Underinsured Number Rising

On June 10^th, the New York Times carried a report headlined Ranks of Underinsured Are Rising, Study Finds. It’s fairly well known that as many as 50 million Americans have no health insurance at all, but according to a new report from the Commonwealth Fund, an additional 25 million people had insurance policies that didn’t really insure them – not against the financial hardships of medical costs. In 2005, before the current deflation of the housing bubble, the Washington Post reported that 40% of the people who were fighting foreclosure on their homes cited health care costs as the reason for their mortgage defaults.

These people aren’t old, if they were they would have Medicare, and they’re not poor, because that’s when Medicaid steps in. Some may have been simply willing to take chances and not buy insurance policies, but others had policies that, in one way or another, didn’t provide adequate protection. One typical example is the adoption of a new pricing system, tier 4, that is being increasingly adopted by medical insurers. Under the oldest system, insurance covered most of the cost of drugs, leaving a co-payment that depended on the terms of the policy. Later, they adopted systems that set lower co-payments for generic drugs, higher payments for single source drugs that were on the insurance company’s formulary, and still higher prices for non-formulary drugs.

There was a rational basis for this, up to a point. Insurance companies spend a great deal of money evaluating the most cost effective way to treat illness. They assumed that by raising the prices on drugs that didn’t seem essential, patients would question the prescribers, and ask for less expensive generic drugs. It never really worked out, but since the system still cut costs for the insurers, there was no reason to change it. Tier 4 is something new, and applies to the most expensive drugs, regardless of medical necessity. Instead of charging a fixed co-payment, be it $10 or $20 or $40, the insurance company will pay a percentage of the costs of these drugs. That may leave the patient with bills running into the thousands of dollars. The insurers say that this system holds down costs for most policyholders – and that’s true. But for those people who require tier 4 drugs, and these are often drugs used to treat cancer, multiple sclerosis and rheumatoid arthritis, the costs can be devastating. Tier 4 began with Medicare drug plans, and is now written into 86% of these plans, and it’s beginning to turn up in private plans as well.

Another problem can be the lifetime cap – a maximum amount that the policy is worth over a lifetime. Most policies have something of this sort, a maximum lifetime payout, and the lower cost policies have lower caps. Rates may go up as medical costs increase, but the caps remain in place. For people with major chronic illnesses, a lifetime maximum of $100,000 doesn’t last very long.

The doughnut hole in Medicare Part D may not count as underinsurance, but for a lot of people it is. Here’s how CBS News described it in 2006: For all patients, Medicare covers 75 percent of the first $2,250 worth of drugs. But after that, coverage drops to zero — and doesn’t resume until the patient hits $5,100 in expenses. Then Medicare kicks in again, paying 95 percent of costs. But it’s this gap — of almost $3,000 — that many sick and disabled seniors call unaffordable.

Between 3 and 7 million people fall into the doughnut hole every year. These are people above the age of 65, with high medical costs judging from their drug bills, and (from the fact that they’re using Medicare Part D) no retiree health benefits from jobs. Medicare’s response: use generic drugs to lower costs, and buy a more expensive insurance policy that will cover the doughnut hole. There’s an extra clinker in Medicare Part D’s drug coverage – not all insurers use the same formulary. People opting for Part D should sit down and examine the formularies to be sure the drugs they’re taking are the ones that will be covered. But, under the current rules, patients can only change insurers once a year, but insurance companies can change formulary listings whenever they care to. What you see may not be what you get.

The reports in the New York Times and Washington Post show that there’s awareness of a serious problem with drug costs. So far, nobody has proposed an answer.