Pet health insurers seeing doggone good times

Pet owners are going to great lengths — and spending tens of thousands of dollars — to provide advanced care for their four-legged friends.

So with veterinary costs rising, more Americans are enrolling in pet health insurance plans to take away some of the financial strain that comes with extending the lives of their furry loved ones.

According to the North American Pet Health Insurance Association, a trade group representing 12 companies that sell pet insurance, about 1.4 million pets were insured in the U.S. in 2015. That's up 12 percent from 2014.

The increase comes as Americans' vet bills are stacking up. Over the past four years, vet care spending has risen nearly 14 percent, including a 2.5 percent jump to $15.4 billion last year, according to the American Pet Products Association. The organization predicts another increase this year, forecasting owners will spend nearly $16 billion in 2016. That number would be even higher if it included pet medicines.

After food, vet care is the second-highest source of pet spending.

"There are more than a dozen companies out there that offer pet insurance now and it's ever expanding," said Mandy Walker, an editor at Consumer Reports, which recently studied pet insurance.

There are a number of factors that influence how much an owner would need to pay to cover their pet. Premiums vary depending on the pet (for example, dogs are more expensive), as well as their age, breed and location.

Dog walker
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Dog walker

The cost also depends on what type of coverage the owner chooses. Though the specifics vary by company, there are essentially three types of coverage: 1) accident only; 2) accident and illness combined (the most common plan); or 3) wellness coverage (this could include everything from annual checkups to dental treatments). Some of the accident and illness coverage may contain wellness features or options.

Accident and illness plans for pets cost around $38 per month on average in the U.S., according to the North American Pet Health Insurance Association. All in, American pet owners paid premiums totaling about $690 million in 2015, a 17 percent increase over 2014.

"People are thinking of their pets more as part of their family and they're not wanting to make decisions that are based on, 'Gee, what is my pet worth that to me,'" said Kristen Lynch, the association's executive director.

The quality of pet care is also improving. Thanks to technological innovations, some veterinary facilities are now using state-of-the-art diagnostic equipment and tools found in regular hospitals to diagnose and monitor illnesses and conditions in dogs and cats. "Vets can provide treatment at the level of what human health care can provide now," Lynch said.

Still, pet insurance penetration rates in the U.S. remain around 1 percent. That's far lower than Western Europe, where some countries have up to 40 percent of pet owners with coverage. Analysts see the U.S. market as a big growth opportunity, particularly as more employers are offering pet insurance as a voluntary benefit.

"As the popularity of pet health insurance expands, some companies are subsidizing a percentage of the employee's cost," said Sue McManus, vice president of marketing for Nationwide, the country's largest pet health insurer with more than 575,000 pets. "We're now seeing some of our groups that we work with paying as much as 100 percent of the employee's pet insurance premiums."

Trupanion, another major insurer in the space, had 307,000 total pets enrolled at the end of the first quarter, up 25 percent from a year ago. The company had its initial public offering two years ago and hasn't reported a net profit as it builds out the business and spends on marketing and sales.

Veterinarians with a cat
Andy Cross | The Denver Post | Getty Images

One drawback with pet insurance is it doesn't cover pre-existing conditions. Therefore, owners of older pets suffering from cancer, diabetes or other conditions that require special treatment or medications may not find new coverage worth it. Some of the policies exclude genetic and breed-specific conditions such as hip dysplasia, a potentially crippling dislocation common in certain dogs and some cats.

Consumer Reports looked at the actual bills of a 12-year-old dog to see what the owners paid and what they would have been reimbursed from three different companies — Embrace, Healthy Paws and Trupanion. Guinness, a Labrador mix, had a relatively clean health record until last fall, when he was diagnosed with skin cancer that required at least two surgeries and follow-up care.

"We found that in all cases just the Healthy Paws plan paid out more than it cost over the pet's lifetime," Walker said. But Consumer Reports also concluded that if Guinness' owner continued to cover cancer treatments, all three plans "may be worth it." That assumes the dog was the insured from a young age, when it had no pre-existing conditions.

Some of the insurance plans such as Trupanion and PetFirst will cover vet care costs (up to 90 percent on some plans) after a monthly per-incident or condition deductible. Nationwide, Aon subsidiary Healthy Paws, Embrace, ASPCA Pet Health Insurance (co-branded with Hartville) and Pets Best (affiliated with Farmers and Progressive) have annual deductible plans, with some of them offering wellness features. There are yearly and lifetime caps on some policies, so it pays to read the fine print.