On to Grand Rounds...

This week's roundup of the best of the medblogosphere is available for your edification. Hosted at Emergiblog, the eponymous theme centers on the Emergency Room.

Our friend Elisa at Healthy Concerns relates her own (surprisingly) good experience with the health care system. Recommended.

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Carnival Monday!

This week, the Carnival of the Capitalists can be found over at Free Money Finance. Of particular interest to me was this story about going kosher at Micky D’s.

The Canadian Capitalist hosts this week’s Carnival of Personal Finance. “Penny wise and pound foolish” could be the title of this post from Roth and Co, which shows how a simple $4 could have saved $$ thousands. Ouch.

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Back to Basics...

With all of our posts on Buy-Sell Agreements, Section 105 Plans, and Consumer Driven Healthcare, it’s easy to forget that there are still basic principles that undergird the insurance industry.

One such principle is that of “Moral Hazard,” another is “Insurable Interest.” I am moved to post about these two seemingly-simple concepts because of a conversation with a would-be client.

Seems that Mr Jones “owns” a home with his wife and their three grown, single sons. I use quotation marks to indicate that it really isn’t that simple:

Rob, his middle son, actually has the mortgage, and his name is the one on the title. His siblings and parents have agreed to help make the payments. There is no formal documentation … okay, except for the mortgage, there is no documentation. And that mortgage is for $205,000, with monthly payments over $2,000.

But wait, it gets better:

Rob has no actual income; he and his brothers just walked away from a failed landscaping business, en route to a new car business. Currently, they are all three “between jobs.” In fact, the only “steady income” is Dad’s $3,500 monthly check from Uncle Sam (don’t ask).

Which raises a few questions: how did Rob qualify for such a loan in the first place? What happens to Rob if any (or all) of his apparently none-too-responsible brothers decide to bail? What if Dad dies? Most of all, though, what has any of this to do with life insurance?

Well, turns out that they have all agreed that they need some, and apparently Dad drew the short straw. After an increasingly frustrating conversation (more than I really wanted to know, and yet not as much as I needed to know), it turned out that they all wanted $250,000 of coverage on each person.

Yes, I wondered that, as well.

The good news is that none of the five are tobacco users, or on any medications. Three, however, are substantially overweight, and Dad has a specific mental health condition.

Those are the facts, but what about the two principles to which I earlier alluded? Well, they come into play in a big way here:

Moral Hazard is defined as “the risk that coverage against a loss might increase the risk-taking behavior of the insured.” In other words, sometimes people are dishonest, or appear so. I work for my clients, but I represent the insurance carrier. I have an obligation to be careful about the risks I seek to place, even if that means that I sometimes have to walk away from a sale.

The second principle at work here is Insurable Interest. This means that in order to insure someone, one has to have some stake in that other person’s well-being. A husband obviously has a financial stake in his wife’s well-being, so he is said to have an “insurable interest.” My neighbor doesn’t have such a stake, so he has no such interest.

In this case, there was a lot of the first (moral hazard) and a lack of the second (insurable interest):

Rob owes the bank a lot of money (insurable interest), but lacks the means to pay for the insurance (moral hazard). His siblings (and parents) really have no demonstrable stake in Rob’s well-being: if he dies, it’s not like they’re on the note. Thus, they lack insurable interest.

Dad was upset to learn that I couldn’t help him. Of course, I wasn’t too thrilled, either: after all, no one pays me a commission to say “no.” I did run this by an underwriter first, of course, to confirm my suspicions. And I suggested to Dad that, if and/or when his progeny find gainful employment, and they confirm this informal agreement by means of a written contract, we could then revisit the situation.

But I’m not holding my breath.

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OK is OK

Oklahoma has already begun finding new and innovative ways to bring small businesses access to affordable health insurance. One such program, Insure Oklahoma (Oklahoma’s Employer/ee Partnership for Insurance Coverage, or O-EPIC), centers on providing premium assistance for healthcare coverage to Oklahoma’s small businesses and low-income individuals. Insure Oklahoma was established during this year’s state legislature under the Oklahoma Health Care Recovery Act. Phase 1 of the program would put affordable health insurance within reach of employers with 25 or fewer workers, including those that offer minimal coverage.

