Shaky Times, Shaky Health Coverage

If your company stumbles, what happens to your health coverage?

Video: Health Insurance Basics

Video: Health Insurance Basics

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Quick return. About the only thing the couple recouped was $1,400 of the $2,000 they had deposited into their flexible spending account for medical expenses that year, and that was only thanks to a sympathetic benefits administrator. When Trac called eflexgroup.com, which had administered the company's flexible spending accounts, to ask about the deposits, "We told them, 'Too late, we already sent them back to the employees,' " says eflexgroup.com President Ric Joyner.

Employees aren't always left so exposed when a company gets into financial trouble. Another company often takes over the ailing firm, as happened with Washington Mutual, Wachovia, and Merrill Lynch, which were acquired by other banks during the financial meltdown. Employees absorbed into the new firm may see no changes in their benefits, at least not initially. "The new employer may continue the existing program for a period of time," says Jeff Munn, a principal at benefits consultant Hewitt Associates. "It may be a year or more before employees have to think about changes."

Retiree coverage may be a different matter. "Because they're not employees, they're more vulnerable," says Mary Sullivan, a labor lawyer with Segal Roitman in Boston. Larry Baird experienced this firsthand. The 73-year-old former Monsanto plant manufacturing director thought he could count on zero-premium retiree health coverage once he turned 65. But in 1997, seven years after he retired at age 55, Monsanto spun him and thousands of others off into a new company called Solutia, a chemicals manufacturer based in St. Louis, which declared bankruptcy in 2003. In February of this year, the company emerged from Chapter 11. Baird's health coverage, which had gradually grown pricier while the company was reorganizing, suddenly became unaffordable. Faced with a $416 monthly premium, plus higher drug costs, deductibles, and copayments, Baird dropped it and signed up with a $98-a-month Medicare Advantage plan instead. "Big companies make big promises, and then they don't keep them," he says.

Stable insurers. A comforting note amid the current economic wreckage is that healthcare insurance providers themselves are unlikely to go under. State regulators keep close tabs on these companies. They must submit quarterly financial statements and annual reports demonstrating sufficient reserves to cover claims. The standard in all states for "sufficient" requires that for every $100 in premiums collected, an insurer must have $250 in reserve. If a company's reserves drop below that level, regulators can effectively take over management of the company until its reserves are back in line.

Troubled insurers can—and occasionally do—become insolvent. If a company loses liquidity because of underperforming investments, for example, it might be unable to pay claims or continue operations, says Sandy Praeger, Kansas insurance commissioner and president of the National Association of Insurance Commissioners. But in those relatively rare instances, claims are covered by a guaranty fund into which all insurers must pay. In her four years as an NAIC officer, says Praeger, she is unaware of any instance in which consumers have been left with unpaid claims because of insurer insolvency. "We have so many opportunities to intervene before a company becomes insolvent," she says.

In these uncertain times, that's one less thing to worry about.