The Uninsured: Health Gamble Affects 1 in 5

When Sacramento upholstery shop owner Steve Valencia somehow found a health insurance policy for himself and his two employees at an affordable price, it seemed too good to be true.

In helping hundreds of entrepreneurs start their own businesses--volunteer work that earned him federal awards and a handshake from President Bush--Valencia had learned that it was very hard for small, fledgling enterprises to find reasonably priced group health insurance.

Valencia soon discovered that his own firm’s policy was too good to last. A month after Valencia signed up, the insurer effectively doubled the premium, pricing the tiny company out of the group health market. And when Valencia and employees failed to find affordable individual policies, they joined a burgeoning population--California’s working uninsured.

The ranks of the uninsured have swollen to the point where an estimated one in five Californians lacks coverage, and the vast majority of those are working people or their dependents.

The Deukmejian Administration considered the problem serious enough to put forward the draft of a striking new proposal last week that would require every California business to provide medical coverage for all employees.

The plan is designed to cover about 80% of the state’s uninsured--mostly low-wage workers and their families--and includes provisions for subsidizing the cost of insurance for low-income employees, low-profit businesses and some of the self-employed.

While health care advocates have praised Gov. George Deukmejian for proposing action, they have also expressed doubts that the plan can work without massive infusions of state money. Some also criticize the plan for excluding the remaining 20% of the uninsured--a group that includes the homeless, some of the unemployed and some students.

The backdrop to Deukmejian’s dramatic initiative is a situation that seems to be going from bad to worse.

Recent studies have shown that Californians are already less likely than most other Americans to have health insurance. Now, many Californians are finding it increasingly hard to get coverage, not only because of sharply rising premium costs but because some insurers are halting or limiting the sale of medical policies to individuals and small companies.

Unless the trends are reversed, health insurance will become still more expensive and less available for small businesses and individuals.

The insurance firms that continue serving small groups and individuals are worried about being stuck with the riskiest customers.

“We’re concerned,” said Robert Hughes, a spokesman for San Francisco-based Kaiser Permanente, which suspended the sale of individual health policies in Northern California last year. “The more the playing field tilts, the more we are being left alone. It could change to a situation where we’re taking care of more than our fair share.”

Meanwhile, the working uninsured are scrambling for personal solutions.

UCLA Study

It is a national problem, but it is especially acute in California.

The number of Californians without health insurance or Medi-Cal coverage jumped from 3.5 million in 1979 to 5.1 million in 1986--45.7%--according to a 1988 study by the UCLA School of Public Health.

The study’s chief author now says the number of uninsured could be as high as 5.8 million, and he estimates that about four-fifths of them are workers or their dependents.

Part of the increase is simply due to population growth. Another part relates to the changing makeup of the state’s economy: California’s manufacturing base, which includes many large companies that have the wherewithal to provide group insurance, has been shrinking. Meanwhile, the state’s service sector has been growing, spawning more and more of the small enterprises that may lack the resources to pay health insurance premiums.

But the most worrisome factor is the increasing number of insurers unwilling to provide coverage to small groups and individuals.

New attention was drawn to the trend earlier this month when Travelers Corp. announced that it will stop selling health insurance for individuals after Jan. 31. Travelers said it has lost money in this segment for five consecutive years.

Said Travelers spokeswoman Rosanne Hennessey: “We have carefully watched the status of this market--both in terms of our own experience and the wider developments in the industry--and it appears likely that our future results would be significant losses.”

Aetna Life & Casualty Co. also is considering halting sales of health insurance polices to individuals, citing losses in that area in two of the last three years.

Other diversified insurers--those selling several kinds of insurance products--have abandoned the market for both individuals and small groups. Cigna Corp. stopped selling to individuals in 1980. Kemper Corp. withdrew from both markets in 1987.

None of these companies by itself had a large slice of the market for individual or small-group coverage, but health care advocates in California are worried about the cumulative effect of the exodus. In California, at least 34 insurers have stopped selling group policies to small businesses--firms of 25 employees or less--since 1988, according to Blue Cross of California.

Wall Street analysts say many diversified insurance firms are withdrawing from individual and small-group coverage because their share of these market segments is too small to be an important source of revenue for them and therefore isn’t worth the risk.

Want Broader Base

The developments disturb such trade groups as the Assn. of California Life Insurance Cos., which represents 20 health insurance providers and 16 other insurers.

“I think the trend will continue and perhaps accelerate unless something is done to stabilize the industry,” said Brent Barnhart, legal counsel for the association.

Barnhart said insurers generally have better success selling group insurance to large firms because the risk of major hospitalization claims can be spread across a broader base. But for a small company, a single expensive claim may offset all the revenue the insurer has collected and in turn trigger an increase in the next year’s premium.

Riskier Pool

Ironically, by precipitously raising prices to cover medical costs in the small-group segment, the insurance industry creates a riskier insurance pool overall, Barnhart said. If premiums are relatively high, he explained, small firms with healthy employees are more likely to dispense with health insurance entirely. On the other hand, firms whose employees have a history of health problems are in greater need of coverage and are more likely pay the high premium prices.

