Cheap Health Care Plans: Let the Buyer Beware

Paul Gaznick tried his best to give his son Justin what he needed to live a happy and healthy life. A single parent, Gaznick, 57, runs a small welding and fabrication business in Methuen, Mass., that was hit hard by the sagging economy. As early as 2007, his contracts had slowed to a trickle and often didn’t pay enough to cover his expenses. Health-insurance premiums were part of his crushing overhead. Gaznick’s policy, covering only him and his teenage son, cost about $750 a month.

He was already shopping around for cheaper insurance when he received a fax promising some relief. For $289 per month, the fax said, he could buy “low cost quality health care for the individual and entire family.” The advertisement, for a company named National Alliance, touted the offer as “top rated insurance.”

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“I said, Well, $300 is better than $700,” says Gaznick. Soon after Gaznick signed up, Justin was badly burned in an accident and ended up in the emergency room. As massive hospital and pediatrician bills began arriving in the mailbox, Gaznick realized he had bought not cheaper insurance but rather membership in a Sam’s Club — like medical-discount program. He was responsible for all his medical bills; the money he’d been paying to National Alliance each month was simply the fee to access a list of doctors and hospitals that had supposedly agreed to give cardholders discounts.

“I’ve always paid my own way,” says Gaznick, who had to work out a payment plan with the hospital, which eventually forgave most of the tab for treating his son. “I was grateful, but I didn’t want it to come down like that. I wanted the insurance company to pay the bills.”

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He isn’t the only health care consumer who is feeling duped. Many others have been seduced by infomercials or out-of-the-blue e-mails or faxes whose slickly worded descriptions may make people think they are getting comprehensive coverage on the cheap. The two most commonly misunderstood products are medical-discount plans — like the one Gaznick signed up for — and limited-medical-benefits plans, which technically are insurance but have relatively low set reimbursement amounts and strict limits on what kinds of care are covered.

Trying to rein in these types of health plans is like playing regulatory whack-a-mole. File a lawsuit or institute new consumer protections targeting one product in one state, and several slightly different variants are likely to pop up to fill the void. And consumer advocates are worried that many more people will sign up for these health plans because of confusion surrounding the new federal health reform law, which will eventually require all citizens to obtain insurance. But that aspect of the law, which will also set a minimum standard for insurers — whose plans must include free preventive care, substantial reimbursement for most treatments and no annual or lifetime caps on coverage — won’t take effect until 2014. In the meantime, the Department of Health and Human Services has issued a scam alert, warning consumers that companies may market plans based on false claims about the new law, such as there being a limited enrollment period for federal health care.

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Massachusetts has been dealing with a deluge of misleading and fraudulent insurance offers since a law enacted in 2006 mandated that nearly every resident get health insurance or pay a fine. The state set minimum standards for policies that can be used to fulfill its universal-insurance requirement, but these rules don’t preclude companies from selling other types of products. The problem lies in how they are presented to desperate Americans looking to reduce their medical-cost burden.

“Whenever you’re entering into a new system, there’s always an opportunity for confusion among customers,” says Massachusetts attorney general Martha Coakley, who sued National Alliance and three of its executives last year for deceptive marketing practices. (The company, which no longer has a working phone number, did not respond to the suit. The three executives have denied any wrongdoing.) Minnesota filed a similar lawsuit against two other discount medical plans, and California is considering increasing licensing requirements for these products.

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Medical-discount plans promise deep savings on doctor and hospital visits to subscribers who pay hefty enrollment and monthly fees. In reality, however, these discounts are often minuscule or far smaller than what an uninsured patient could negotiate independently. In 2005, the Federal Trade Commission issued a consumer alert for medical-discount plans, stating that “many take consumers’ money and offer very little in return.” Still, these plans continue to proliferate.

Who is signing up for them? “People looking for bargain-basement health insurance who don’t know what they’re buying,” says Jenny Libster, a senior research associate at the Commonwealth Fund, a nonprofit health-policy organization. Medical-discount plans can, in theory, be beneficial for someone who has no ongoing expensive health conditions or who can afford to pay cash for most care. But marketers of these plans are aggressively pursuing a much wider swath of consumers. “They are targeting low-income people and people with pre-existing health conditions,” Libster says.

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Limited-medical-benefit plans are going after a similarly vulnerable slice of society. These plans provide often scant coverage in exchange for monthly premiums that are lower than those for traditional insurance but typically still quite high. For example, Cinergy Health charged families $479 per month for its Preferred 1000 plan, which covered $100 for one emergency-room visit per year per person and $1,000 per day of hospitalization for up to 30 days. (The average cost of an ER visit is more than $500; a single day in the hospital can easily cost more than $5,000.) Coverage for doctor visits was pretty decent — up to $70 per visit for up to five visits per year, a key selling point. But even if a family of four maxed out this particular benefit, it would have received only $1,400 in payouts after paying nearly $6,000 a year in premiums.

The five-year-old company, which provided limited-benefit plans as well as medical-discount plans, at one point ran an infomercial promising customers “significant health coverage for a reasonable price.” But what counts as “significant” coverage? Most consumers expect their health plans to protect them from mountains of debt if, say, they suffer extensive injuries in an accident or develop a chronic disease. Cinergy’s products didn’t offer much help in either scenario.

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“No matter how clear your member material is and how well you educate your members, they’re still expecting more out of it than they may ultimately get,” says Steve Trattner, president and chief marketing officer of Cinergy. “The expectations far exceed what a discount medical plan truly can offer when it comes to the traditional medical and hospital services.”

State regulators, deluged with complaints about Cinergy, have responded. New York banned the company’s television ads last year, and Florida, where Cinergy is based, has accused the company of deceptive marketing. (Cinergy disputes the charge and has requested a hearing on the matter.) In February, the Better Business Bureau revoked Cinergy’s membership.

Cinergy has stopped selling limited-benefit plans to new customers, but this type of product is not going away anytime soon. In fact, bigger players are getting into the market. Traditional insurance companies such as Cigna and Aetna are offering limited-benefit plans to small businesses, retailers and young adults. These plans are geared toward common medical issues such as colds, flu and broken bones but are clearly labeled as not providing comprehensive or catastrophic coverage.

Minor, everyday costs, however, are often not nearly as high as the cost of a limited-medical-benefit plan. Judy Spurlock, a disgruntled Cinergy customer in Batavia, Ohio, sat back recently and wondered, “How beneficial would it be for us to just take the money [for premiums] and put it in a bank account?”

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