The perils of buying your own policy.(The Unraveling of Health Insurance, part 2)(Buyers Guide)

If you live in the wrong state, have any type of illness, or are too young (for Medicare), too rich (for Medicaid), or too broke (to pay steep premiums), you might be shut out of the health-insurance market. None of those factors will stop you from getting group health insurance through most employers, but they can entrap the 16 million or so Americans who buy their own policies. This group includes the self-employed, employees of small firms that don't offer medical insurance, people between jobs, young adults moving off their parents' policies, widowed or divorced people who have lost their spouse's group coverage, and people who retire early and lose their group health coverage before they're 65 and old enough for Medicare.

If you need to buy your own individual or family policy, you're entering a perilous market in which good advice is scarce. This report will tell you about the traps you'll face and how they can affect your premiums and coverage.

The companion piece, "Shopping for Your Own Policy," on page 38, gives guidance about choosing coverage, based on a CONSUMER REPORTS study of policies available in six U.S. cities, funded by The Commonwealth Fund, a New York-based philanthropic organization. If you're turned down by insurance companies, you can consult the table on page 40 for information about your state's safety net.

Needing to buy your own health insurance makes you one of the unwanted children of the insurance marketplace. Consider the case of Carolyn Weaver, who over the last decade has fallen into virtually every trap in this market. In 1992, Weaver bought her own health-insurance policy from Washington National Insurance Co., under an arrangement called a "group discretionary trust" (see Trap 2 on page 36). With a deductible of $500, the policy cost $1,665 a year and because a test revealed that Weaver had a blood factor that might lead to rheumatoid arthritis, it excluded coverage for arthritis and for most diseases of the spine.

Shortly after Weaver got the policy, Washington National hiked her premiums almost 64 percent, attributing the increase to the higher cost of medical care. Premiums kept rising and Weaver had to increase her deductible to $5,000, to afford the policy. By this year, because of Weaver's advancing age (she is now 63) and rising health-care costs, the annual premium had reached $18,500. The final straw: Washington National has canceled her coverage because it is leaving the individual-health-insurance market.

Weaver has been scouring the market for new insurance, but because other health problems have developed, she has had a tough time finding a carrier willing to insure her at a price she can afford. She may have to settle for a policy that covers some basic hospital and surgical care but not routine office visits or drugs.

Few insurance carriers want to insure people like Weaver. In employer group policies, healthy and sick people are mixed in the same pool, and premiums paid by healthy people help cover the claims of those who are ill. But with individual insurance, there's no one to subsidize those who need care. As a result, insurers say that even high premiums are often insufficient to cover the cost of care when policyholders get sick.

Many companies avoid writing policies in the individual market, or, when they do write them, they devise strategies that limit the company's risk and the consumers' ability to obtain coverage for the care they need. "It's a difficult market to manage," says Susan Morisato, senior vice president at Bankers Life and Casualty, in Chicago, which is also getting out of the business of selling individual major-medical policies. Other companies have found ways to take advantage of gaps in state regulations and offer policies that seem to be good deals. The good deals often vanish when people get sick or injured and begin to file claims.

These strategies create traps for consumers, who may have to struggle to stay insured.

[TRAP 1]

NO COVERAGE FOR EXISTING ILLNESS

Most individual policies are medically underwritten. That means carriers look closely at an applicant's medical record and turn down people whose conditions pose too much risk. Most companies deny coverage to people with serious conditions such as cancer, diabetes, coronary artery disease, or multiple sclerosis. But they may also turn down applicants with ailments like hay fever and ear infections. To underwriters, covering people with medical problems is like insuring a burning house.

"We have to have enough money to cover everyone's claim," says Ray Haase, senior vice president of Trustmark Insurance Co., in Lake Forest, Ill., another company that has left the individual-policy market. "One way to do that and keep the premiums lower is to exclude coverage for conditions people already have."

For example, at Highmark Blue Cross Blue Shield, in Pittsburgh, the company might accept an applicant with allergies who takes the prescription drug loratadine (Claritin), but not a person who needs allergy shots. At Anthem Blue Cross and Blue Shield, in Colorado, some kids with chronic ear infections may get coverage, but if they have tubes in their ears they may be rejected, says Chris Miller, a senior underwriter for Anthem. Anthem also examines the prescription medications applicants take. If their drug expenses are as high as the premium, they are denied coverage.

When a company does accept a person with medical conditions, chances are it will exclude coverage for those illnesses through a waiver or a rider. If you have asthma, for example, a carrier may exclude coverage for that disease, or for all lung conditions, or for the whole respiratory system. Unlike the more familiar pre-existing conditions clauses for new members of group insurance policies, which often exclude coverage for three or six months, these waivers are usually permanent. There is no coverage for as long as you hold the policy.

Sometimes insurance companies will add a surcharge for insuring a person with potentially expensive conditions. In insurance jargon, this is called rating up and may increase premiums by 20 to 100 percent. If you're overweight, an insurance company might rate you up. The more overweight and outside the norms of the height-and-weight chart, the higher the surcharge.

Recently, the Kaiser Family Foundation and the Institute for Health…