Many people have learned the hard way that health insurancedoesn't cover every medical expense, but some credit unions areturning that problem into an opportunity by partnering withsupplemental insurance providers to convert rising out-of-pocketexpenses into expanded product offerings and noninterestincome.

Supplemental health insurance is a category of policies designedto pay out money to offset high deductibles, big copays oruncovered medical expenses members typically end up paying on theirown. The policies usually cost less than traditional healthinsurance coverage and frequently pay fixed cash amounts afterevents such as stints in the hospital or diagnoses of particulardiseases. And they can be a big relief for many credit unionmembers, according to Robert Dudacek, president of the Franklin,Tenn.-based Affinion Insurance Solutions, which partners withcredit unions to sell supplemental policies to members.

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

Out-of-Pocket Cost Battle

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

Companies such as Aflac, a prominent supplemental insuranceprovider in the United States and Japan, have flourished partly asa result of a nationwide scramble among consumers to payout-of-pocket expenses. Aflac, however, largely sells throughworksites. Other companies, such as Affinion, are tailoringprograms 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 benefitfor covered illnesses or a $400 daily benefit for covered injuriesfor every day a member is the hospital. Members pay $24 a month forindividual policies and $36 a month for family policies (that mayvary slightly by state, Dudacek noted). There are also norestrictions for pre-existing conditions.

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

Because much of the insurance business is regulated at the statelevel, companies like Affinion must get permission from regulatorsto sell on a state-by-state basis. In June, for example, thecompany 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 ofColumbia now offer Affinion's recuperative care product.

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

Affinion has plans to sell 20,000 polices by the end of the yearand 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 canboost noninterest income – LIMRA's 2016 Bank and Credit Union LifeInsurance Study found 78% of financial institutions said growinglife insurance was an important priority, for example. And althoughsales of any kind of insurance were just 5.1% of noninterest incomeat credit unions in a recent survey of 170 credit unions byCallahan & Associates, roughly one in five (18.2%) saidinsurance is on their radar in 2016.

Dudacek thinks things like recuperative care policies can add tothat noninterest income. The company pays a royalty for everypolicy a credit union sells, and it covers marketing costs, whichare largely direct mail. (Dudacek did not share details about theroyalty structure but did say royalties vary based on the number ofAffinion products the credit union offers and the performance ofthose products.)

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

Dudacek said he believed credit unions can up their insurancebusiness by as much as 25% by adding supplemental policies such asrecuperative care to their accidental death and dismembermentofferings.

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

Members with high-deductible health plans and older membersmight also be natural fits for recuperative care policies, Dudacekadded. Younger workers, who may be less financially able to absorbbig medical bills, tend to choose high-deductible health plans whengiven the choice at work, according to a study by benefitsmanagement company Benefitfocus. Plus, people over 65 spend threetimes as much on health care than working-age people, according tothe Centers for Medicare and Medicaid Services).

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