I order to write this post, I did an internet search for “what is gap health insurance?” And I found two different answers.
The most common answer to “what is gap health insurance” defines it as a supplemental health insurance policy designed to cover deductibles and out-of-pocket medical costs.
The second answer to “what is gap health insurance?” will provide links to various short-term health insurance policies. And in a way, short-term health insurance was initially designed to fill the gap between losing traditional major medical health insurance and when you again have coverage.
Filling the Gap After Losing Your Group Health Insurance
In the second definition, gap health insurance is seen as synonymous with short-term health insurance.
Imagine that you just lost your job. And with it, you lose your health insurance. Suppose your employer had 20 or more employees. In that case, you will be eligible for COBRA (https://myhealthcare360.org/consolidated-omnibus-budget-reconciliation-act-what-every-worker-needs-to-know-about-cobra/). But perhaps the COBRA premium is way too expensive.
Since your COBRA is expensive, you check out the health insurance marketplace. Unfortunately, you have made too much money to qualify for a subsidy. And your health insurance options on healthcare.gov are expensive. Plus, they come with very high deductibles.
You are sure that you will soon find a new job and with it, you will get health insurance. Because you are healthy, you opt for a short-term health insurance policy to fill the gap.
As you shop for short-term health insurance, you discover that you can buy a plan that covers you for 30 days, 90 days, or for as long as 3 years. Your gap in health insurance coverage is now taken care of.
Read my article on Short-Term Health Insurance here https://myhealthcare360.org/should-i-buy-short-term-health-insurance/.
What is Supplemental Health Insurance?
When you search for “what is gap health insurance?” the first response you will find defines it as a supplemental health insurance product. But what is supplemental health insurance?
Is all supplemental health insurance gap health insurance? Supplemental health insurance includes all the following health insurance products:
- Accident insurance
- Disability insurance
- Cancer Insurance
- Critical Illness Insurance
- Hospital indemnity insurance
- Dental insurance
- Long-term care insurance
Many health insurance agents will sell all the above as gap health insurance, but that would be misleading. While each of these policies will pay cash benefits directly to you and that cash can be used to pay deductibles and coinsurance, they do a poor job of it.
Then there is Medigap health insurance, which is designed to fill the gaps found in Medicare. Medigap health insurance is much closer to what most people think when they look at gap health insurance.
Why Supplemental Health Insurance Should Never Be Purchased as Gap Health Insurance
Many insurance agents sell accident, hospital indemnity, and critical illness insurance as gap health insurance. Unfortunately, they do a poor job covering your out-of-pocket costs.
Accident insurance, critical illness insurance, and hospital indemnity insurance work great if you have an accident, are admitted to the hospital, or get diagnosed with cancer. Those supplemental health insurance products do not help at all if you have outpatient surgery for an inguinal hernia. Or if you get diagnosed with Parkinson’s disease or diabetes. However, if you are diagnosed with cancer, having a cancer insurance policy will be awesome.
You need to think about all the possible medical events that you can have before buying gap health insurance.
What is Gap Health Insurance?
In my opinion, the best definition of gap health insurance is any product specifically designed to pay benefits that reduce your deductible and out of pocket costs. But not just any product will do. You want an insurance product that coordinates with your major medical health insurance policy. Unlike an indemnity policy, a gap health insurance product will reduce your deductible and out of pocket costs regardless of the medical event.
Gap health insurance is not generally designed to pay for routine doctor visits. You want a policy that helps defray any emergency room visit costs, needed surgery, or any diagnosis of chronic illness.
How Does Gap Health Insurance Work?
A gap health insurance policy will coordinate with your health insurance policy and is designed to offset expenses applied to your deductible and coinsurance. With some, both inpatient and outpatient medical expenses are treated the same. In other plans, outpatient services only receive 50% of the inpatient benefit.
To better understand, consider a couple of examples:
Imagine that you have a health insurance policy with an $8550 deductible. You then buy a Gap Health insurance policy with a $5000 benefit. This plan treats inpatient and outpatient expenses the same. After you purchase your gap health insurance policy, you develop stomach issues.
