Health Insurance and the Independent Contractor

(Note: this was originally posted at http://gamingmercenaries.com/?p=33)

This post applies pretty much to all independent contractors in America, not just those in the game industry. Those of you in countries with socialized medicine can skip this article, or read it and be amused while sadly shaking your head.

I would submit that if you asked most independent workers to identify their biggest concerns about their career choice, the top two answers would be some combination of “finding work” and “health insurance”. One of America’s prime problems today is the current system of health care which is flat out broken. But to avoid getting into a political sermon, I’ll concentrate on what we independents can do about it.

First, some background. Unlike every other industrialized nation in the world, the United States ties employment to health care. This makes no logical sense, and it is an immense bureaucratic mess that makes changing employment difficult, adds red tape and overhead for employers, and still requires oversight and involvement from the government. Basically when most people get a full-time job “with benefits” they can opt to purchase health insurance through their employer. Their employer may pay a portion of it, and the employee contributes any difference between what their employer is willing to pay compared to the cost of the actual health plan they select. The primary advantange, however, isn’t the cost, it’s that the employer has negotiated a group rate with its insurance providers, which means that A.) employees get health coverage at a significant discount to independent contractors and B.) employees are almost never denied coverage even for chronic pre-existing conditions.

As independent contractors, we do not have the ability to negotiate for better rates or guaranteed coverage unless we’re part of a larger union that has this ability. The Screen Actors Guild has done a remarkable job on this front — actors have pretty comprehensive benefits from what I understand so long as they work a fairly minimal number of jobs during a year. Some professional associations such as ACM also negotiate for coverage on behalf of their members, although usually without the comprehensiveness of an employer provided plan.

So where does that leave us? After leaving a full-time job, independent contractors have the option of applying for COBRA continuation of their existing coverage. This extends for 18 months after leaving their current company, but they must now pay the entire cost of the premium instead of the subsidized cost. This guarantees coverage for a fixed period of time, which is helpful if you have a chronic or expensive medical condition that would be reason for denial of coverage elsewhere, but you have a fixed period of time and you incur greater monthly costs as a result.

The second option is to pursue some type of coverage on your own via a traditional (HMO/PPO) individual health plan. This is viable, but the cost tends to be exorbitant, the premiums can radically change during the life of your coverage as the insurer continually reassesses your risk, and if you have a pre-existing condition you may be denied or find that the premiums are so high that it is impractical. If you are single and healthy, this type of plan can work, but it is still often very overpriced compared to the benefits you derive.

However, over the past few years with some reforms signed into law, we now have the option of High Deductible Health Plans in conjunction with Health Savings Accounts (HDHP HSA). These are available to both employees with other benefits available, and to self-employed individuals. The gist is this: a HDHP is a health plan with a very high deductible (from $1100 to $10000 or more) in conjunction with reasonably low monthly premiums. The extremely high deductible means that this type of coverage is designed to handle catastrophic medical coverage — major accidents or illnesses. Everything else you pay out of pocket.

A Health Savings Account is a tax-deferred savings account that can be used to pay for most medical expenses. You can contribute up to a certain cap every year (for families it’s currently $5450) and this rolls over from year to year. Contribution is not required, but it makes a lot of sense since it’s all pre-tax, like an IRA. In addition, depending on the HSA account, you may be able to invest your money into mutual funds, stocks, bonds, CDs, or simply let it sit there accumulating standard interest rates. Most HSA providers will give you a checkbook and debit card so that payment is simple and easy — use your debit card when paying for prescription drugs or a doctor’s visit, and you’re set.

Now, a HDHP HSA is not for everyone, and there are some drawbacks. The first is the perception that you have to eat a lot more of the bills since there’s no co-pay and the deductible is so high. This is true, however for most families it actually works out to your favor. I’ll give you a concrete example from my own experience.

Prior to switching to a HDHP HSA, I had a PPO through one of the major health insurance companies to cover my family (none of us have any lingering medical conditions). The plan had a moderate deductible ($2000 I think) per family member, and the standard $20 doctor visit co-pays and what not. However, the cost to me was over $800 per month. After analyzing our medical expenses over the past few years, even during the years with major medical events we would have still come out ahead by being uninsured since we almost never had $10K in medical expenses in a given year.

By switching to a HDHP HSA with a $10K family deductible, our premiums dropped to $260/month, which is far more palatable, saving almost $7000/year in premiums. While doctor’s visits are more expensive (typically a visit is now $75 or so, which can be alarming when compared to a $20 co-pay), doing the math ($800-260 = $540 difference, divided by $75/visit) makes it apparent that I’d have to visit the doctor almost twice a week for the cost difference to match my old premiums. So I’m still coming out way, way ahead with the higher co-pays.

The second concern that is often raised is that a high deductible can be difficult to pay for a lot of families. While true, in my case I was paying almost as much per year in premiums as I would have with a $10K deductible. If you have a long term medical condition then an HDHP HSA may not make sense, but the reality is that if you have a long term medical condition any individual health plan doesn’t make sense. That’s the unfortunate state of healthcare in the United States today. So really, the high deductible is a wash, because you’re saving every month through drastically reduced premiums.

One benefit out of all this is that now that I’m paying out of pocket for everything, I’m finding myself taking a more active role in my medical care. This means I’m avoiding stuff that is there to pad a doctor’s invoice to the insurance company — and this is, realistically, how many doctors today make their money. If I have a bad cough due to bronchitis and I want a prescription cough syrup, I’ll go to my doctor and say that. If they start wanting to do cortisone shots, Albuterol nebulizer, etc. I’ll politely decline because I know for a fact that stuff isn’t going to make a huge difference since it’s the same cough I’ve had for fifteen years whenever I get bronchitis. These elective treatments can, granted, sometimes uncover something hidden that needs to be addressed, but by and large most of that stuff isn’t necessary when all you need is a prescription for pink eye, a bad cough, or back spasms.

By making the consumer responsible for medical costs, ideally competition starts pushing doctors to be more competitive and aware of their services — doctors today very often have no need to differentiate their services from others because they will be paid the same amount due to negotiated rates from insurance companies. Even worse, typical office visit payments are based on an assumed short visit, as low as 3 minutes (or so I’ve heard), so a doctor has a strong incentive to see you, write a prescription (or hand you off to a nurse to perform procedures that allow for higher billing with the insurer), then move on to the next patient. Doctors in that environment make more money based on throughput than quality. To make matters worse, consumers are also typically unable to tell a good doctor from a bad one or simply don’t have an opinion, so the choice of doctor often comes down to location and what insurance is accepted.

Bringing this back around to the independent contractor — with a few caveats, the HDHP HSA plans out there make insurance affordable for the independent contractor. First, you need to be able to pay the monthly premium and out of pocket medical expenses up to the deductible amount — however this is true whether you’re using a PPO, HMO, or HDHP/HSA, it’s just amplified with the latter. Second, if you have a chronic condition such as diabetes then you may still find costs excessive or coverage difficult to acquire since you don’t have a group policy to negotiate guaranteed coverage and reduced rates.

But even so, generally speaking the HDHP HSA makes a lot of sense for independent contractors. Costs are kept low, you control your own medical expenses, and you are covered in the case of catastrophic accident or ailment (heart attack, stroke). For me, HDHP HSA has made one of my biggest concerns with independence go away.

Feel free to ping me directly if you want some pointers or referrals to reputable agents and companies, since I spent quite a bit of time researching my insurance options.