The same cost-need equation prompts healthy people to forgo individual policies, again leaving insurers with a riskier pool. As the price goes up, Barnhart said, “it’s the older and less healthy who are willing to pay.”

And as the pools become riskier, insurers try to be increasingly selective, said Maryann O’Sullivan, executive director of Health Access, a statewide consumer coalition representing unions, church groups and senior citizens.

“You have companies trying to skim the cream off the market by selling to the healthiest and denying (coverage to) people with any poor health conditions or any genetic background that might lead to problems,” O’Sullivan said. “There’s a real movement toward offering coverage only to people who are not in need of policies.”

Premium charges are also increasing because the cost of medical health care is rising much faster than general inflation, noted Richard Brown, associate professor at the UCLA School of Public Health and chief author of the 1988 UCLA study on the state’s uninsured.

In California, annual group rate increases of 20% or more have been common over the last two years, insurance executives say. As bad as that is, it is worse for small firms, which generally pay more per worker than large firms. And the increases can be steeper still for individuals and for small firms with employees who have made major medical claims. From the “safest” policy to the “riskiest”--as insurers assess them--premium prices can vary by as much as 800%.

Too Many Customers

Faced with wide disparities in pricing and fast-rising premium costs, customers tend to flock to any insurer with relatively stable and reasonable charges. The rush for personal policies offered by Kaiser Permanente in Northern California was so great that the insurer decided to suspend the sale of policies to individuals. Sales in the region, bounded by Santa Rosa in the north and Fresno in the south, were halted last March and have yet to be resumed.

Kaiser had seen a 6.2% increase in enrollment in 1988 and another 6% increase in 1989--an increase of 267,000 policies in Northern California in just two years. As a health maintenance organization, Kaiser provides care at its own hospitals.

“The growth exceeded our projections,” Kaiser spokesman Hughes said. “Our facilities are at capacity. We don’t feel we can take new members until we have the physicians and staff to take care of them.”

While others are withdrawing from the market for individual and small-group coverage, certain specialist firms are using creative approaches to stay in it and are eager for new business.

Pioneer Life Insurance of Illinois, for example, depends on small groups and individuals for 40% of its revenue. With a relatively large revenue base of 120,000 policies nationwide, Rockville-based Pioneer can keep policy prices low enough to attract healthy individuals, said Nancy Zalud, a vice president.

Pioneer has other incentives designed to attract and retain healthy customers. For example, policy holders who make no medical claims over a period of time are given discounts, Zalud said. With the prospect of a future discount, some customers resist making claims and pay smaller medical costs out of their own pockets.

Like Pioneer, Blue Cross of California--where policies for individuals and their families account for about 20% of total enrollment--is also looking to expand in that sector, said Mark Weinberg, an executive vice president.

Weinberg said that two keys to success in individual coverage are being big enough to absorb the occasional claims and patient enough to ride out bad times.

“To weather the cyclical nature of this business, you have to be very committed to this market,” Weinberg said. “Certain companies that have dabbled in this business will have to make a decision on whether to continue.”

Blue Shield Stand

Individuals and their families account for a similar 20% of the enrollment at Blue Shield of California, spokesman Michael Odom said.

“We’re fully committed to offering affordable coverage to individuals and families,” Odom said. “But Blue Shield can only do so much.”

People looking for health insurance sometimes have to be flexible. Some reduce the cost of coverage by accepting higher deductibles or more limited coverage. Some shop around extensively or hire insurance brokers to track down affordable policies.

Terry Galanoy shopped around but could find nothing in his price range. After he left his job at an advertising agency to become an independent producer of television commercials, Galanoy found himself without coverage in part of 1988 and 1989.

Some insurers were willing to write him an individual policy, “but they wanted to charge $400 to $500 per month and include massive deductibles,” Galanoy said.

Losing medical coverage means a loss of personal security as well, Galanoy said: “You become aware that you could be plunged into sudden poverty as a result of a serious illness or an accident.”

Like some other self-employed people, Galanoy finally solved his problem by affiliating with a larger group: He joined the Directors Guild and enrolled in its group policy.

Steve Valencia, the Sacramento upholstery shop owner, was hoping for a similar solution when he tried to organize members of a local business group into an insurance pool. The group--a 195-member coalition called the Stockton Boulevard Merchants and Property Owners Assn.--is chaired by Valencia. All of the members had health insurance needs, Valencia said.

“One agent had told me that if I couldn’t get the group together (for a policy), I could forget about finding insurance,” Valencia recalled. “When the (association) members agreed to be part of a group insurance plan, that agent wouldn’t return my calls. Other (insurance company) agents didn’t bother to come out to see us. Some agents said that insurance companies didn’t want to look at us right now.

“They said insurance companies are waiting for government to do something about the problems of the uninsured. They said it was just too risky right now.”