HSA for America

How to Avoid Out-of-Control Rate Increases

November 1, 2006
Vol. 2, Issue 10

Anyone who has carried individual health insurance for more than a year or two is familiar with rate increases.  There’s nothing so unusual about that, as the prices of most things tend to go up over time.  But as most people who have carried the same health insurance plan for any period of time know, health insurance rates seem to increase at an accelerated rate.  I want to explain what is going on here, and how to make sure you stay in a plan offering the best rates possible.

How Rate Increases are Calculated

One common myth is that insurance companies will raise your rates when you have a claim.  When I first started out in the health insurance business in 1987, I was trained that one of the main selling points of the particular policy we offered was that it was “non-cancelable,” and that the insurance company could not single the insured out for a rate increase.

Well I was young and naïve, but I came to learn that this was very misleading.  In fact, all health insurance plans work this way – no matter how many or how big your claims are, you cannot be cancelled because of those claims and the only way you can be rated up is if everyone in your “block” is rated up by the same amount.

For example, a block could be everyone in zip code 12345 who has purchased the “Super HSA Plan” with a $3,000 deductible from company XYZ.  Eventually there will be some people in this block who file very large claims on their Super HSA Plan, but as long as there are new healthy applicants joining the block every month, (who will be paying premiums and not filing many claims), the premiums should stay fairly stable.

Closing the Block of Business

The catch is most insurance companies eventually come out with new plans, and quit selling older plans.  So if the insurance company comes out with the “Fantastic HSA Plan,” they may quit offering the “Super HSA Plan” for sale.  This is called “closing the block of business.”  The next time there is a rate increase on the Super plan, people who are still in good health may find a better value elsewhere.  Someone who has had a heart attack must keep what he’s got, because a new insurance company will not accept him due to the serious pre-existing condition.

So as healthy people begin to leave the block of individuals covered by the Super HSA plan, the block shrinks.  Since people with health problems are less likely to leave, the average health status of people insured in this block go down, and the size of the average claim goes up.  This results in more rate increases, which results in more healthy people leaving the block.  Eventually this can turn into a “death spiral,” in which rates are increasing quite substantially for anyone left in the block.

To give you an example, last week we had a call from a 42 year-old single woman from Atlanta, Georgia.  Because she had had some pre-existing health conditions that prevented her from changing plans, she had been with the same plan for the past 12 years.  Her premiums, which had started out at less than $80 per month, had grown to – get this – $1,783.46 per month.  If she qualifies (which I believe she will, since the previous health problem is no longer a concern), the same insurance company that she uses now will cover her under a new plan for just $116.82.  (Though, she may be better off switching to a different company).

How to Protect Yourself

Unfortunately, there are no guarantees that the plan you have will not eventually experience large rate increases.  But there are some steps you can take to reduce the chances that you’ll end up in a situation like I described above.

  1. Go with a reputable insurance company with a long track record.  There are a lot of insurance companies out there, some who’ve been around for decades and others who have been in the business for only 3 or 4 years.  In my experience, the more established companies in general tend to have more stable rates than newer, smaller companies.
  2. Ask your agent if the company tends to charge the same rates for renewals as it does for new business, or if rates are higher on people who have had the coverage for a couple years.
  3. Compare rates every year or two.  No one likes shopping their health insurance coverage, but doing so on a regular basis will save you money.  (By the way,HSA for America clients benefit from our Annual Comprehensive Policy Review, in which we offer to reanalyze your situation so that you know your options and evaluate the benefits of changing plans.
  4. Stay healthy, so you can change plans if you need to.  Though this isn’t always possible, the majority of the health problems and medical expenses American’s suffer from are self-inflicted.  Exercise, eat right, and take care of yourself, and the odds are high that you’ll be able to qualify for coverage any time you need to change plans because rates (or your needs) have changed.
  5. Eliminate risk factors, and ask the insurance company to adjust the rates accordingly.  For instance, if you quit smoking or lose weight, most companies will adjust the premiums once the new behavior has been in effect for at least a year.
  6. Raise your deductible as you accumulate funds in your HSA.  There’s probably no sense carrying a $2,000 deductible if you have $15,000 accumulated in your HSA.  As your HSA grows, you should always be raising your deductible.  Premiums drop dramatically as you go to a higher deductible, and HSA contribution limits go up unless your deductible is already higher than the maximum contribution.

When I was studying for my master’s degree in nutrition and exercise science a couple years ago, I learned that 64.5% of all Americans over age 20 are considered to be overweight.  Tremendous numbers smoke, don’t exercise at all, and eat a diet of sugar and junk food.  (By the way, this was even true of many of the faculty in the nutrition department!) And many tend to believe that good health is based on a lucky roll of the dice...

Most people who own HSA plans are different.  Because health savings accounts reward you with lower premiums, tax breaks, and a medical retirement account, they provide a tremendous incentive to take personal responsibility for your health.  If you deposit money into your HSA and don’t withdraw it right away, it will grow tax-free and could accumulate into a substantial amount of money.  Also remember that HSA funds can be used to pay for lab work, alternative therapies like acupuncture or homeopathy, or virtually any other medical procedure that is meant to treat or prevent a specific disease.

So be smart about your health and your health insurance.  Stay healthy, so you don’t need to withdraw money from your HSA, and so you can switch insurance plans whenever it becomes beneficial to do so.

It can sometimes take up to six weeks or longer for an insurance company to approve your application for coverage.  So if you do not yet have an HSA plan, now is the time to apply.  You’ll want to get your coverage in force by January 1 so you can get the full tax benefits for 2007.


To your health and wealth!

Wiley Long
President - HSA for America

P.S. - Next month I’ll talk about why HSA plans have become so popular among people who use alternative medicine, and give you some ways to use your HSA that you may not know.



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Fort Collins, CO 80524
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