In the January and February issues of LGNY ("Changes Upending the Viatical Market in New York" and "New AIDS Drugs and the Realities of Disability Benefits") we tallied the implications of new AIDS treatments on disability and selling life insurance. To sum up those articles: despite media hype little impact has yet been registered on disability issues, but licensed (and therefore tax-free) alternatives are greatly diminished for New Yorkers wishing to sell their life insurance.

In this issue of LGNY we'll uncover some of the financial time-bombs that emerge when people with HIV simply live longer - especially when it comes to medical insurance, credit, taxes, and investment.

- Medical insurance

Medical insurance is the first line of defense with HIV. New York has the strictest, most pro-patient insurance regulation of all the states.

Because regulation differs from state to state, this article is based on NY regs only.

Yet self-insured plans - over half of all employers - are not subject to state insurance regulations. They're poorly regulated by Federal ERISA pension plan regulations which by comparison offer much less protection.

* Drug reimbursement

The first dilemma posed with new drugs for any illness is paying for them. President Clinton has proposed per-capita spending limits for Medicaid in his new budget - threatening access to the new treatments. Some states have imposed a maximum (sometimes as low as 3) on the number of Medicaid prescriptions that can be filled in a month.

New York's AIDS Drug Assistance Program (ADAP) covers over 200 drugs - and all three protease inhibitors. Yet NY-ADAP has had to cut drug coverage significantly in the past. Four states still don't cover the drugs. Even the Illinois ADAP covers only one of them, has cut its list of approved drugs to 28 from 112, and will soon impose an annual dollar limit - probably $12,000 - for each participant. The public safety net has become very shredded.

Managed care (HMO) limits are a problem for any person with HIV. Outside Manhattan HMO physicians may simply not see enough HIV cases to offer patients enough experience, networking, or special training. AIDS or Gay physicians are not identified in HMO directories yet studies routinely show that 1/3 of all straight physicians hold anti-gay prejudice, feel gays should not be in certain occupations, and actually deliver substandard care to gay people. HMOs or their employer sponsors often set annual limits of $2-3000 per person.

Even privately insured patients face increasingly complex preauthorization requirements. Some insurers wait as long as possible before paying for new treatments or tests - using the category "experimental" as an easy out. In one case, despite relentless follow up, the insured waited 9-12 months before a review committee got around to reviewing the literature. Then the committee was dissolved because of a merger; this could happen as well if the insurer is changed by the employer. Patients with no money to pay for new treatments can't afford such delays.

Merck has a last resort program for patients who reach their limit but are not eligible for Medicaid. But this involves considerable negotiation. All of these complications may result in an interruption of treatment - and prompt virus mutation and resistance to the drug.

What's next? New, costly drugs are coming on stream for depression, cancer, MS, hypertension, and other conditions. Rationing is definitely here to stay. Competition may hurt the very cutting-edge treatments everyone hopes are next in the drug pipeline. More than ever, people who can should save for a non-reimbursed care treatment fund - and build credit and liquidity to cover drug introductory periods.

* Medicare

Outliving themselves, many on long-term disability are now going onto Medicare - without realizing the immense bottom-line implications this triggers. The confusion is compounded by the fact that each state and each type of private medical insurance policy deals with Medicare supplements differently. These things are always true:

- Medicare doesn't pay for outpatient drugs (except when administered by a physician or infused)

- Medicare is automatic 29 months after the disability starts - even for many civil and federal employees who didn't pay into social security.

- Medicare has many deductibles, copayments, and other gaps in coverage. People over 65 may have enough savings to pay for the substantial out-of-pocket costs that Medicare doesn't cover; people on disability aren't in the same position and can be hit hard by those costs.

- Much group medical insurance paid for under COBRA discontinues when the insured becomes Medicare eligible.

- Retiree medical plans are usually only as solid as the companies sponsoring them. To rectify these problems traditional solutions can be expensive, only partial, and increasingly rare. In particular, self-insured plans don't have to offer conversion & extensions - and most don't.

- Insured group plans may possibly be converted into an expensive, minimally designed individual policy with a lifetime maximum of $200,000.

- A person on disability might be able to apply for a disability "extension of benefits" which would pay for all costs for the disabling condition only for one year - free. The streets of NY are full of people who qualify for this but who don't know it.

- They can apply for an expensive Medigap policy which in most states cover either no drugs or only up to $1500/year worth of drugs.

Because these alternatives vary widely from state and are almost always worse outside NY many find Medicare means being a prisoner with golden handcuffs in NY if they don't want to lose key health coverage - exactly at the time when many want to leave.

If people decline or are unaware of these alternatives they may end up on the ADAP program - and that could create another cost time-bomb that may prompt rationing and cutbacks in the drug list again. Congress came up with the money at the last crisis. Will they continue to do so as the numbers swell because people are kicked off their group insurance when they become eligible for Medicare? Again, if you have private funds safeguard them for that possibly rainy day.

* Preventive Medicare coverage

NY is the only state to permit people to keep their individual coverage (and its drug plan) when they go onto Medicare. To take advantage of this existing group COBRA coverage must stop by the date the individual coverage takes effect. Most important, the effective date of the individual coverage must be prior to the Medicare date - NOT coincident with it.

The best coverage is obtained by joining a HMO and opting for the "point-of-service" option; that permits you to go any physician of your choice. This option is expensive - probably around $6000 per year by the time copayments and deductibles are figured in.

