Buy your own health plan

By Kiplinger's Personal Finance Magazine

If you work for yourself, retire before Medicare kicks in, or don't have health insurance through your job, finding individual coverage you can afford is as much a function of the state in which you live as it is the state of your health.

It often comes as a rude awakening to look for insurance on your own, especially if you've been spoiled by years of relatively carefree coverage through your employer. But that's been exacerbated over the past 10 years as states such as Maine have passed laws designed to guarantee all state residents access to coverage.

Some states (see the list on the next page) chose to pass guaranteed-issue laws, which forbid insurance companies from rejecting people based on the condition of their health. Others elected to go with a "community rating" system, which requires insurers to charge everyone the same rates, regardless of health, or otherwise limits their ability to raise premiums. But these well-intentioned laws have often backfired, forcing some healthy people to pay more in insurance premiums than the monthly mortgage on a small house. And it's even tougher to find an affordable policy if you're in poor health.

Spreading the risk

Insurance usually works because companies can spread their risk over a wide range of people. The healthy ones end up paying more in premiums than they submit in claims, and the difference helps to subsidize sicker people with more expensive claims. Healthy clients accept the situation because they usually pay lower premiums than higher-risk clients -- and they never know when they might become sick themselves.

But when insurance companies can't reject anyone or adjust rates based on risk, they end up charging everyone more. That's what happened in Maine after 1993, when the state passed a guaranteed-issue law.

"Rates shot up dramatically because insurers could no longer cherry-pick," says Tom Wright, a health-insurance broker in Yarmouth, Maine. When prices rose, many healthy people elected to take their chances and drop their coverage, while sick people stayed on. Insurers then had to raise rates even higher. "We've entered an actuarial death spiral, and it's accelerating," says Wright.

As the risk pools got worse, many companies decided it wasn't profitable to do business in the state and pulled out.

In Maine, insurers may adjust premiums a bit based on the age of the insured. But in New Jersey, everyone has to pay the same rate for similar coverage, whether you're a 25-year-old triathlete or a 61-year-old who has had quadruple-bypass surgery. That means everyone is able to buy insurance -- but hardly anyone can afford it.

New Jersey residents could cross the Delaware to take refuge in Pennsylvania, where individuals are able to buy comparable health-insurance coverage for a little more than half as much. California -- another large state with a highly competitive health-insurance market and no community-rating or guaranteed-issue laws -- is also friendly to individuals who are in good health. You can find several options online through eHealthInsurance.com.

A buyer's guide

With state policies varying all over the map, there's no sure route to finding affordable health coverage on your own. If you happen to live in Kentucky, Maine or Washington state, you'll have few choices of any kind. In rural areas of Texas and other states, you can't always save money with an HMO because there aren't enough people to make it economical. Association plans, which sometimes offer good deals, are unavailable in several states. And your state may limit your options for raising deductibles or cutting back on coverage to lower the price.

But you have to start somewhere, so follow these steps. Depending on where you live, they may lead you to a dead end -- or to a far better deal than you have now.

Use a health-insurance broker who knows your market. Brokers not only will help you shop for price, they'll also know if a company has a reputation for raising premiums or hassling policyholders who file claims. If necessary, a broker can find a group for you to join or help you sign up for your state's high-risk pool.

Finding a broker can be a task in itself. Many life- and auto-insurance agents don't deal in health insurance because the rules are complicated and the commissions low. But they may be able to refer you to a specialist. The National Association of Health Underwriters can also put you in touch with member agents in your area.

Continued: You can form a small group

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