GUARDED HEALTH
Covering the Uninsured,
But Only up to $25,000

Tennessee Experiment
Goes Against the Grain
As States Remake Care

By CHAD TERHUNE

Wall Street Journal
April 18, 2007; Page A1

TULLAHOMA, Tenn. -- In late 2005, Dot Smith gave up offering health insurance to her employees at Pepper Patch Inc., which makes jellies and cakes in this middle Tennessee town. At $400 a month per employee, the premiums were just too high.

Now, five people who work at Pepper Patch have insurance again, thanks to a new state program that kicked off this month. It costs Ms. Smith only around $50 a month per employee. "It gives me a sense of security knowing I have this [insurance] card in my purse," says 23-year-old Ashley Robinson, who's still paying off a $3,000 bill for an emergency-room visit she made when she was uninsured.

The program, engineered by Tennessee Gov. Phil Bredesen, has won national attention as states try to develop plans for universal health care. President Bush, during a recent speech in Chattanooga, commended the governor, a Democrat, for being "on the leading edge" of health-care reform.

There's just one catch. Ms. Robinson and others in the program only get coverage up to $25,000 for health expenses annually, and only $15,000 of that can go to hospital bills. If she becomes seriously ill or has a major accident, she'll be just as vulnerable as she was before. She'll have to either pay the bills herself or ask the hospital for charity care.

The limits put Tennessee in sharp contrast with Massachusetts and California, two other states that are part of the U.S. trend toward reconsidering universal coverage. Plans in the two states envision people paying more of their own medical bills at first, in exchange for protection against catastrophic costs.

Gov. Bredesen isn't the only one casting an eye toward limited-benefit or "minimedical" plans. Employers such as Avon Products Inc., International Business Machines Corp., and Sears Holdings Corp. offer them, typically to part-time or entry-level workers. IBM says temporary workers at the company up to a year are eligible. Insurers say more than a million people are in such plans.

Aetna Inc. and Cigna Corp. have acquired two of the biggest players in the minimedical business. Insurers see the plans as low-risk and good for squeezing revenue from an untapped market. The industry faces pressure to find new customers because the proportion of U.S. firms offering health-insurance coverage dropped to 60% last year, from 69% in 2000.

Alan Sager, a professor of health policy at Boston University, calls the Tennessee plan "flimsy insurance" that will merely "provide cover for employers to save money." Adds University of Tennessee medical-school professor David Mirvis, "It may be better than nothing, but it's not real insurance."

In an interview, Gov. Bredesen says he listened to focus groups and queried blue-collar folks, such as a waitress at a waffle restaurant, to devise his plan. "They weren't interested in buying insurance for catastrophic events. They wanted access to the emergency room next month, access to the pharmacy next month," he says. "Let's give people what they want instead of what some advocate says they want."

The governor says the working poor can't afford $2,000 deductibles, and he questions whether Massachusetts and California can pay for their more-ambitious plans.

Gov. Bredesen, who founded and sold a managed-care company before getting into politics, has already experienced turmoil in dealing with the uninsured. TennCare, the state's version of Medicaid, was once praised for expanding coverage to a broader range of the uninsured, but by the time Gov. Bredesen was first elected in 2002, it was overwhelming the state budget. In 2005, he axed 170,000 adults from TennCare's rolls, despite heavy criticism.

At the end of that year, the governor suffered a family tragedy. His younger brother, Dean, was uninsured and couldn't get medical treatment for alcohol-related liver disease without a large cash deposit. Dean Bredesen refused to ask family members for the money and died, says the governor. He says health coverage might not have saved his brother's life, but he deserved a chance.

Those experiences shaped the "CoverTN" program that the governor announced and the state legislature approved last year. It offers coverage to some of the uninsured without making them pay a significant amount upfront. At the same time, it and several other related programs make only a small dent in the state budget. Tennessee kicks in around $50 a month to help cover people like Ms. Robinson at Pepper Patch. The state expects those contributions will add up to $125 million over three years. Tennessee had 836,000 uninsured people in 2005, according to the U.S. Census Bureau, or 14% of the state's 5.9 million population.

CoverTN is open initially to businesses that haven't offered health benefits for at least six months and have fewer than 25 workers. At least half of the firm's workers must earn $41,000 or less annually. The nonprofit insurer BlueCross BlueShield of Tennessee won state bidding to administer the plan. Participants must receive care at a network of doctors and hospitals assembled by BlueCross BlueShield. The governor wants to expand the program eventually to more businesses and uninsured individuals. More than 12,000 businesses have applied so far.

Such plans are popular among some employers, who say even restricted benefits can help attract and retain workers while taking little or no bite out of the bottom line. While a typical comprehensive health policy might cost an employer $300 a month per employee, according to the Kaiser Family Foundation, the narrower plans often cost employers nothing because employees pay the entire premium of $50 to $100 per month.

Some of the plans are significantly less generous than CoverTN. Lowe's Cos., the large home-improvement retailer, says about 7,000 part-time employees are enrolled in limited-benefit policies capped at $2,500 or $5,000 a year. Bob Ihrie, vice president of compensation and benefits, says the policies are good for covering pregnancies, which account for more than a third of the retailer's medical claims. "We have had great word of mouth, with employees saying, 'My wife had a baby and look how little I had to pay,' " Mr. Ihrie says.

BlueCross BlueShield of Tennessee says many people in the state can't afford comprehensive coverage and don't seem interested in high-deductible policies that offer protection against catastrophic expenses for as little as $100 a month. Ron Harr, senior vice president of government programs, says insurers need to be more like hotel companies that offer a wide variety of amenities and rates under different brand names. BlueCross expects to break even initially on CoverTN.

