On Being Rated For Life And Health Insurance

I was diagnosed with sleep apnea a few years ago and am now being treated successfully. Yet when I applied for new life and health insurance recently, I was rated because of the sleep apnea. I am in good health overall and am frustrated with the higher premium. Why did I get rated?

This is a complex question, so first, some background: Like any company, insurance companies determine their charges or premiums according to their expected costs of doing business and desired profit. The insurance industry uses a specific term for part of the costs of doing business: the "loss ratio" is the expenses for claims (the cost of medical bills). Other components of the costs of doing business include expenses for handling the claims, for litigation, for sales commission paid to agents, for dividends paid to owners or stockholders, and for underwriting. The underwriting department reviews applications for insurance and determines who is eligible for its coverage. It is this department that sets the premiums and ratings. In your case, the insurance company determined that because you have sleep apnea, you are a higher rate of risk and therefore you should pay a higher premium. (Whether this is appropriate or not is another matter.)

A rating is a surcharge based on an expectation of higher claim expenses due to any medical condition or a family history of medical conditions, or lifestyle activities such as skydiving. For example, with automobile insurance, you pay a higher rate if you have a bad driving record (number of speeding tickets, crashes, etc.). With health insurance, someone who is overweight and has high blood pressure is more likely to have health problems than someone of ideal weight and normal blood pressure; countless studies show the potential consequences of these conditions. Thus insurance companies charge these individuals a higher rate. Typical ratings are 30 percent, 60 percent or 100 percent of the premium for someone with no reported health problems. Someone with a chronic condition is more likely to be rated than someone with a temporary health problem, for example, an uncomplicated broken arm. The severity of the health problem (e.g., high blood pressure or AIDS) also plays a role in setting the rating.

Insurance companies rate based on their own experiences, and to some extent, they may also look at other companies to make sure their determinations will not be far out of line from the others. For example, say one company has a 30 percent rating for high blood pressure and another has no rating. People with high blood pressure will naturally use the latter company as it has the lower premium. That company will then presumably lose money and will not be able to meet its expenses.

Premiums and ratings are calculated for an insurance company by an actuary. In order to make these calculations, an actuary needs a pool on which sufficient data on the pool's health exists: the number who are overweight, who smoke, who have diabetes and other conditions, and so on. From such pools (often geographical regions such as states or counties), an actuary can draw the ratings. However, if the company's clients are not similar to the pools on which the company has data, the company will not charge according to its risk and may get a greater number of clients with "less desirable risk." (In insurance, risk is defined as the potential for future loss.) In that case, its claim expenses will be higher than expected; if there is no profit, the company cannot continue to offer a product. Accurate underwriting or risk assessment, on the other hand, should lead to an accurate premium for the group with like medical problems as a whole.

Incidentally, besides premium payments, insurance companies receive revenue from investment income. Different insurance companies have different profit goals; as mentioned, these goals help to determine premiums. In fact, insurance companies once followed the practice that they did not have to make a profit from premium payments alone, but this is changing, at least in some portions of the insurance industry.

Pre-existing conditions like sleep apnea affect the insurance rating and premium. When someone has a preexisting condition, the insurance company has three options: to cover the person with full benefits immediately but at a higher rate; to put a rider or a limitation of coverage on the condition for a period of time (subject, of course, to protection available under laws like the Health Insurance Portability and Accountability Act of 1996 or HIPAA); or to deny coverage altogether. When your sleep apnea is properly treated and is under control, it may not be a factor in determining your premium. (Talk about any potential problems with the insurance agent when making the initial application.)

Whatever the decision, if it is not to your liking, you may appeal a company's decision. Discuss the company's reasoning with the insurance agent, and work with the agent and your doctor in appealing the decision. Because sleep apnea is typically not well understood by the insurance industry (or the medical community outside of the sleep field) and there are not yet sufficient studies to show the benefits of treatment, sometimes you must provide them with information about your specific case.

A strong letter from your doctor on your health post-treatment can be quite powerful. Any evidence on the benefits of sleep apnea treatment (such as a reduction in your blood pressure) should be included in the letter. If you had surgery for your sleep apnea and had a post-surgery sleep study that shows your apnea is no longer clinically significant, you may want to include a copy of that. Likewise, if you use a CPAP machine, it may be helpful to include a copy of your titration study that shows the machine is set at a pressure high enough to reduce the apnea-hypopnea index to a clinically insignificant level. Follow-up progress notes may also be supportive, particularly if your sleep studies are out of date (ask the agent what constitutes "out of date" to the insurance company). If you use a CPAP machine with a time monitor device, your physician can provide the insurance company with an objective measure of your usage of the machine. This information can be important in presenting a strong appeal. You may also want to include in your appeal appropriate articles published in peer-reviewed scientific journals that address the benefits of your treatment. (If you have access to the Internet, you can find abstracts or summaries of relevant articles on the PubMed web site at www.ncbi.nlm.nih.gov/PubMed/.)

Your state's insurance commissioner can be helpful in providing you with information about your rights in the appeal process. (The commissioner's phone number is usually in the blue pages of government listings in the telephone directory, but you can always contact your state legislator for the phone number as well.)

If you are denied individual coverage, consider applying for group coverage if you can. (Most insured Americans are covered under group plans.) Individual policies are the most tightly underwritten and thus the most difficult to get. The advantage to them is that if you are in good health according to the company's perspective, they are generally the least expensive. If group coverage for life insurance is not an option, you can also purchase a guaranteed issue life insurance policy, but these have high premiums and limited benefits in the first few years of the policy. (For more information on these policies, speak to an insurance agent.)

Even with a group policy, under certain circumstances—for example, joining a group plan after the initial hiring period or outside of open enrollment—you may have to apply for coverage and thus may have to be underwritten. In addition, annual premiums for groups will be based at least in part on the insurance company's experience with the group's claims. Yet every state has different regulations and protections for consumers: when concerned about an insurance company's decision, contact the state's insurance commissioner. The Better Business Bureau is another resource if you have complaints about an insurance company.

When applying for any insurance coverage, remember to answer questions on the application form truthfully and honestly. Any false answer may be considered "material misrepresentation." Generally, if this is uncovered during the underwriting process, the insurance company may either deny you coverage altogether or may offer you coverage but at a higher premium. If the misrepresentation is discovered in the first two years of coverage, the insurance company may return your premiums to you and make your policy null and void. Or it can retroactively adjust the premiums and benefits to what they should have been. After two years (when it is assumed that the company has had ample opportunity to learn all the facts relevant to your application), the policy may not be denied outright but the company can retroactively adjust the premiums and benefits to what they should have been. Contestability clauses, which vary from state to state, are noted directly in the application that you sign.

Many people now use the Internet to find the lowest insurance premium, but a web site does not tell the complete story on insurance companies' underwriting. Many times the company with the lowest advertised premium has the most conservative underwriting which in the end can actually lead to a higher price. You can use a web site to give you a quote (use a term such as "insurance quotes" on a search engine to locate these sites). In addition, you can discuss your situation with an insurance agent who can assist you in finding a company whose underwriting offers you the lowest rate available, given your medical history.

The above answer was written with the help of volunteers who have significant experience with the insurance industry, including Bill Peters, a former ASAA board member, and Scott Hoffman of Howard and Hoffman in Washington, DC; we much appreciate their volunteer efforts.

This information is of a general nature only. For more information about your insurance coverage, talk to an insurance agent.