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Insurance for Your Insurance? New Plans Offer to Fill the Gaps in High-Deductible Health Coverage

Insurers like the Morgan White Group (whose advertisement is pictured above) offer 'gap insurance' plans to help cover the financial risk of high-deductible health insurance.

For the first time in her life, 26-year-old freelance designer Susannah Lohr had to shop for health insurance this year.

She called up a major insurer in the St. Louis area where she lives and they offered her a plan with a hefty $6,000 deductible—that’s the amount she’d have to cover herself before the insurance kicks in.

When she balked, the salesman on the phone suggested for an extra $50 a month, she could buy a “gap plan,” a separate policy to cover her deductible.

“After I got off the phone with him, I realized: That’s actually just insurance for my insurance,” she says.

Gap plans, used to cover out-of-pocket expenses like high deductibles, are becoming increasingly popular among consumers and businesses, to the surprise of experts.

The rising price of insurance is driving the trend, explains insurance broker Ryan Hillenbrand, president of the Missouri Association of Health Underwriters.

“People see the prices of individual insurance and they say, ‘Boy, a $6,000 deductible seems really high, I don’t want something that gives me that much risk,’” Hillenbrand says. “That’s why [the gap insurance] market is heating up a little bit more.”

‘Here Come the Gap Plans’

Gap insurance plans have gone by many names over the years (“mini-med policies,” for example, or “indemnity insurance’”) but the idea behind them has always been the same: to cover one-time events like a sudden hospitalization or critical illnesses. The specific parameters of these plans limit the amount of money an insurance company has to pay out, lowering the premiums in the process.

Before the Affordable Care Act, Hillenbrand says the cheap price tag of these plans made them popular alternatives to major medical insurance. So when the healthcare law required everyone to get some form of major medical insurance, the need for gap coverage should have disappeared.

Instead, there’s renewed interest in the plans. With monthly premiums on health insurance going up, more people are choosing cheaper, high deductible options. In 2016, more than 90 percent of people buying insurance under the Affordable Care Act chose plans with an average deductible of $3,000 or higher.

Next year, the cost of one of the most popular plans available under the Affordable Care Act could increase by 10 percent on average across the country. That comes on top of a 5 percent jump the year before.

When consumers see those prices, Hillenbrand says, “they get sticker shock.”

“If you don’t qualify for a subsidy, you’re bearing the brunt of all that cost,” Hillenbrand says. “And here come the gap plans.”

An Alternative for Small Businesses

About eight in 10 people qualify for some form of subsidy on the Obamacare exchanges, helping to make insurance more affordable for consumers.

Businesses, on the other hand, are facing those costs on their own. And for some businesses, especially smaller firms with less purchasing power, gap plans can make a lot sense, says Alex Forrest, an insurance broker in South Carolina.

“The cost of health insurance is going up and businesses have been forced to deal with that by raising their deductibles or increasing out-of-pocket costs for their employees,”  he says.  “That stinks.”

With a gap plan, he says, companies can offer a package of health benefits that keeps out-of-pocket-expenses for employees down. And they still spend less—even paying for a gap plan on top of a high deductible plan—than they would with higher-priced plans with lower deductibles.

Forrest says he’s seen more gap insurance products for businesses come to market in the past few years, they’re being marketed as a creative way to keep out-of-pocket expenses low for employees. This video explaining a plan called the ‘Premium Saver,’ even boasts, “the only thing that’s really different for you is, now, you have two [insurance] cards instead of one.”

St. Louis footwear company Diba Imports, for example, purchases both a high-deductible health plan and a type of gap plan  called ‘hospital indemnity insurance’ for its roughly 30 employees.

“It basically reimburses most of your deductible if you have an illness or injury that puts you in the hospital,” says Diane Butrus, the company’s COO.

Butrus says that Diba used to pay the deductibles for its employees, but as those deductibles started rising, eventually up to $3,000, “we couldn’t afford to do that anymore.”

Some years the cost of covering employee deductibles could reach as high as $25,000. That made it too unpredictable and costly.

The hospital indemnity plan only costs the company about $50 a month per employee, and that means Diba knows exactly how much it will spend on insurance every year.

“It’s been very good,” says Butrus.

Better Off in the Marketplace?

Not everyone is bullish about gap plans, however, especially for individual buyers.

Health economist Deborah Chollet of Mathematica Policy Research—an independent research firm—says the insurance reforms in the Affordable Care Act were designed, “basically to drive these kinds of creative insurance arrangements out of the market.”

Because gap plans are not major medical insurance, Chollet explains, they’re not regulated by the healthcare law and can avoid complying with consumer protections built into the law. So the companies providing gap insurance, “can ask you about your health status, they can deny you coverage, they can do all of the kinds of things that the Affordable Care Act prohibits,” she says.

Chollet says individuals might be better off getting an Obamacare plan through their state exchange, or at least checking to see if they qualify for subsidies—as 80 percent of consumers on the exchanges do.

That’s what Susannah Lohr ended up doing. It took three full days on to find the best plan, but after her tax credit, her monthly premium is about $200 and her deductible is just $600.

“[It’s] a much better plan,” she says.

For people who are intimidated, overwhelmed or find the whole process of choosing a plan unmanageable, there are dozens of free health insurance navigators in each state—people you can talk to who will help you choose your coverage. It’s something Susannah Lohr wishes she had know about when she started searching for a plan.

This story was produced by Side Effects Public Media, a reporting collaborative focused on public health.