One night you are awakened at 2 AM with severe abdominal pain and head to the emergency room. They run some tests, give you a prescription, and are discharged. Two weeks later, you receive your bill. The approved charges totaled $3000 and were applied to your deductible. But your gap health insurance plan paid the $3000.
Two months later, you are playing in the backyard with your kids, and you twist your leg. Off you go to the emergency room again. This time you get a bill for $5000. The $5000 is applied to your deductible since it is $8550. But you have a $5000 gap health insurance plan, so you received a $2000 benefit. You now only owe $3000.
Now assume the same scenario, but your gap health insurance plan pays 50% of the inpatient benefit. In this plan, your inpatient benefit is $5000, which means that your outpatient benefit is only $2500. You would have received a $2500 benefit in the first emergency room visit instead of the $3000 benefit. And for your second emergency room visit, you would have received zero since you have already received the maximum benefit.
Is Gap Health Insurance Worth the Money?
The average monthly premium for a gap health insurance policy is between $30 and $40 a month, according to a Magnify Money article (https://www.magnifymoney.com/blog/featured/theres-insurance-insurance545359805/). That said, costs vary based on the actual benefit chosen.
One plan that I look at had a premium of $41 a month for a $2000 benefit. But if you do a little math, you can see that this is a complete waste of money. On an annual basis, that $41 a month equals $492. Over 4 years, assuming no premium increase, you would spend $1968. That is just $32 short of the $2000 benefit in this example.
If you go 5 years without incurring a medical bill of $2000 or more, you will have paid more in premium than the plan benefit!
So, is gap health insurance worth the money? The short answer is that no, gap health insurance is not worth the money. But let us look at the statistics to better understand this. The Brooking Institute has helped us out with their report on A Dozen Facts About the Economics of the U.S. Healthcare System.
As you can see from this graph, the bottom 50% of Americans will spend an average of $310 in a year on medical expenses. The next 25% will spend an average of $2240. That means that only 25% of all Americans will incur enough medical bills to really benefit from the gap health insurance plan.
That is not to say that a gap plan that pays a $2000 benefit does not benefit someone who just incurred $2240 in medical expenses. But a cost-benefit analysis needs to be done.
Should Employers Use a Gap Health Insurance Policy?
If you are an employer struggling to deal with increasing group health insurance premiums, you are looking for an idea that will lower your costs. At the same time, you do not want to raise deductibles and out of pocket costs to your employees. Many agents will present a gap health insurance solution.
The primary solution is to increase the deductible enough to significantly reduce your monthly group health insurance premium. Next, you use a portion of those savings to purchase a group gap health insurance plan. Your goal is to avoid any increase in the real deductible or out-of-pocket cost to the employee.
Does the gap health insurance solution work? It does work to reduce total monthly premiums while simultaneously minimizing any increase in total out-of-pocket costs to employees. But is it actually a good idea?
A Gap Health Insurance Case Study
In doing my research for this article, I found a company’s case study using a gap health insurance solution. In this case study, the company had 68 employees. The original group health insurance plan had a $2000 deductible with another $2000 out of pocket. The premium was $400,000 annually.
At renewal, this employer the premium increased to $478,000. To control costs, the employer raised the deductible to $5000 and lowered the out-of-pocket costs to $1300. The combined out of pocket cost was now $6300. This reduced the premium to $388,582 annually. But moving to a $5000 deductible would cause an employee revolt.
By implementing a $2000 gap health insurance plan, the total premium was now $427,799. That is well below the $478,000 renewal premium but still $27,000 more than last year. The real question is whether there is a better solution.
Is a Health Reimbursement Arrangement (HRA) Better Than a Gap Health Insurance Plan?
A health reimbursement is a qualified employee benefit funded by the employer to pay employees’ qualified medical expenses. The HRA’s money is owned by the employer and is only used to pay for qualified medical expenses. At the end of the year, the employer retains any funds remaining.
In this case, the employer could have established a $2000 deductible and offered to pay for the next $2000 of medical expenses. The net result would have been identical to the gap solution above with one glaring difference.
With the gap health insurance solution, the premium was $39,218 annually. Once paid to the insurance company, that money is forever gone.
If, instead, the employer set up a health reimbursement arrangement that $39,218 could have been available for employee medical claims. Since the HRA benefit is limited to $2000 per covered person, it is doubtful that the fund would have been depleted. Any money remaining at the end of the plan year remains in the account and can be carried over.
