Many people have learned the hard way that health insurance doesn't cover every medical expense, but some credit unions are turning that problem into an opportunity by partnering with supplemental insurance providers to convert rising out-of-pocket expenses into expanded product offerings and noninterest income.

Supplemental health insurance is a category of policies designed to pay out money to offset high deductibles, big copays or uncovered medical expenses members typically end up paying on their own. The policies usually cost less than traditional health insurance coverage and frequently pay fixed cash amounts after events such as stints in the hospital or diagnoses of particular diseases. And they can be a big relief for many credit union members, according to Robert Dudacek, president of the Franklin, Tenn.-based Affinion Insurance Solutions, which partners with credit unions to sell supplemental policies to members.

“A lot of consumers are in high deductible plans or have significant copays that they have to pay, so you're released from the hospital and you have those expenses,” he explained. “When you look at home health care, if you need to have an attending nurse come to your house, a lot of times there is a limit on the number of times that someone will come, or that there is an additional $50 to $100 per day copay on that.”

Out-of-Pocket Cost Battle

Around 11% of the country's $3 trillion in health spending is now out-of-pocket, according to the Centers for Medicare and Medicaid Services. And according to the Commonwealth Fund Health Care Affordability Index, about a quarter of Americans with private health insurance had premiums, deductibles, and/or out-of-pocket costs that were unaffordable in 2014 and 2015. There may be little reprieve on the horizon, too: Inflation and rising price tags for medical services are expected to increase medical spending by 5.7% for 2017 through 2019.

Companies such as Aflac, a prominent supplemental insurance provider in the United States and Japan, have flourished partly as a result of a nationwide scramble among consumers to pay out-of-pocket expenses. Aflac, however, largely sells through worksites. Other companies, such as Affinion, are tailoring programs for credit union members.

In April of 2014 that company launched a recuperative care plan, which is sold through credit unions and pays a $200 daily benefit for covered illnesses or a $400 daily benefit for covered injuries for every day a member is the hospital. Members pay $24 a month for individual policies and $36 a month for family policies (that may vary slightly by state, Dudacek noted). There are also no restrictions for pre-existing conditions.

“There are a lot of programs out there that provide benefits for accidental injuries but very few that have a sickness platform that is a guaranteed issue product,” Dudacek added.

Because much of the insurance business is regulated at the state level, companies like Affinion must get permission from regulators to sell on a state-by-state basis. In June, for example, the company expanded to credit unions in California and Florida; approval in North Carolina came shortly after that, Dudacek said. Today, some 100 credit unions in 41 states and the District of Columbia now offer Affinion's recuperative care product.

“That's, I would say probably, maybe a fourth of the [credit unions] that we think should be offering the program,” he said. “As it becomes more available in more states, we definitely expect that to grow.”

Affinion has plans to sell 20,000 polices by the end of the year and then grow that number by 50% by the end of 2017. Kansas, Louisiana, Maine, Montana, New Hampshire, New York, North Dakota, Vermont and Washington are still on the to-do list.

What's in It for Credit Unions

Many credit unions already know insurance sales in general can boost noninterest income – LIMRA's 2016 Bank and Credit Union Life Insurance Study found 78% of financial institutions said growing life insurance was an important priority, for example. And although sales of any kind of insurance were just 5.1% of noninterest income at credit unions in a recent survey of 170 credit unions by Callahan & Associates, roughly one in five (18.2%) said insurance is on their radar in 2016.

Dudacek thinks things like recuperative care policies can add to that noninterest income. The company pays a royalty for every policy a credit union sells, and it covers marketing costs, which are largely direct mail. (Dudacek did not share details about the royalty structure but did say royalties vary based on the number of Affinion products the credit union offers and the performance of those products.)

“I think the success of the program directly relates to the affinity that a credit union has with its members. If a credit union has a great trust within their membership, whether you're selling an auto loan or you're selling insurance, we tend to see greater results,” he said.

Dudacek said he believed credit unions can up their insurance business by as much as 25% by adding supplemental policies such as recuperative care to their accidental death and dismemberment offerings.

“Accidental death and dismemberment tends to be the lead product for any insurance program that's direct mail,” he explained. “I think this is a great second product to help expand the size of their program.”

Members with high-deductible health plans and older members might also be natural fits for recuperative care policies, Dudacek added. Younger workers, who may be less financially able to absorb big medical bills, tend to choose high-deductible health plans when given the choice at work, according to a study by benefits management company Benefitfocus. Plus, people over 65 spend three times as much on health care than working-age people, according to the Centers for Medicare and Medicaid Services).

“We're probably another year before having a full complete demographic picture because the product is so new,” Dudacek noted. “What we've been doing is mailing it to pretty much the full membership base so far and seeing spectacular results.”

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Recuperative Care Policies Arrive at Credit Unions

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