Over 800 small businesses have already inquired about Insure Oklahoma! To be eligible for the program, employers will be required to contribute at least 25% of the premium for those employees who participate. The employee would contribute no more than 15% of their family's premium, but must verify that their household income is no greater than 185% of the federal poverty level.

The Oklahoma Health Care Authority is seeking final approval from the federal government to start Insure Oklahoma as early as the end of this year (2005)! The state plans to devote an average of $50 million per year to the initiative, money that will be generated through the new tobacco tax, which took effect on Jan. 1. Subject to approval by the federal government, the state’s subsidy will be matched each year with approximately $200 million in federal funds.

Comment: While I do not support the idea of using federal tax dollars to fund health care, this particular arrangement seems to have merit.

It requires contribution from both the employer and employee alike towards the cost of insurance.

The plans offered are “shelf” plans with full benefits, not some watered down mini-med type coverage.

Currently there are 9 carriers involved who offer plans that are “approved” under this program.

The state portion of the tax contribution comes from “sin” taxes on tobacco. In other words, those who have a greater tendency to use health care services are the ones who are funding this program.

Based on nothing more than a quick look, it seems that Oklahoma is OK with this concept.

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Employers are Stupid

Employers are stupid.

They give away money like it was water. (On second thought, given the predilection toward bottled water at $5+ per gallon that phrase probably should be retired). They complain that employees don’t appreciate their job or benefits and then wonder why.

The hidden paycheck reveals both the problem and the solution.

Most employees take things for granted and never appreciate the “free” benefits associated with their job.

When they are hurt at work, their employer pays for their medical care, including rehab and training as needed. They also send them a weekly check.

When they retire, at least a portion of their Social Security and Medicare benefits are provided at no charge to them.

When they are laid off, they may qualify to receive a check for 6 months, sometimes longer, until they find replacement employment.

If they have health or dental insurance through their employer, a significant portion of the cost of coverage may be provided by their employer.

So how much is this hidden paycheck worth?

In some cases 20% of more of their paycheck is hidden from view. Employers pay for half the FICA tax due, all of the Workers Comp premiums, all of the FUTA & SUTA taxes and anywhere from 75% to 100% of the cost of health insurance for the employee.

Usually, the only time employees become aware of how much the employer provides in the hidden paycheck is when they leave employment and receive their COBRA notification. That is when sticker shock sets in.

Health insurance provided by the employer is usually the most expensive coverage you can find. It is also unappreciated.

Why?

Because employers are stupid.

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Gaming the System, 2.0

Heard from my preggo lady again today. She is still thinking about the group plan, but has not yet made a decision.

This is the woman who is 2 months “along” and looking for health insurance to cover the prenatal & delivery. Group insurance is her only option.

The plan I suggested will run about $850 per month and will cover all but $1500 of her fees.

Sounds like a lot, but it also covers her husband AND her 5 kids on a plan that pays 100% of charges in excess of the $1500 deductible. That is for anything that could happen. This is not just a special maternity only plan I came up with.

Not a bad deal.

In today’s exchange she said she would make a decision by Monday, but she is considering just negotiating with the doc & hospital to pay cash.

That will work.

But all that does is address a normal delivery for her. What if there are complications?

I guess after 5 kids you figure this kid will shoot right out without a hitch.

Of course pregnancy is not the only medical crisis that can occur over the next 7 months. With 7 of them in the family chances are pretty good someone can have a serious medical emergency during that time.

But hey! Why buy insurance for something that may never happen? Apparently in her world the only time you buy insurance is when you know you are going to use it, you buy it after the condition develops, and you only buy it if you can get more in benefit than you pay out in premium.

Now why didn’t I think of that?

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