How do I evaluate a health insurance policy that covers a specific disease?

Question

I know that medical emergencies could be fatal for emergency funds and other personal finance aspects.

How can you evaluate a cancer insurance policy? What are the aspects that makes one policy better than the rest?

Answer 1

These policies are usually called dread disease policies or critical illness insurance, and they normally aren't a good deal. Furthermore, with the passage of the Affordable Care Act, such policies may become less common or disappear entirely.

Background: adverse selection and asymmetric information

These policies aren't a great deal because of the effects of adverse selection and asymmetric information, two closely related concepts in the economics of insurance. When you purchase an insurance policy, the insurance company charges you a premium based on your average risk level or the average risk level of your risk pool, e.g. you and your fellow employees, if you get insurance through your employer. For health insurance, this average risk level is the average probability that you'll incur healthcare costs. The insurer's actuaries calculate this probability from numerous factors, like your age, sex, current health, socioeconomic status, etc.

Asymmetric information exists when you know more about this probability than the insurance company does. For example, you may look like a relatively low-risk individual on paper, but little does the insurance company know, BASE jumping is one of your hobbies. Because you know about your hobby and the insurance company doesn't, you secretly know that your risk of incurring healthcare expenses is much higher than the insurance company expects. If the insurance company knew this, they would like to charge you a much higher premium, if they could. However, they can't, because a) they don't know about your hobby, and b) the premium may be decided for the entire group/risk pool, so they can't increase it simply because a few individuals in the group have higher risk levels.

Adverse selection occurs when individuals with higher risk levels are more likely to buy insurance. You may decide that because of your dangerous hobby, you do want to take advantage of your employer's healthcare plan. Unfortunately for the insurance company, they can't adjust their price accordingly.

Adverse selection is a major factor in insurance markets, so I didn't go into much detail here (too much detail is probably off-topic anyway). I can point you towards more resources on the topic if you're interested.

Application to dread disease policies

However, the situation is different when you purchase a dread disease policy. By expressing interest in such a specific policy, e.g. a cancer insurance policy, you signal to the insurance company that you feel you have a higher risk of facing that disease. In your case, you're signaling to the insurance company that your family probably has a history of cancer or that you have habits that make you more susceptible to it, and your premiums will be higher to compensate the insurance company for bearing this additional risk. Since the insurance company already has a rough estimate of your chances of developing that illness, they may already know that you have a higher chance of facing it. However, when you express interest in a disease-specific policy, this signals the existence of asymmetric information (your family history or other habits), and the insurer assumes you know something they don't that elevates your risk level of that specific disease.

Since these policies are optional policies often sold as riders to existing policies, the insurance company has more flexibility in pricing them. They can charge you a higher premium because you've signaled to the insurer that you have a significantly above-average risk of contracting a specific disease*. Also, the insurer can do a much better job of estimating the expected costs of insuring you since they need only focus on data surrounding one disease. The policy will be priced accordingly, i.e. in such a way that isn't necessarily beneficial to you.

Guaranteed renewal

Furthermore, most dread disease policies aren't guaranteed renewable, which means that even if you are willing to keep paying the premiums, the insurance company doesn't have to keep insuring you. As your risk of developing the specific disease grows, e.g. with age, it may pass the point where insuring you is no longer an acceptable risk. The company expects you to develop the illness with the next few renewal cycles, so they decide not to renew your policy. The end result? The insurance company has the premiums you've paid previously, but you no longer have coverage for that illness, and ex post, you've suffered a net loss with no reduction of risk for the foreseeable future.

Affordable Care Act

Dread disease policies are changing under the Affordable Care Act. According to healthcare.gov

Starting in 2014, ... all new health insurance plans sold to individuals and small businesses, and plans purchased in the new Affordable Insurance Exchanges, must include a range of essential health benefits.

