Not Really Insurance: The Pre-Existing Condition Debate

The recent debate over the potential repeal and replacement of the ACA, with the current focus on coverage for preexisting conditions, has drawn a great deal of attention to the concept of health insurance.  While our political leaders are constantly talking about it, few of them seem to understand the “insurance” component of health insurance. As a result, much of what they say about preexisting condition coverage is gibberish. We are here to set the record straight.

At its most basic level, insurance provides protection against the risk of unexpected financial losses. We focus on the term risk because if we were risk neutral (i.e., we were indifferent between sure things and actuarially equivalent gambles), then we would not value this protection. But nearly all of us are risk averse, meaning that we would rather not face having to dramatically reduce consumption of everything we enjoy in the event we are hit with an astronomical medical bill.  Because we are risk averse, health insurance improves our collective well-being by helping us collectively smooth our consumption.  Everyone who purchases insurance consumes somewhat less of everything else when healthy, but does not have to consume dramatically less when sick.

Turning to preexisting conditions, consider a person who is currently uninsured but has recently been diagnosed with a serious medical problem.  Given the opportunity, this person would love to purchase a health insurance policy.  But make no mistake about it, this policy is no longer insurance in any traditional sense of the term.  By skipping out on paying premiums until the illness strikes, this individual has consumed a lot more than everyone else when healthy, yet is able to consume almost the same as everyone else when sick (almost because there is likely to be some cost sharing).  This isn’t consumption smoothing, it is free riding, and this is what the prohibition on considering preexisting conditions encourages.

(To be fair, some individuals may lack the means to purchase insurance at any price, even with ACA subsidies, and it is excessively harsh to describe them as free riders.  We will return to these cash-constrained individuals at the end of this blog.)

There are two problems with free riders.  First, someone has to bear the cost – that someone is the “responsible” (although some might say “foolish”) individual who purchased insurance all along.  Second, because free riding drives up the price of insurance for everyone, some responsible individuals refrain from buying insurance in the first place, potentially even leading to a death spiral.

To help make things clear, we have constructed a simple numerical example.  Suppose there are 100 people who each have a 20 percent chance of incurring a $50,000 medical bill at some point in the next five years.  If everyone purchases insurance, premiums would be $10,000 each year.  But suppose that only 70 people buy insurance every year, while 30 people free ride, purchasing insurance only at the time they require medical care. In expectation, 20 people will be sick each year, 14 “responsible” individuals and 6 free riders. With an annual insurance pool of 76 enrollees (the 70 responsible ones and the 6 free riders), the insurer would have to charge a premium of $13,158.   This is quite a good deal for the free rider, who otherwise would have had to come up with $50,000 (or paid over $13,000 in premiums each year).

This table summarizes the conclusions:

If insurers could discriminate based on preexisting conditions, they certainly would not issue a policy to someone requiring $50,000 of medical care for any less than $50,000 in premiums.  But prohibited from discriminating, insurers must “over-charge” responsible customers in each year to make up for the shortfall of having to cover the free riders.  The amount of the overcharge is not small, and the increased premiums may well scare additional people out of the market.

It is remarkable to us that seemingly the only feature of the ACA with broad appeal is the provision that bans insurers from considering health status when offering and pricing insurance plans.  The purported purpose of this ban is to assure that all individuals have access to insurance, but that clearly is not the true effect.  Instead, the effect is to encourage free riding while punishing those who do the “responsible” thing.  It is for this reason that the ACA contains both a mandate (which given its size is of dubious effectiveness) and pre-specific annual periods of open enrollment (i.e. you can only purchase insurance, barring extraordinary circumstances, during a pre-specified time of the year). These are the provisions that are under attack, yet these are what make the ban on preexisting condition exclusions almost sensible.  Our politicians have it ass backwards. If anything, we should be increasing the cost of the mandate to discourage free-riding.

One possible solution to the free-riding problem would be to not provide coverage to those who game the system and/or gamble on their health status.  However, there is a reasonable argument made that as a society we do not want anyone to face high medical bills, and potentially even medical bankruptcy, even if they knowingly chose to free ride. This sentiment certainly underlies existing arguments that even those who have been diagnosed with cancer or who are currently pregnant should be allowed to purchase “insurance” in the marketplaces.  Is there a national consensus about this?  We are not sure.  Should there be a two-tiered system, so that those who knowingly free ride are forced to obtain care at “lower quality” providers (perhaps some county hospitals fit the bill)?  We are not sure of this either.  Is anyone asking these hard questions besides us?  We are sure they are not.

