What’s The Point Of Buying Primary Insurance?

Bill Brann calls the phrase supplemental insurance “obsolete.” Brann is the owner of Obamacare Alternatives, a benefits agency in Corpus Christi, Texas.

It’s not that supplemental insurance is going away; just the opposite. Supplemental insurance could, for some, become their primary insurance.

“What we expect from insurance is financial security, that’s the thing that we want to get out of it,” Brann told InsuranceNewsNet. “People are looking at their health insurance and coming to the conclusion that it’s not doing that for them.”

Certainly, premiums toward supplemental insurance, also called voluntary benefits, are still a very small subset of the entire health care premium paid by consumers in the U.S. But, is it possible to contemplate that supplemental will turn into a consumer’s primary means of coverage?

Brann said it’s a question of simple math, and this is how some of his clients are running the numbers.

Assuming a $1,500 deductible on the family health insurance policy costing $750 a month, that’s more than $9,000 in annual health care premiums, not including the out-of-pocket expenses required to trigger insurance coverage above the deductible.

Families that are healthy aren’t reimbursed any premium for unused care so why continue paying the premium for a primary policy?

Why not take the $9,000 and put it in the bank -- the “coffee can,” in Brann’s words -- and pay the doctor’s visit out of that fund?

If there’s an accident, a family member is covered through a supplemental accident policy. In case of cancer or other critical illness, whip out the critical illness policy.

It’s true that while supplemental policies are available for much less, they also provide fewer benefits than conventional insurance does.

Yet, it’s also true that millions of people believe they are getting less and less for their money through primary insurance. Meanwhile, insurance carrier executives see supplemental health products as one of their fastest-growing lines.

With carriers raising deductibles, copayments and coinsurance, and restricting access by offering lower prices for doctors in certain networks, consumers in individual and group markets are asking: What’s the point of buying primary insurance?

The penalty for eschewing major medical -- or “going naked,” in insurance parlance -- is still relatively low. But in consumers’ minds, supplemental policies offer coverage for a serious injury at a much lower price than group health plans, or individual and family plans sold on the exchanges.

“Now people are finding that products that used to be called supplemental are primary, whether it’s accident coverage or critical illness or a cancer benefit,” Brann said.

Years ago, when employer-sponsored plans offered employees good coverage at group rates that many still considered affordable, supplemental coverage barely registered with buyers. The policies were only meant to fill in the gaps left open by major medical coverage.

But the gaps left open by primary care coverage have grown, and total premium paid in the voluntary market has grown along with it.

In 2013, total premium in the voluntary market reached $6.6 billion, according to statistics tracked by Eastbridge Consulting. This is more than double 1999 premiums of $2.6 billion.

The rise of supplemental coverage is an opportunity for brokers and advisors, and more of them are beginning to distribute supplemental policies, said Ginger Bates, director of research for Eastbridge Consulting.

“You’ve got a lot of things going on and, to me, the voluntary market is becoming much more mainstream,” Bates said.

More than 100 insurance carriers underwrite supplemental insurance, but the top 15 carriers account for 79 percent of the market, she added.

Bates also said big property/casualty and benefits brokers that specialized in group and major medical policies are merging or entering into partnerships with specialty voluntary benefits distributors as profit margins come under pressure from the Affordable Care Act (ACA).

Critics also point to supplemental policies as big profit-makers for brokers looking to protect those margins as the ACA requires major medical plans to spend a higher percentage of revenue on medical care than supplemental policies are required to do.

Policy experts such as Timothy Jost, a health care specialist and law professor at Washington and Lee University, see a risk in supplemental plans because consumers may not understand that they aren’t designed to replace primary health coverage.

Supplemental insurance doesn’t cover the minimum essential coverage required under the Affordable Care Act, so buying a “portfolio” of three or four supplemental policies won’t fulfill the ACA’s coverage requirement.

Going to the doctor’s office for strep throat, pneumonia or a laceration isn’t going to be covered by a supplemental policy, for example.

That’s where the “insured” family dips into the coffee can and draws on the $9,000 that otherwise would have gone to an insurance carrier in the form of a monthly premium payment.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].