The essential health benefits include quite a few areas of coverage; since this applies to policies offered on the state insurance exchanges and those offered outside of it, dread disease policies wouldn't seem to qualify. For more information, you can read the linked page on healthcare.gov or see Section 1302, subsection b), titled "Essential Health Benefits Requirements" in the law itself (p87). I imagine more details will be available on a state-by-state basis through 2014 and into 2015.

One legal source (see the discussion on p24) states that:

whatever else the ACA does with excepted benefit policies, including specific disease and fixed dollar indemnity policies, it does explicitly provide that such policies do not count as minimum essential coverage for purposes of the ACA

This seems pretty straightforward; a dread disease (or "specific disease" policy, as it's referred to in the article), won't count towards the minimum essential requirements. This may not be an issue for you, but for others, it's important to understand that you'll still need to pay the penalty if you only purchase one of these policies.

The ACA spells this out in Section 5000(f) (see p316, which states that "excepted benefit policies" are excluded and defines them using the definition in the Public Health Service Act (PHSA). **The PSHA specifically includes "Coverage only for a specified disease or illness" in their definition of "excepted benefit policies" (see section 2791(b), paragraph 3A on p82, so it's probably a safe bet that such policies won't count towards the minimum.

Also, as Rick pointed out in the comments, the Affordable Care Act also forbids lifetime limits on most insurance plans, so assuming you find an insurance policy with adequate coverage for the specific disease you're worried about, such a plan should cover the related expenses without a lifetime limit. Deductibles, annual limits, and other factors may complicate this somewhat.

In the section about lifetime limits (Sec. 2711, p2), the Affordable Care Act states that:

A group health plan and a health insurance issuer offering group or individual health insurance coverage may not establish ... lifetime limits on the dollar value of benefits for any participant or beneficiary.

However, the law states in the next paragraph that the preceding statement should not

be construed to prevent a group health plan or health insurance coverage from placing annual or lifetime per beneficiary limits on specific covered benefits that are not essential health benefits under section 1302(b) of the Patient Protection and Affordable Care Act, to the extent that such limits are otherwise permitted under Federal or State law

The section also contains similarly vague caveats about annual limits, so the actual details and limits may vary once individual states finalize their policies. The law is intentionally vague because the vast majority of the law's implementation is left up to individual states. Furthermore, certain parts of the law specify actions involving the Secretary of Health and Human Services, so these may require further codification in the future too. You should still read the fine print of any insurance policy you buy and evaluate it as you would any contract (see the next section).

Evaluating a health insurance policy

Since a dread disease policy probably isn't a good idea, you'll probably want to evaluate the healthcare plans offered by your employer or individual plans offered in your area (if your employer doesn't offer coverage). I've tried to include the basic points offered in these articles to give you or future visitors some idea of where to start. These points may change once the Affordable Care Act is implemented, so I'll try to keep them as general as possible.

1. Services - Above and beyond the minimum essential requirements, what services does the plan offer? Are these services a good match for you and/or your family, or do they add unnecessary cost to the premium with little or no benefit? For example, my health insurance plan offers basic dental coverage with a small co-pay, so I don't need a separate dental plan, even though my employer offers one.

2. Choice - What doctors, clinics, hospitals, etc. are preferred providers under your plan? Do you need a referral from your primary care doctor to see a specialist, or can you find one on your own? Are the preferred providers convenient for you? In my first year of college (about five years ago), my student health insurance only covered a few hospitals that were in the suburbs and somewhat difficult for me to reach. This is something to keep in mind, depending on where you live.

3. Costs - This is a major one, obviously. Deductibles, copays, maximum cost limits over a year or your lifetime, out-of-network costs, etc. are all variables to consider.

There are other factors, but since I don't have a family, other members of the site can provide more detailed information about what to look for in family policies.

Summary

In place of a dread disease policy, you're likely better off purchasing a comprehensive health insurance policy, perhaps a catastrophic coverage policy with a high deductible that will kick in once you've exhausted your standard insurance policy. However, this may be a moot point since the passage of the Affordable Care Act may significantly reduce the availability of such policies anyway.