The employee benefits market in Southeast Michigan has historically been heavily union-oriented. As a result, the rich benefit packages had little need for voluntary coverage offerings such as hospital indemnity plans.

Then the recession hit.

The state of the economy, coupled with the crippling rise in health care costs, continues to lead employers to introduce consumer-driven, high-deductible plans.

To help wedge the resulting coverage gap, "hospital indemnity plans are starting to come into their own," says Pat Short, president of Benefit Services in Farmington Hills. "The fact of the matter is with the economic condition, the advent of HRAs, HSAs, consumer-health driven programs; you're seeing much more of that."

Although such circumstances would seem to present the perfect opportunity to cross-sell hospital indemnity and other voluntary benefits, in Michigan and other states across the country some carriers are beginning to put restrictions on plans designed to reduce the impact of high-deductible major medical plans.

Usage and abuse

While Helen Stojic, spokesperson for Blue Cross Blue Shield of Michigan, has read of other carriers in other states not allowing any sort of "wrapping," BCBSM allows it for most products - but with a price differential ranging from 4%-8%, depending on the product or region.

"We felt that that was the most fair and equitable approach to the issue," says Stojic. "We want to price it fairly; otherwise the cost rising from higher utilization is a disadvantage to other customers who do not wrap."

Hospital indemnity plans may be used with some of the BCBSM plan designs, but those that include payment for a member's deductible, copay, or coinsurance may not.

Stojic maintains that a wrapped high-deductible plan is no longer a true high-deductible product and therefore does not have the lower utilization rates actuarially expected from a CDHP.

"The use rates are different than a typical high-deductible product," she says, "so we thought that we should price it fairly. Otherwise, the costs arising from higher usage are a disadvantage to other customers who do not wrap that product, and they're experiencing the lower usage."

This past January Steve Blewitt, vice president at IFS Benefits in Wilmington, Del., started to see insurance companies increasing rates when an employer funded more than half of a deductible through an HSA or an HRA.

Blewitt has yet to see any actual statistics on increased utilization, and although he'd love to see a statistic, "I'm not going to argue this practice too much because in theory it does make sense," he says. "You're taking away the consumer-driven approach, which is why these products were priced lower than your traditional HMO and point-of-service plans - because an underwriter assumed that utilization was going to be less due to the fact that employees are spending their own money."

Sure, it's not as if your average employee wakes up one day and decides to get an MRI because their employer is funding their deductible, but Blewitt thinks it is realistic for an employee who has $1,500 of their $2,000 deductible funded by their employer to be lax in areas where savings could be found, such as obtaining a generic prescription versus a name-brand one.

"As far as traditional gap plans go like an accident policy or a hospital indemnity policy we're not seeing a huge uptick in demand from consumers or from businesses for those products," says Blewitt. "The health insurance companies are pretty much allowing those plans to be offered without penalty assuming it's an employee-pay-all scenario."

Even so, because Delaware's health insurance costs in general are among the highest in the nation, "there's not a lot of extra money in paychecks for people to be buying [voluntary benefits] - but they're definitely out there," he adds. "We have some clients that offer them."

Hands tied

For Short, who is seeing an increasing demand for hospital indemnity and other offerings that will help ease the transition to a high-deductible plan, the carrier restrictions on wrapping CDHPs are interfering with his ability to help clients cope with rising health care costs.

"As a consultant and adviser, it ties our hands or takes out of the field various things we can do for our clients," he says. "In reference to the client, it doesn't help them at all because it doesn't give them a total breadth of what they can do," Short says.

As the former owner of one of the largest independent employee benefit agencies in Michigan, Dick Chelten now advises other agencies through Chelten Benefits Group and is an advocate of wrapping high-deductible plans.

"I could see a carrier making a strong case for over-utilization, if in fact we are covering everything, that some people would over-utilize," he says.

"But I never felt that a person had a heart attack because they had a low deductible versus a high deductible. A person didn't get pregnant because they had a low deductible. These things happen. If we can raise our deductible to $5,000 and sell a supplemental insurance policy that covers most, but not all, hospital and surgical deductibles we can save employees from financial disaster," Chelten explains.

Short can understand carriers' objections to a third-party administrator being brought in to run a wrap program, but believes there should be no policy impacting the offering of hospital indemnity coverage or other voluntary benefits.

"I think the big question is should the carriers be allowed to dictate what somebody can or cannot have, insurance-wise? That's the big issue," he says. "Then we get into a slippery slope."

The restrictions from BCBSM and others are affecting the way Short runs his business.

"In terms of what I do as an insurance agent in consulting with a client, it takes away from what I do a basis or a tool in consulting or making recommendations," he says. "An employer always wants to save dollars. They're still going to put in higher deductibles to save those dollars."

'A wonderful tool'

Chelten is "not a big fan" of hospital indemnity plans that pay a predetermined lump sum. "'I'm thinking I'm going to get pregnant this year so I get a $1,000 deductible, let's get a $5,000 hospital indemnity program' - I'm not crazy about that," he says.

He prefers the wrap plans that provide first-dollar coverage at 100% up to typically $5,000 for inpatient services, and 50% coverage for outpatient services.

"Then that person at least goes to sleep at night knowing that if something happens they are made whole," he says. "They have first-dollar coverage, 100% coverage. So that's where gap coverage is a wonderful tool."

Chelten has taken up the issue of carrier restrictions on such plans with the Michigan insurance commissioner's office, as well as the state attorney general's office.

Whatever insurance companies' stance on wrapping, "gap insurance is not wrapping," Chelten maintains. "An insurance policy for any of us who took an insurance licensing exam is a premium paid for a risk transferred, and that premium is paid whether or not the claim actually happens. In wrapping, it's a pay-as-you-go type program and we don't pay unless a claim occurs. And a voluntary product such as gap insurance should be allowed to be sold."

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