Bogus Health Plan


Wal-Mart has a limited benefit plan, called Starbridge.

Fast-Growing Health Plan Has
A Catch: $1,000-a-Year Cap

Employees Pay $10 or So Weekly, for Basics
That Provide Little Help for Serious Illness

For legions of Americans with no health insurance, a policy known as
"limited benefit" sounds like an appealing choice. Premiums are often
only about $10 a week. But there's a big catch: For basic medical care,
it often pays only $1,000 a year -- so little that some question whether
it amounts to health insurance at all.

The policies are among the fastest-growing health-insurance offerings
in the workplace. Sold by half a dozen insurance companies, they cover
an estimated 750,000 employees and family members. Wal-Mart Stores Inc.,
McDonald's Corp. and Lowe's Cos. are among major companies making them
available to their employees.

Yoshiko Craig, a receptionist in Duluth, Ga., bought such coverage in
April 1998. She used most of a 50-cent raise she had just gotten, to
$7.75 an hour, to buy the plan through her employer, the big Regis Corp.
hair-salon chain. It cost $16 a week and capped her basic benefits at
$1,000 a year, although, as with most such plans, it let her collect a
few thousand dollars more if injured in an accident or hospitalized. Age
61 at the time, Mrs. Craig remembers thinking that she didn't expect to
become seriously ill.

Five months later, she learned she had breast cancer. Following surgery
and chemotherapy, Mrs. Craig found herself facing medical bills of
$85,000. Ever since, she and her husband have been paying about $10,000
a year toward their medical debt.

"The insurance wasn't any help," Mrs. Craig says.

Some health-care advocates and industry executives are highly skeptical
of plans such as hers. At one insurance-company meeting last year, a
roomful of agents burst into laughter when an executive described a
limited-benefit plan. "I see no value in a $1,000 policy," says John
Hartnedy, Arkansas' deputy insurance commissioner, who says what people
really need is coverage for major illnesses.

The plans spotlight the growing disparity at many companies between the
treatment of higher-ranking employees -- who generally get comprehensive
health-insurance policies -- and hourly workers, who tend to be the
lowest-paid and least able to cope with medical costs.

Supporters of the limited-benefit plans say their critics don't take
into account economic realities facing the working poor. "It's easy for
someone to say it's a nothing program when they have money in the bank,
credit cards in their wallet and nice health insurance," says Charles
Shoumaker, a former human-resources manager who helped launch the
limited plans more than a decade ago. "They don't realize that $1,000 is
a lot of money to the working poor."

Adolfo Gutierrez, an hourly employee at an Austin, Texas, restaurant in
the Schlotzsky's Deli chain, found value in his $1,000-limit plan. It
saved him a couple of hundred dollars when he sprained his hand playing
basketball last year and had to go to an emergency room for a splint.
This week, he got treatment for a rash on his hands and didn't pay
anything at the doctor's office. "Having health insurance is wonderful,"
says Mr. Gutierrez, 22, whose employer, unlike most, paid the premium.

Defenders say the simple act of giving low-income workers an insurance
card can encourage them to seek routine preventive care. They contend
that some measure of health coverage, however small, is better than

Cost Conscious

Some employers also say this is all they can afford, with the economy
in low gear and health-care expenses soaring. The cost to employers of
providing comprehensive health benefits has risen 57% in five years, to
$5,646 per employee, according to Mercer Human Resource Consulting.

By offering limited-benefit plans, meanwhile, employers are able to
tell new low-level workers that health insurance is available through
the job, even though most employers pay nothing toward it.

Think of it as getting insurance for the price of a movie or a few
beers, some employers and insurance agents tell workers.

Enrollment in the limited-benefit health plans has grown about 20% in
each of the past two years. Insurers sell them solely through employers.
The employers make them available chiefly to hourly workers, either
full- or part-time, and collect the premiums by payroll deduction. The
companies, many in the service sector, typically find that 10% to 30% of
eligible workers purchase the coverage.

An employee-benefits administrator dreamed up the plans in 1986. The
initial idea was that the plans might help businesses retain certain
categories of workers, such as veterans and minorities, that entitled
the employers to a tax credit. The benefits firm, Strategic Resource Co.
in Columbia, S.C., lined up an underwriter and later began marketing the
plans widely.

A couple of years later, Mr. Shoumaker developed his own version, while
he was human-resources manager for Circle K convenience stores. He
started a firm to market it, Star Human Resources Group Inc. He found
corporate executives dubious of a $1,000 health policy. "Many felt
embarrassed to take anything that low," he says.

They grew more comfortable after Star signed up McDonald's in 1994, and
then retailer Target Corp. a year later. McDonald's says about 12,500 of
250,000 hourly employees at its corporate-owned and franchised
restaurants are enrolled in limited-benefit insurance. The chain offers
those hourly employees more-comprehensive health insurance but at a
higher price.


Some features of one of the limited-benefit health plans offered at
Regis Corp., through UICI.

* Basic annual benefit: $1,000*

* Weekly premium for an individual: $6.92

* Weekly premium for a family: $21.55

* Basic deductible: $50

* Doctor visits: $15 copay

* Accident benefit: $5,000, up to two a year, insurer pays 80% of
covered expenses

* Accidental-death benefit: $10,000

*Per insured person

Source: Regis

Employers readily concede the plans offer scant help with a serious
illness. The average cost of a hospital stay in 2001 was $13,685,
according to Mutual of Omaha Insurance Co. study. Employers and
insurance agents say they make sure workers understand what the
insurance can and can't do.

