Allstate’s Dropping of Small Group Health Coverage Stings Many

Facing a liver transplant operation that will cost at least $140,000 and possibly much more, Grayce Aul, a Canoga Park housewife, has lost her regular health insurance policy, one that would have given her nearly full coverage.

All she has been able to obtain in replacement is a conversion policy that provides bare-bones coverage, including a basic $100-a-day hospital benefit and a maximum surgical benefit of a little more than $1,000.

It was not her illness that led to Aul losing her regular policy. The loss was due to a decision by Allstate Life Insurance Co. to stop selling health insurance to 14,000 small groups, averaging just three people each, including the one to which Aul belonged. The consequences of that decision were that Aul, along with others in these groups who were very ill with continuing diseases, could not obtain any other adequate insurance.

The case illustrates the plight that critically ill people can fall into through no doing of their own, and of one of the many gaps that exist in American health insurance.

The facts of the Aul case were confirmed by Aul herself, her physician, Stephen A. Borowsky of Northridge, and by executives of Allstate Life who were interviewed at company headquarters in Northbrook, Ill. They add up to what may be a choice between an early death or poverty for a woman and her husband who, in their 50s, are financially well off now.

Aul and Dr. Borowsky are both active in the United Liver Assn., a Southern California support group for victims of liver disease. Its officers report that insurance problems plague many of those facing high expenses as a result of required operations and recuperative drugs and procedures.

“They’re facing the fact they have an incurable illness, their ways of living have changed, and they have all these physical and psychological stresses, and added to them are the insurance problems,” said Kathleen Memel, a Beverly Hills psychotherapist who moderates support groups for the association and is a member of its board. “We hear about them constantly.”

Aul agreed to have her name used and her situation checked with her doctor and her insurer.

“I just don’t think it’s fair to pull the rug from under me,” she explained. “We paid high premiums for years before this happened and so have thousands of others. I’m not alone. There must

be many others wondering just as I am today what’s going to happen to them.”

Aul had been insured since 1981 under a small group policy carried through her husband’s business, Aul Pipe & Tubing Inc. of Vernon. The policy benefits were generous, the coverage comprehensive and there was originally no limit on the amount the insurer would pay during the policyholder’s lifetime. Nine people were covered under Aul Pipe & Tubing’s group plan, and premiums last year ran a total $5,345 a month.

But on Feb. 17, the Aul firm received a 90-day notice of termination from Allstate.

“The group insurance industry has experienced rapid changes over the last few years, principal among those changes being the development of managed health care programs,” said Allstate’s letter. “We do not currently have a managed care program to offer to our group insurance customers, nor does our volume of business warrant the extensive investment that would be required in order for us to develop an effective program. We have, therefore, regretfully decided to withdraw from the group insurance market. In order to effect this withdrawal, we are terminating existing policies.”

One of those covered under the Aul firm’s policy died of cancer before the policy’s cancellation date, and another person covered has diabetes. Six others covered were generally healthy and were quickly able to obtain another comprehensive health insurance policy. Mrs. Aul represents the ninth person who was covered under the plan.

But Aul--who has been ill with primary biliary cirrhosis for seven years and, according to her doctor, would have about five years life expectancy without an eventual transplant--said she and the other women with pre-existing disease could find no company willing to sell them comprehensive coverage. They had to settle for the conversion policy Allstate was required to offer by law.

On May 8, Aul received another letter from Allstate. “Congratulations!” it began. “Your request for conversion of your Group Health Insurance has been approved with an effective date of May 1, 1989.” Her premium was $1,520 a year.

Aul purchased the coverage.

“But this policy was almost nothing,” she told The Times. “Its hospital benefit of $100 a day (for a maximum 70 days) is only a tiny fraction of what a daily hospital stay costs. And it leaves almost all the cost of a transplant to me.”

“The actual average of a single transplant is about $140,000 or $150,000,” said Dr. Borowsky. “Sometimes it doesn’t take, and the patient needs to go for another one. And then there may be complications. I’ve heard of a total price of $380,000. And then there is post-care for 10 or 15 years.”

Post-operative medication alone would cost Aul at least $1,000 a month.

Under these circumstances, Borowsky said, “I don’t think anyone will sell her a (comprehensive) policy.”

Allstate officials wouldn’t, as they made clear in comments that were considerably more pointed than the language of the Feb. 17 termination letter.

“People who are insurable will not take conversion policies,” said David McPherson, executive vice president for administration at Allstate Life. “Only the uninsurable will, and the cost of insuring them is enormous. To keep the price down, the states have decided the minimum package is all that is required. The policy we offered Mrs. Aul complied with state law.

“We recognize that people like Mrs. Aul have a problem, but we can’t offer her more than other people in her class.”

McPherson and Robert Seiler, senior vice president and general counsel of Allstate Life, said that Allstate decided to drop its small group policies as part of a general move out of the health insurance business.

Rapidly escalating medical costs, and a continuing inability to control them, as well as a general assessment that the federal government is apt to create a national health insurance system sooner or later, helped convince the company to sell all its group policies, they said.

They did not say that Allstate had been losing money on the policies, but they said future trends were not promising.

“We realistically don’t know if there’s any way you can control costs short of national health insurance,” Seiler said. He said it would have cost anywhere from $100 million to $300 million for Allstate to have established a HMO, a managed care program, and even that might not have worked to successfully control costs.

So, the executives explained, Allstate sold all its large group policies to Metropolitan Life Insurance Co. But, they said, Metropolitan was not interested in buying the 14,000 separate small group policies. Allstate was left with those.

“We decided to exit, terminate our (small group) contracts,” McPherson said. “And the law requires that you treat everybody the same.”

Sensitive, however, to the plight of Aul and other uninsurables, the Allstate officials said, they and other insurers have been supporting creation of an “uninsurables pool” under which a state or federal mechanism would spread the risk of insuring such people to the insurance industry as a whole.

“Sixteen states have authorized such pools,” McPherson said. “In California, the enabling legislation was introduced but not approved.”

In Sacramento, legislative consultants said that in 1986 and 1988 bills were actually passed that would have established such a pool, but that in both instances they were vetoed by Gov. George Deukmejian on grounds that the benefits were too extensive and could be a drain on state tax funds.

New legislation is pending this year and, this time, the consultants said, Deukmejian aides have suggested certain cost safeguards that, if adopted, would result in Deukmejian signing a bill creating such a pool.