Friday, August 14, 2009

What About Pre-Existing Conditions?

University of Chicago finance professor John Cochrane answers that question in today's WSJ:

The bills being considered in Congress address the pre-existing condition problem by forcing insurers to take everybody at the same price. It won't work. Insurers will still avoid sick people and treat them poorly once they come. Regulators will then detail exactly how every disease must be treated. Healthy people will pay too much, so we will need a stern mandate to keep them insured. And this step further reduces competition.

Private, competitive insurance markets are a superior way to solve the pre-existing-conditions problem, and the only hope to lower costs.

A truly effective insurance policy would combine coverage for this year's expenses with the right to buy insurance in the future at a set price. Today, employer-based group coverage provides the former but, crucially, not the latter. A "guaranteed renewable" individual insurance contract is the simplest way to deliver both. Once you sign up, you can keep insurance for life, and your premiums do not rise if you get sicker. Term life insurance, for example, is fully guaranteed renewable. Individual health insurance is mostly so. And insurers are getting more creative. UnitedHealth now lets you buy the right to future insurance—insurance against developing a pre-existing condition.

These market solutions can be refined. Insurance policies could separate current insurance and the right to buy future insurance. Then, if you are temporarily covered by an employer, you could keep the pre-existing-condition protection.

The right to future insurance could be transferrable to another company, for example, if you move. You could have the right that your company will pay a lump sum, so that a new insurer will take you, with no change in your premiums. Better, this sum could be occasionally placed in a custodial account. If you got sick but had something like a health-savings account to pay high premiums, you could always get new insurance. Insurers would then compete for sick people too.

Innovations like these would catch on quickly in a vibrant, deregulated individual insurance market.

Originally posted at Carpe Diem.


At 8/14/2009 7:50 AM, Blogger brodero said...

Why would an insurance co.want to compete in the right to future insurance market....and if its
unaffordable...aren't we back to square one....this pre existing issue is going to be big issue whichever political party is in power....

At 8/14/2009 8:13 AM, Anonymous Anonymous said...

It seems a pivotal question is:
If Uncle Sam required all insurance companies to ignore pre-existing conditions:
this would level the competitive field for all insurers.
some would figure out how to make it work.
others would eventually fail.
What are the unintended consquences of that?
insurers would begin to restrict services/coverage to "normal" subscribers??
all insurers fail?
I continue to hold out hope that this can be resolved with minimal impact on the taxpayer or impoverishing the insurers.
I'd like to see more effort to solve the problem, remove the barrier than simply point them out and go home.

At 8/14/2009 10:25 AM, Blogger Joshua Macy said...

It's simple: if Uncle Sam required all insurance companies to ignore pre-existing conditions, they would accept people with pre-existing conditions but charge them enormous premiums to cover the fact that they're going to cost the company money. If Uncle Sam further required that they charge no more to someone with a pre-existing condition than anybody else ("community rating") then they'll bump the premiums up for everybody else to compensate and possibly cut what they cover for everybody. If the government further intervened to mandate what they cover, then insurance premiums would sky-rocket. This is exactly what happened in New York, which has must-cover, community rating, and generous mandates on what insurance companies must include. During the period when nationally average insurance premiums rose by 25%, New York's premiums rose by about 16 times that.

This is still a good deal for the people with pre-exisitng conditions, but it's a massive transfer of wealth from healthy people to sick people, even if the sick people are richer than the healthy people. This causes the healthy people to opt out of getting insurance unless they become sick, so then the government further intervenes to force everybody to buy insurance or face a fine. According to CBO estimates, under the current proposals there are going to be around 8 million people who are making too much money to get the subsidy, still can't afford insurance and will have to pay penalties...and still won't be insured.

At 8/14/2009 12:04 PM, Anonymous Rand said...

Note to brodero

The entire insurance industry is based upon future expectations.

That's what actuaries calculate.

You should be able to purchase health insurance at any time, but the premium will be fixed for the rest of your life. That would be an incentive to buy it when you are young and to keep renewing at the same low rate.


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