To make sure consumers don't confuse CoverTN with comprehensive insurance, BlueCross puts the words "Limited Benefits" in bright red on insurance cards. Benefit forms mailed to members will show how close they are to hitting their limits. "It is very important people understand this is not your typical BlueCross plan," says Mr. Harr.

For those who would otherwise go uninsured, a big advantage of CoverTN is the steep discounts that BlueCross can extract from doctors and hospitals. That will stretch the $25,000 further, says Stan Roberts, health-practice director at Milliman Inc., a Seattle consulting and actuarial firm.

Mr. Roberts estimates less than 2% of enrollees will exceed the $25,000 annual cap. But those people could account for a third of overall medical spending among enrollees, he says. "Some of those are massive, million-dollar claims. That is the reason we need insurance," Mr. Roberts says.

In practice, people with a claim of that size would count on the hospital for charity care. Or, if they tried to pay themselves, it might wipe out their assets and make them eligible for Medicaid. Gov. Bredesen says hospitals already receive substantial government help and must do their part for citizens. "I don't have a problem with hospitals holding the bag," he says.

CoverTN offers two similar plans. Both have no deductible and keep co-payments modest: $15 to $20 for a doctor's visit and $100 for a hospital stay. One plan covers hospital stays up to $15,000 a year, but will only pay $75 every three months for drugs. The other covers up to $250 a quarter in drugs but only $10,000 a year in hospital costs. The average hospital stay in the U.S. cost $20,455 in 2004, according to the most recent federal data, not including doctors' fees that could add thousands of dollars. Also, CoverTN doesn't cover pre-existing conditions for the first 12 months.

Ms. Smith, owner of the Pepper Patch business, assumed at first that CoverTN was offering many of the same generous benefits she once received through the BlueCross policy of her husband, a retired physician at Vanderbilt University. But even after learning about the limits, she remained enthusiastic. "The big problem is finding insurance that is affordable to the employees and the company," she says.

Ms. Smith, 69, started Pepper Patch out of her Nashville home in 1976. Thirty years later, her company still has a family atmosphere, and she regularly refers to her work force as the "girls." Her company has nearly $2 million in sales and is best-known for her "tipsy cakes," which include Jack Daniel's Tennessee whiskey. Inside a kitchen and warehouse in Tullahoma, about a half-dozen workers in hairnets, T-shirts and jeans make pepper jellies, spirit-laced cakes, fudge sauce and other treats.

Ms. Smith offered health insurance for more than a decade until late 2005. She grew frustrated at times with employees signing up for coverage and then dropping out because they didn't want to pay their share of the premiums. Kitchen workers on hourly wages get around $7 to $10 per hour. As enrollment dwindled to older, sicker workers, premiums soared.

After Ms. Smith dropped coverage, some workers with young children left for jobs with health benefits. When CoverTN began, five of seven workers in Tullahoma signed up. Premiums are split three ways between the employee, employer and the state. Each party must pay between $34 and $99 a month, with smokers and obese people paying more.

Sherry Slatton, 46, a nine-year veteran in the Pepper Patch kitchen, dropped her comprehensive health insurance through her husband's employer. The couple enrolled in the CoverTN plan, and their monthly cost will drop to about $175 from $350. Ms. Slatton wasn't happy with the old coverage, which she says stuck her with $4,000 in charges when she underwent surgery to remove a benign cyst.

Though state officials see CoverTN as a program to help the uninsured, another Pepper Patch employee is also switching to it from existing coverage. Operations manager Judy Knight was paying $550 a month for individual coverage from BlueCross that carried a $2,500 deductible. Now she'll pay $63 a month for the no-deductible CoverTN plan. "The difference in cost is unreal," says Ms. Knight, 55.

Ms. Knight is taking a chance. She currently takes six prescription drugs and gets quarterly checkups and blood work for a connective-tissue disease and for high blood pressure. The coverage cap "is a concern, but hopefully I will never have to use the $25,000," she says. "There is always bad with the good."

Ms. Robinson, the 23-year-old kitchen worker, figures it can't get any worse than being uninsured. A nonprofit clinic recently told her she couldn't get an appointment for a sinus problem for three weeks. Last summer, she went to a hospital emergency room for an infection. She says she was treated rudely, never saw a doctor and couldn't get a prescription for an antibiotic from a nurse. Now, she's paying $47 a month to the hospital to pay off her $3,000 debt. Her CoverTN premium is $41 a month.

"You walk in the hospital without insurance, it's like you don't even matter," says Ms. Robinson.

Some small businesses and employees are disappointed once they discover how limited the benefits are. "I think it's unacceptable to have that alone," says Teresa Manning, who runs a landscaping business in Chattanooga with her husband.

Doctors and hospitals have balked in some cases at participating in the CoverTN network, figuring they'll end up with lots of patients who are effectively uninsured. Eighty-nine of Tennessee's 138 hospitals have signed up, and about 10,000 of the state's 17,000 doctors are in the CoverTN network.

Franke Elliott, regional vice president for managed care at hospital chain HCA Inc., says his 13 Tennessee hospitals aren't participating yet in CoverTN out of fear it could "worsen our bad-debt issues" when patients rack up big bills.

Both Gov. Bredesen and Mr. Harr of BlueCross say enrollment is aimed at the uninsured, and hospitals should benefit overall. "We know it's not perfect and not as comprehensive as we would like," says the governor. "But it gets people into the system."

Write to Chad Terhune at chad.terhune@wsj.com