Before the Obamacare days, the pre-existing condition dilemma generally occurred when a high-risk individual transitioned off an employer sponsored health insurance plan and was unable to gain coverage in the individual market. Even though 1996 HIPAA (Health Insurance Portability and Accountability Act) regulations incorporated guaranteed renewability — where an employee could switch from his previous employer plan to a new employer plan or individual plan without denial due to health status — this protection did come up short in some cases. Plans could still be unaffordable for those transitioning from group coverage to an individual policy since carriers could risk-adjust premiums based on one’s health status.
Denial of coverage certainly occurred prior to Obamacare’s passage, but it happened infrequently. The Obama Administration embellished tales of the severity of the matter, which added substantial leverage to the push for the law’s passage four years ago.
Today, the White House believes that simply adding more regulatory layers will solve the previously stated issues. Obamacare not only prohibits insurers from denying coverage to high-risk individuals in the individual market (even those entering for the first time), but their premiums must be affordable as well. So in order to stay open for business, carriers now charge artificially high premiums for the low-risk population to offset the cost of the high-risk population’s premiums. This is known as community rating. This concept coupled with guaranteed issue will supposedly enable the high riskers to access coverage and afford monthly premiums. However, in order for this to be successfully executed, other things must harmoniously fall into place, like the young invincibles willingly signing up for a bad deal. According to Blue Cross and Blue Shield of North Carolina’s webinar yesterday, just 25% of the exchange population in the state is made up of 18-34 year olds. This figure is well below the CBO’s original projection that 40% of this population must sign up for health exchange policies in order to maintain a viable enrollment mix.
Let me be clear that it certainly creates very real hardships when those with pre-existing conditions have trouble gaining or keeping coverage in the individual marketplace, worrying at the end of each policy period whether their insurers will renew their policies, or if further medical underwriting will trigger skyrocketing premiums.
Private carriers realize this and have capitalized on it, creating ways to mitigate this issue over time by offering variations of guaranteed renewable policies — and they did it well before government intervention.
If we pretend that Obamcare does’t exist for a hot minute, these policies represent a free market solution to providing accessible and affordable coverage for those who feel uneasy about being classified as uninsurable in the future.
Put simply, guaranteed renewability incorporates two payments into one’s health insurance policy premium: a medical insurance premium that covers medical expenses, and another payment that insures against denied coverage in the future in the unfortunate event of a drastic change in health status. This surcharge accumulates over time into a pool that can then be used to the policyholder’s benefit if needed, helping to prevent sticker shock.
Michael Cannon, Director of Health Policy Studies at the libertarian Cato Institute, explains the concept with pithy:
It’s easy to see why GR would dominate in a competitive health-insurance market. If Plan A costs $600/month but then jumps to $6,000/month if you get sick, while Plan B costs $800/month no matter how sick you get, which would you choose? Some will choose Plan A if circumstances dictate. But most would find Plan B’s GR feature to be worth the added cost.
UPenn economist Mark Pauly has done extensive research on this subject and is one of the guaranteed renewable gurus out there. In a Health Affairs article, he mentions that this type of contract appealed to roughly 80% of individuals shopping for insurance — well before its widespread regulation. Pauly further states that not only do insurers use this feature as a competitive business strategy to keep their customers, but it also proves to be less costly and less of an administrative burden than re-underwriting.
Sure, issues still arise when insurers cherry pick healthy people over sick. But a free market inevitably sorts out the good insurance companies from the less reputable.
Last week, I mentioned John Cochrane’s free market prescription for resolving access problems for those with pre-existing conditions. Cochrane’s health status insurance strengthens guaranteed renewability by adding portability. A way in which this can be done is by setting up a separate health status insurance account. With this account, individuals receive a lump sum payment from the insurer and can switch to plans with a different health care insurer for whatever reason.
Reason Magazine paraphrases Cochrane’s policy analysis on health status accounts:
Under Cochrane’s proposal, if an insured person develops an expensive chronic condition, a lump-sum payment would be deposited into a health-status insurance account that would be available only to pay medical insurance premiums. This restriction would limit the temptations to commit fraud (faking an illness to get the money and then run) or to spend it and then show up at an emergency room unable to pay. In addition, if the insured becomes unexpectedly healthier and his premiums decline, the money could then be returned to the insurer.
Even individuals who take the risk of remaining uninsured for a period of time could still protect themselves by paying a health status insurance premium. And for those who are already sick, the government could initially contribute a defined amount of money into their health status insurance accounts and then step aside.
These ideas and already tested practices are just a few ways in which a free market can supplant Obamcare’s precarious attempt to resolve this specific issue by using government price controls.
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