If your income is less than $xx you can apply to the AHIP program (212/630-1788) to pay your premium. (AHIP has no limit on savings.)

I call these complex steps the Medicare two-step. Professional assistance is strongly advised. Giving up COBRA is not for the weak-of-heart. Mistakes cannot be undone once Medicare has begun. Call GMHC's Health Advocacy Hotline at 212/337-3500, 3-6pm, M,Tu,Th,F or call a financial advisor experienced in this highly technical process.

* Medicare & returning to work

Those going off social security have free Medicare for 36-48 months as part of Social Security's Trial Work Period Program (see the last issue of LGNY for more details on this program). Under NY's "continuity of coverage" provisions, people going off Medicare should be eligible for group or individual coverage without any pre-existing condition.

The bottom-line? A great deal of planning should occur before becoming Medicare eligible. This is one of the many one-way tickets HIV especially if medical progress takes place.

- Credit and debt

When disability looked like a one-way street, many people going out on disability either spent down assets, declared bankruptcy, or simply stopped paying their creditors. Many found that their state laws often protected their disability incomes from the claims of creditors; often old balances were written off.

Some wisely insured their credit card balances with credit disability insurance. But most of these insurance payments cover only the minimum payments leaving the capital still due. Going off disability can mean being liable for those balances at exactly the wrong time.

Yet credit problems can impair an important resource required by new treatments and tests: liquidity. New drugs that aren't reimbursed right away by health plans demand cash or credit to pay for them until they are reimbursed.

Going off disability also can trigger a sudden need for liquidity. Any life change requires financing - and returning to the world of work amounts to a relaunch of You, Inc: communications costs, printing costs, contact development, transportation, clothing, and grooming. This effort can be nipped in the bud by a lack of cash or credit.

Thankfully rebuilding credit has become much faster and easier. Materials are available by sending payment to Bankcard Holders of America, Publications, 524 Branch Drive; Salem, VA, 24153 for their "Building Credit" package - $4. Membership is $24 per year - and worth it if you have credit problems.

- Taxes

Going off disability may also mean paying the piper on deferred tax bills. If taxes were owed the Federal government, they're ready and waiting for that first paycheck unless special arrangements are made. Those with large tax obligations may find themselves locked into the safe haven of disability status - a true financial catch-22 of the new drugs.

- Pre-1977 Viatications

Another catch-22 awaits those who sold their life insurance and didn't pay the taxes prior to 1/1/1997 - perhaps thinking they wouldn't be around to deal with that obligation. There is no question that those viatical settlements were income on which tax was due even though 1099 forms were never required to declare the money to the IRS.

In practice, here are some ways this question is being handled. Please note that this is not tax advice, that I am not a CPA or tax attorney - and that you should consult one if you have a problem here. If there is a serious audit in which bank records are requested, the income will be glaringly obvious. This happened in one case several years ago - and the taxpayer paid the tax but the IRS did not impose penalties. In another case involving accelerated benefits a legal aid attorney and her interns opposed the IRS on grounds that were emotionally appealing but probably not technically solid; yet the IRS backed off presumably to avoid establishing precedent. It is possible that the IRS is not seeking to drag terminally ill people into tax court; but what if they adopt the media's opinion that an AIDS cure is at hand? Caution is the best counsel.

What's a taxpayer to do? A few taxpayers are declaring the amount and then declaring in an addendum to their return the reasons for which they feel the amount is not taxable. However, most appear to be letting the money go undeclared - but now they are superconservative about aggressive deductions and live with a potential cloud over their head.

Executors of estates who were aware of the receipt of a settlement by the deceased but who didn't declare it have a great deal to worry about since they are personally responsible for the tax if the liability surfaces. They too must worry about tax alligators in the swamp - especially since in fraud there may be no time limit as to their liability.

- Post-1977 Viatications

Those selling life insurance in 1977 face ambiguities in practice as well. A 1976 law made viatical settlements after 1/1/1997 tax-free if life expectancy is certified to be less than two years and if the buyer is licensed in the state of the seller - the requirement in New York.

Yet the IRS still has not designed the 1099 forms by which this income will be declared. The information payers should put on the forms is not yet identified. This lack of definition sets the stage for misinterpretation, information getting lost during the course of the year, and exploitation by the unscrupulous.

Some brokers are claiming that their licensing status meets the IRS requirement: wrong. Some sellers are dealing with non-licensed buyers: wrong. Some sellers shift their residency - but imperil NY protections on health benefits. It's a tax mess.

- Investment

One common reaction to the energy and optimism the new drugs generate is to get fed up with sitting out on one of the all-time great bull markets. Some PWAs flush with cash from viatication are tempted to rush into the market - at its peak. The successes generate headlines; the tragedies generate tears.

Rash investors run the risk of a downturn - and needing that cash if the drugs crash as well or if they uncover new dreams to invest in. "Last in, first out" is a poor-making market strategy.

If they are inexperienced and turn to brokers the resulting commissions may easily eat away 3-6% of the investment's value before it starts earning - a cost that is often only recouped by leaving that investment be for years.

The new drugs have not changed one fundamental financial fact about HIV: uncertainty and potential change - up or down. Liquidity is the best strategy for such a situation. Learning to invest is a great vote for the future. Gradually increasing risk as experience accumulates is a winning strategy. But jumping into overvalued securities whose value may plummet as they have always done in the past may risk the very funds needed to create a future.