Is Your Kid Covered?

Insurers make big profits from college students, but some families are left with huge bills

by
Ben Elgin and
Jessica Silver-Greenberg

In fall 2006, Ralph Giunta Sr. decided to buy his son Ralph Jr. a
practical birthday gift: health insurance. The father, who owns a small
financial-services company that lacks an insurance plan, phoned Palm
Beach Community College, where his son was on the dean’s list. The Lake
Worth (Fla.) school recommended a policy provided by MEGA Life and
Health Insurance, whose student business was acquired in late 2006 by
giant UnitedHealthcare. Giunta wrote a check for $1,044 for one year.
“They assured me he was well covered,” he says.

Six out of 10 colleges and universities now recommend specific
health insurance plans for their students, and three of 10 require
them. But as the Giuntas discovered, many of the policies turn out to
be scanty at best, and inferior to comparably priced alternatives. This
can leave families exposed to crippling medical bills they thought
they’d protected against. Insurers, meanwhile, have found that the
student market can be quite profitable.

Ralph Giunta Jr. knew something was wrong in March, 2007, when the
photography major and avid skateboarder felt pain in his legs and feet.
Then 19, he lost all feeling in his lower extremities and was rushed to
the hospital. The diagnosis: Guillain-Barré’s syndrome, a rare disease
of the nervous system that typically causes temporary paralysis. His
father’s anxiety was compounded upon learning more about the insurance
he had purchased. Even with “major medical” coverage, the plan
reimbursed only $22,800 of the $206,325 bill for 19 days of intensive
care.

In the end, Ralph Jr. recovered, but the Giuntas owed $265,000 in
hospital and doctor bills. As he juggles maxed-out credit cards and
loans from friends to make minimum payments on medical debts, Ralph Sr.
admits he didn’t read the UnitedHealthcare plan closely. “I thought,
well, the college is offering it,” he says. “Why would it be a bad
plan?”

More than half of the insurance plans recommended by colleges offer
benefits of $30,000 or less, according to a survey published in March
by the General Accounting Office, an arm of Congress. Many plans have
further limits that prevent payout of even modest maximums. While
two-thirds of the country’s more than 17 million college students have
coverage from a parent’s employer or their own job, many of the rest
may be vulnerable if they suffer a serious illness or accident. With
premiums and restrictions increasing under employer-provided plans, a
growing number of parents are shifting children to college-sponsored
coverage. But “when a student gets gravely sick, $30,000 in benefits is
unrealistically low,” says Alan Sager, a professor at Boston
University’s School of Public Health.

Schools often arrange for a standard student plan, and some even
bill for it automatically unless students or their families opt out.
But the administrators negotiating multimillion-dollar insurance
packages frequently aren’t sophisticated or diligent enough to obtain
the best deals in the marketplace, says Mark Rukavina, executive
director of the Access Project, a nonprofit health advocacy group in
Boston. “Unfortunately, most schools don’t know how to secure the best
coverage for students, and so what results is simply the illusion of
coverage.” Students and parents, for their part, often don’t take the
time to study the fine print.

IN WHOSE INTEREST?

In some cases, universities have comfortable relationships with
carriers that reimburse the schools a small percentage of student
premiums to cover administrative expenses. This raises questions about
whether schools ought to serve as what amounts to a broker. The
University of Alaska system receives 5% of premiums collected through
its plan. With $2.3 million in premiums expected this academic year,
the payment would come to about $115,000, according to a copy of the
contract provided by the system. The Kansas Board of Regents receives
1.5% of its students’ premiums to cover costs of administering the plan
“or other uses as determined by the Board,” according to its contract.
That could mean a reimbursement of about $100,000 for 2007-08.

Officials at the University of Alaska and the Kansas Board of
Regents say the modest fees don’t influence their judgment and are used
only to pay staff to handle student insurance. Some critics counter
that the payments create a conflict of interest. New York Attorney
General Andrew M. Cuomo is examining ties between universities and
insurers. “The question is whether…the relationships between vendors
like health insurance companies and schools cause schools to favor
vendors that are best for the schools financially rather than those
that are best for students,” says Cuomo aide Benjamin Lawsky.

Some plans endorsed by colleges are inferior to what a savvy
consumer can secure on the open market. In the case of the Giuntas, a
search on the Web site eHealthInsurance.com shows several plans in the
Palm Beach area for a healthy, 19-year-old male that provide $5 million
in benefits for roughly the same premium the family paid
UnitedHealthcare. The more robust plans have higher deductibles—up to
$2,500—which patients must pay before coverage kicks in.

UnitedHealthcare says in a statement that it allows school
administrators “to customize plans to meet the needs of their unique
student populations. Administrators strive to balance benefits with
affordability and act in the best interests of their students.” Bill
Truxal, who heads the company’s student unit, says in an interview that
colleges have sufficient clout to negotiate favorable terms. Since the
Giuntas purchased more coverage than the basic plan recommended by Palm
Beach, the payout to the family exceeded the school’s ordinary benefit
cap, the company says.