Is there a risk that member claims could exceed the $39,218? Sure! But it is highly unlikely. Remember, the employee or dependent would have to have medical expenses of more than $2000 before the plan would pay benefits.
Is Gap Health Insurance Better than A Health Reimbursement Arrangement for Smaller Employers?
In the example above, the employer had 68 employees. As a result of the number of employees, this employer would have spent $39,218 annually. Under these conditions, the risk that employee medical claims could cost more than that amount was relatively small.
But what about the employer with 10 or fewer employees? At 10 employees, the gap plan’s cost would be $410 a month or $4920 annually. If more than two employees were to have medical bills of $2000 or more, it is possible to spend more than $4920.
The smaller the group size, the greater the risk to the employer. With only 5 employees, the employer would spend $2460 annually on a gap health plan. If that same $2460 was placed in an HRA, there is a possibility that would be insufficient.
All of that said, as an employer, you should look at the makeup of your group. Are they all young and healthy? If so, your HRA risk is minimal. Are your employees older with health problems? Go with the gap plan.
Gap Health Insurance for Individuals
As you might have already guessed, I am not a huge fan of gap health insurance. And I am really opposed to gap health plans for individuals.
First, I have been unable to find a true gap health insurance policy for individuals. By true gap health plan, I refer to those plans that coordinate with your major medical health insurance. That is as opposed to the sale of critical illness and accident policies as a gap plan.
You should also know that I am a huge fan of critical illness insurance, but not as gap insurance.
As for accident and hospital indemnity insurance, I am totally opposed to them. That is because they only pay if you get one of the listed medical events. Personally, I cannot understand why any insurance agent would sell those products at all. For the cost, they deliver a minimal benefit. Plus, over five or six years, you will pay more than the benefit you can receive.
Which is better – Gap Health INsurance or a Health Savings Account (HSA)?
Assuming that you are relatively healthy, a high deductible (HSA qualified) health insurance policy is the way to go. But to understand this statement, you must understand two things. First, you must understand the premium savings available by switching to a high deductible health insurance plan. And you must know what a gap health insurance policy would cost.
Here is a rather simplistic example to illustrate the point. I ran a quote for a healthy 40-year-old male in North Carolina. This individual could purchase a health insurance plan with a $2500 deductible and $8550 maximum out of pocket for $424 a month. On the other end of the spectrum, this individual could purchase a health savings account compliant health insurance policy with a $7000 deductible and maximum out-of-pocket for $298 a month. That is a difference of $1512 annually.
In my research, I found a group gap plan that provided a $4500 gap benefit. That plan had a premium of $84 a month or $1008 annually. While this plan is not available for an individual, the premium is instructive. If you purchased this $4500 gap plan, your net deductible would be $2500.
Now let us assume you purchased the HSA compliant $7000 deductible health insurance policy. Instead of buying the $4500 gap plan, you took those premiums and combined it with the savings from choosing the $7000 deductible health insurance. Your total savings would be $2520 in year one.
If you deposited that $2520 into your health savings account, your effective first-year deductible, and maximum out of pocket cost is now only $4500. Assuming nothing changed, you would have $5040 in your health savings account at the end of year two. And after the third year, your account balance would be greater than your deductible and out-of-pocket maximum.
Is Gap Health Insurance Ever a Good Idea?
If you have read this entire post, you already know that I have not made a single argument in favor of buying a gap health insurance policy.
Whether you are an employer or an individual, there are more efficient ways to control costs and reduce deductibles and out-of-pocket risk.
Always Work with an independent and professional health insurance agent
If you have read any of my other posts, you know that I always close with this thought. It would be best if you only worked with an independent health insurance agent. This is someone licensed with multiple health insurance companies. He/she can legally enroll you into an ACA compliant health insurance policy or a policy with any other insurance company.
A professional health insurance agent is someone with years of experience. This agent will understand the implications of the various pieces of legislation. A great example of this is the health savings account discussion. Another example is the information about health reimbursement arrangements in this article.
If you have any questions, you can feel free to contact me. You can leave your questions in the comments or send me an email at firstname.lastname@example.org.