'Death spiral' is nearly as unpleasant as it sounds

Staying Ahead

February 26, 1996|By JANE BRYANT QUINN

NEW YORK -- A lawsuit filed in Illinois is the first, to my knowledge, to challenge an odious method of pricing health insurance. It's known, appropriately, as the "death spiral." If you have individual or small-group insurance, it could cost you your coverage just when you need it most.

Policyholders are death-spiraled when they're sick and uninsurable anywhere else. The company runs up your premiums until you can't afford to pay. You eventually drop out, which saves them the cost of your medical bills.

How high could premiums go? Just ask Mark Gilbert, a retired businessman in Lincolnwood, Ill., who sued Bankers Life and Casualty of Chicago. He was paying for coverage on his daughter. The annual premiums, he says, rocketed from $1,333 in 1990 to $13,844 in August 1995.

Gilbert's daughter, who is 53, is clinically depressed and has run up big bills for drugs and psychiatric care. Luckily, she has now qualified for Medicare so her father no longer has to face even higher premiums to ensure her care.

For those who can't pay the premiums, or who don't qualify for Medicare, the choices are shocking. They can: (1) let their medical bills drive themselves and their families into poverty, which qualifies them for Medicaid; (2) run up their bills, then escape them by filing for bankruptcy; (3) beg for charity care; or (4) go without care, perhaps at risk to their lives.

Few Americans think this can happen to them if they buy an individual health insurance policy that's guaranteed renewable. With that policy, you join a pool of people sharing risks. In any year, the premiums paid by the healthy members (who make few claims) help hold down the cost of the pool as a whole.

What makes a pool work is the constant infusion of new members. They've just passed a health test, so they're the least likely to make claims. But most health insurers don't keep these pools open to new blood. After 12 to 36 months, they may close the pool and start a new one, issued on a new policy form. As the members of the older pool age, the number and size of their claims go up. To cover the cost, the insurer jacks up premiums at a rapid rate.

Pretty soon, the pool's healthy members start dropping out. They switch to newer, cheaper pools, offered by that same insurer or by some other insurance company.

That's when the death spiral begins. The members left behind are in poorer health, which drives up their premiums even more. Slowly, the sicker people leave, too, because they can't afford the price.

When the pool becomes unprofitable, it may be canceled altogether. Your renewal "guarantee" means only that you can't be canceled individually. The insurer is free to terminate your entire group.

As long as you and your family remain in excellent health, you can jump to cheaper policies. But some day, one of you may fall ill -- and that's when your personal death spiral starts.

Gilbert's lawsuit charges that it's a form of "prohibited discrimination" to let the death spiral strand the sick in a shrinking insurance pool. It also charges breach of contract.

Bankers Life says the terms and premiums of all its policies "are filed with and reviewed by state insurance regulators," and that the company "complies fully with its obligations to each policyholder."

Dick Rogers, deputy director of the Illinois Department of Insurance, says Illinois doesn't approve or disapprove premium rates. "We believe that competition will control the rates," he says.

But there's no competition for people whose health locks them into the policies they have. Captives are stuck with whatever the insurance company wants to charge.

You can write to Jane Bryant Quinn at: Newsweek, 444 Madison Ave., 18th floor, New York, N.Y. 10022.

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