On a number of campuses, students feel pressure to purchase
threadbare policies because those are the only ones the school will
process. Unless students or their parents take the initiative to shop
independently, Connecticut College, a private liberal arts school in
New London, signs them up for a plan sold by Chickering Group, a
subsidiary of Aetna (AET),
offering just $10,000 in maximum benefits for an illness. The school
includes coverage for “catastrophic” accidents, but this doesn’t apply
to major illnesses such as cancer or appendicitis. If students buy
their own policies, they have to handle the reimbursement paperwork for
all but the most rudimentary services provided by the campus health
center. That’s a burden most 19- and 20-year-olds don’t want to assume.

Cate Moffett, director of Connecticut College’s health center, says
her small staff can’t handle insurance claims for multiple
underwriters. Echoing an argument made by many campus administrators,
she notes that relatively few students fall seriously ill and
complaints about coverage are rare.

A spokesman for Aetna, Matthew N. Wiggin, reiterates that schools
need to weigh policy coverage and cost. “It’s ultimately the decision
of the schools to select the plan that best fits their needs,” he adds.

The vigorous health of most college students helps make insuring
them a lucrative niche, according to industry consultants. Most
insurance companies, even if publicly traded, don’t break out separate
financial results for their student-oriented policies. But some schools
disclose an indication of the profitability of policies sold to their
students: the so-called benefits ratio. This shows the percentage of
premiums returned to customers in the form of benefit payouts. Large
health insurers typically have overall ratios of about 80%, meaning 20%
of premiums goes to profits and administrative costs.

In several cases where BusinessWeek (MHP)
was able to obtain benefits ratios from colleges or universities, the
percentage was well below 70%. Anything below 75% ought to be grounds
to negotiate a better deal, according to Eric Engstrom, president of
Keeling & Associates, a consulting firm in New York.

At Palm Beach Community College, the benefits ratio for the spring
semester of 2008 was 42.6%, according to reports provided to the school
by UnitedHealthcare. In previous semesters the benefits ratios dipped
as low as 10.2% and 13.8%. This means the college’s plan has been a
veritable gold mine for UnitedHealthcare. At the University of South
Florida in Tampa, which offers a plan from American Fidelity Assurance,
the ratio this academic year is 35%, down from 71% and 61% the previous
two years, respectively.

Asked about the ratios, Grace Truman, a spokeswoman for Palm Beach
Community College, says: “We do not negotiate coverage with the
insurance company. We are not an active player in what they cover and
at what percentage.” To choose its plan, the school relied on “positive
comments” from other colleges about UnitedHealthcare, not on
independent comparisons. Palm Beach has received only one complaint
about the plan, she stresses. “We do tell students to read the plan
carefully.” Still, she continues, “it may be time to take a better look
at this insurance plan.” The University of South Florida acknowledges
that it is seeking a more favorable benefits ratio. “During renewal
negotiations there are lengthy discussions regarding benefit designs,”
says Marisol Amarante- Hernandez, manager of the school’s insurance
office.

James Breeding, director of risk management and insurance at Rutgers
University, stresses that most students and their families are looking
for low prices. Breeding recently negotiated a better deal for Rutgers
students, upping the school plan’s maximum from $50,000 to at least
$100,000, after finding that three to six students exceeded the plan’s
old maximum each year. The new plan, provided by Aetna’s Chickering,
costs about the same as the former one: $424 per year. “The plan is
designed to meet most of the needs of most students, not to meet all
the needs of all students,” Breeding says.

Apart from low maximums, insurers can contain payouts by imposing
“interior caps” on coverage for particular types of treatment. Sean
Marquis discovered the hard way how this works. After turning 26,
Marquis, a medical student at Ross University in Edison, N.J., was
bumped from his parents’ plan. He signed up for the school-sponsored
plan with UnitedHealthcare, comforted by its $100,000 overall maximum.

Last spring, Marquis became dizzy during class. He stepped into the
hallway and collapsed, fracturing a bone near his jaw. He stayed in the
hospital for 48 hours, and left owing $24,098. UnitedHealthcare covered
only $6,260, because Marquis had hit the $2,500-per-day cap for room,
board, and miscellaneous expenses. The hospital forgave more than
$10,000, but Marquis still had to pay several thousand dollars and has
set up an installment plan for remaining medical bills. “I bought
insurance to cover something just like this,” he says.

Peter Goetz, vice-president at Ross, declines to comment on the
Marquis case, citing privacy concerns. The school looks for the best
deal for its students, putting its insurance contract out to bid every
two years, he says. Last fall, it switched from UnitedHealthcare to
Chickering. “Our goal is to always find reasonably priced insurance
that also covers catastrophic events,” Goetz says. UnitedHealthcare
won’t discuss Marquis’ case.

Interior caps aren’t exclusive to the college market, but they
appear to be spreading more quickly there, due to the lack of demanding
buyers. “In the college market, things are more egregious,” says Bryan
A. Liang, executive director of the Institute of Health Law at
California Western School of Law. “Insurers can do what they want and
get away with it.”

Elgin is a correspondent in BusinessWeek’s Silicon Valley bureau
.
Silver-Greenberg is a reporter for BusinessWeek.com.