"The concern is they understand it is a limited benefit, so we don't
have someone enrolled in the plan who has open-heart surgery and thinks
they have coverage for $100,000," says Bob Ihrie, a vice president at
Lowe's. The home-improvement retailer offers part-time employees a
choice of two Allstate Corp. plans with maximum annual benefits of
$2,500 or $5,000. To avoid confusion with broader, largely company-paid
insurance for full-time employees, the company schedules enrollment on
its limited-benefit plans at a different time of the year. Some
employers require insurance agents to come to their premises and explain
the plans to potential buyers.

Some insurance companies have tried offering low-cost policies that
cover "catastrophic" health costs. But industry officials say low-income
employees haven't shown much interest because such plans require high
deductibles -- perhaps a couple of thousand dollars -- before coverage
kicks in. Low-wage workers are more interested in something that covers
basic expenses, insurers say.

'Adverse Selection'

Another problem insurers cite in trying to offer a low-cost plan with
potentially large payouts is "adverse selection": Disproportionate
purchasing by people whose health is poor, and who are likely to use a
lot of the benefits. With employer-sponsored plans, health insurers
cannot reject applicants on the basis of their health.

Mrs. Craig, the hair-salon receptionist in Georgia, recovered from the
cancer that struck soon after she bought a limited-benefit plan. But the
bills were daunting. Indeed, a serious medical problem such as hers is a
factor behind about half of the nation's 1.5 million bankruptcy filings,
according to Harvard researchers who study the issue. Mrs. Craig
rejected the bankruptcy route. The doctors "saved my life" and deserve
to be paid, says Mrs. Craig, now 66.

She and her husband, William, a 69-year-old retired farm-equipment
salesman, paid a deposit to each medical provider and began sending
monthly checks. They've whittled their balance to $28,000.

Although a limited plan was of scant value to Mrs. Craig, it can be a
big help for an employer, with few costs. Even the expense of enrollment
is largely borne by insurance companies or their agents.

"We wanted to do something that would attract and retain people and
give them the ability to have some insurance," says Jan Cohen, managing
director of benefits at Budget Rent A Car System, a unit of Cendant
Corp. About a hundred of Budget's 1,800 part-time employees purchased a
limited policy.

The early architects of the plans figured that price would be key for
lower-income workers, so they set weekly premiums at equal to just one
to two hours' wages. Those premiums, in turn, dictated low levels of
benefits: from $1,000 to a few thousand dollars per year for basics such
as emergency-room care and doctor visits.

Some in the insurance industry have a hard time taking this coverage
seriously. A gathering of 300 insurance agents in Las Vegas erupted into
laughter last summer when an insurance-company executive explained a
limited-benefit plan offered by Star Human Resources. "The annual cap is
$1,000. That's not the deductible," said Gregory Mutz, CEO of Dallas
insurer UICI, which had just acquired Star from Mr. Shoumaker.

Mr. Mutz told the agents not to laugh. Economically, the potential
customers "are at the bottom of the food chain," he said. "I don't want
to make fun" of this coverage.

Allstate, Safeco Corp. and CNA Financial Corp. have also thrown their
formidable brand names behind limited-benefit plans. At CNA, which
underwrites Strategic Resources' plans and has just begun offering one
of its own, "This is an area we would like to grow aggressively," says a
vice president, Douglas Hayes.

Restrictions Apply

One of the selling points to employees is that the plans will cover
their everyday medical expenses. Still, the policies have restrictions
such as waiting periods for "wellness checks" and for treatment of
pre-existing conditions. They also involve deductibles that
policyholders must pay each year before benefits kick in.

Mrs. Craig's plan imposed a $150 annual deductible, and it required $10
copayments for doctor visits. Besides the $1,000 basic annual benefit,
she could collect a $500-a-day reimbursement for up to five days of
hospitalization a year. The policy also offered up to $2,000 a year for
surgery and $5,000 for an accident, up to two of them a year. She paid
an extra $3 a week to get some dental and vision coverage.

"The plan is a rip-off," says Beth Todd, a 28-year-old who enrolled in
a limited-benefit plan at another Regis hair salon, in Asheville, N.C.,
in 1999. She says she canceled the policy after less than a year because
it paid so little toward her treatment for a sinus infection and

Regis's chief financial officer, Randy Pearce, says limited-benefit
plans don't fit every worker's needs. "But I think people vote with
their wallet," he says, "and we have more than 7,000 employees
enrolled," or about 20% of its U.S. work force.

Some smaller companies are beginning to drop comprehensive health
insurance in favor of these scaled-down, employee-paid plans. Duane
Zuber, part-owner of a Comfort Inn in Grand Rapids, Mich., says he did
so when the state's Blue Cross Blue Shield carrier raised his
health-insurance premiums on five employees and their families by 24% --
in a year when his revenue was down 7%. To contain his health-insurance
cost, Mr. Zuber ended comprehensive coverage for two employees and
offered them a limited-benefit plan.

Mariah Tompkins, a clerk earning $8.25 an hour, was one of the two. Now
the 20-year-old spends $9.95 a week on a limited-benefit plan, which
will pay $50 per visit for up to five emergency-room or doctor visits a
year, plus extra amounts for hospitalization or car accidents. "It's
kind of annoying I have less now," Ms. Tompkins says. "I would like to
have good insurance."