reported practice of insurers canceling policies after an individual becomes sick was confirmed recently when executives of three of the nation’s largest health insurers told the House Subcommittee on Oversight and Investigations that they sometimes did cancel medical coverage for sick policyholders and that the practice was not limited to individuals who engaged in fraud in order to conceal certain illnesses. A House committee investigation of the three largest insurers found they canceled coverage of more than 20,000 people, saving more than $300 million in medical claims over a five-year period. The hearing included testimony from one woman whose coverage was cancelled after she was diagnosed with breast cancer, allegedly for her failure to report a visit to a dermatologist.

Wendell Potter, a former senior executive for Cigna, also shed light on this practice during a recent Senate hearing. “They dump the sick, all so they can satisfy their Wall Street investors,” Potter said. “They look carefully to see if a sick policyholder may have omitted a minor illness, a pre-existing condition, when applying for coverage, and then they use that as justification to cancel the policy.”

Sham plans, or “fake” insurance The National Association of Health Underwriters warns that rising price tags on health insurance has paved the way for the creation of more sham plans, often which offer lower cost and coverage than the market standard. These plans, it says, are “created to look like authorized health insurance plans but are never intended to pay benefits or abide by state insurance laws.”

You or a family member gets sick A great irony of health insurance, as it is structured today, is that people are most challenged to keep their health insurance when they become ill. Even if the health insurance works, as designed, to insulate people from high medical bills, it does nothing to ensure that people remain employed after becoming sick. In fact, the Harvard study found that illness led to job loss for 38% of patients’ families.

In addition to resulting in an inability to work and a much higher health insurance bill under COBRA, a chronic illness could trigger a rescission, discussed above, or uncover loopholes that allow the insurer to deny coverage in a plan that had appeared watertight in times of good health.

See related work on Unemployment insurance | Recession/stimulus | Employer coverage | Health | Economic Growth | Wages, Incomes, and Wealth

See more work by Andrea Orr