The remaining question then is how we fund the redistribution system that we have created. In the terms of the simple numerical example above, we fund the $50,000 in medical expenditures for the free-rider by charging higher premiums to the responsible customers that purchase insurance when they are healthy.  This is similar to what happens in the ACA.  These higher premiums are paid for through two primary mechanisms. For the subsidized portion of the marketplace, the increased premiums are paid via general tax revenue. However, the unsubsidized portion of the market (those earning more than 400 percent of the poverty line) are forced to pay for both the portion of the premium that relates to their risk of medical expenditures as well as pay what is effectively a tax to support individuals who chose not to purchase insurance until they were sick.

This is terribly unfair.  The ACA marketplace is a small sliver of the total insurance market and as a result we are asking quite a bit of the higher income marketplace enrollees (who are not necessarily high income in the broader population). In the process, we are driving the healthiest of these individuals out of the marketplace. They either will seek employer based options or go without insurance. And why wouldn’t they leave?  They have the ability to eventually enter the market if they get sick.  Note that these healthy and higher income enrollees are the very people who have failed to show up to the ACA marketplaces in the numbers that we expected.  Given the discussion above, this should perhaps not be surprising.  We are placing a fairly high premium tax on those individuals.

Having hopefully convinced you that funding the redistributive portion of the ACA via premiums is distortionary and inefficient, we next turn to possible solutions. Like many things in healthcare, while the problem here is clear that answers are far less so. One potential solution is to create a series of heavily subsidized insurance pools for individuals who have known high medical expenditures and have chosen to previously forgo the purchase of insurance.  These are often referred to as “high risk” pools, which is itself a bit of a misnomer.  There is no risk here; these are high cost pools where we know individuals will have high medical expenditures. An advantage of such a strategy is that funding these pools via general tax revenue instead of premiums wouldn’t distort the insurance decisions of healthy high income exchange enrollees. However, putting individuals into a high risk pool doesn’t decrease their medical expenditures and therefore these pools have to be heavily subsidized. The sheer size of these subsidies is often daunting and faces political opposition. Underfunded high risk pools are certainly not a good solution – and for this reason ACA supporters are often unimpressed by this as a solution to rising premiums.

Another solution is simply to reinsure firms that offer insurance from the federal marketplace. Effectively, for expenditures over a certain threshold the federal government could agree to compensate insurers. In some ways this is the idea behind the “invisible high risk pools” that have been recently debated. Again, reinsurance involves observable transfer payments to private firms – something that while potentially efficient has drawn political ire (remember the billions in risk corridor payments the government didn’t ultimately pay insurers). This seems to have little support from the public, who view this as a subsidy to insurers (though only to make sure they don’t lose money), rather than a way to stop taxing responsible exchange enrollees.

We would note for the purposes of completeness that another (perhaps less equitable) option would be one we discussed earlier.  Allow everyone a few years to buy their way into the insurance market regardless of their current health status, and then reintroduce medical underwriting. People who choose not to participate in this market would then be allowed to receive medical care at county hospitals which would receive increased funds to cover the costs of these individuals. These funds could come from general tax dollars. We note that this to a first approximation, this system is not that meaningfully different from the current standard.

As a final note, if we want to have serious conversations about the role of preexisting conditions and the choice to purchase insurance we need to make sure that individuals are not liquidity constrained from buying coverage in the first place. For example, individuals earning less than 100 percent of the poverty line and living in the 19 states which did not expand Medicaid are effectively locked out of the insurance market because of their lack of resources. We shouldn’t see this as an expression of their preference to be uninsured or evidence of free riding.

While we both have over time been critical of various features of the ACA, one feature we have consistently praised is the creation of a viable non-employer based option for individual insurance.  The first three years of the ACA have shown that the marketplaces have failed to live up to these expectations.  Insurers have consistently claimed that individuals are gaming the system in a manner that is similar to the numerical example that we discuss above.  The resulting higher premiums are likely a driving force in the inability of these markets to attract higher income and healthy enrollees – who are necessary for a well-functioning insurance market.  For this reason, we would call on policymakers to carefully consider changes to the ACA that would improve the redistributive portions of the law.

David Dranove and Craig Garthwaite are economists at the Kellog School of Management at Northwestern University.

32 replies »

  1. Is it insurance? Yes, but… Health insurance policies are set up as “claims-made” policies; whoever is your insurer when you go to the doctor pays your bills. But the insurable event for health insurance purposes is getting sick, not getting treatment. The argument over pre-existing conditions stems from this simple misunderstanding of what, exactly, we are insuring against.

    The key to solving the pre-existing condition problem is to restructure private policies as “occurrence” policies under which the company insuring you when you get sick pays your bills. How might that work for people who change insurers? Well, Medicare’s DRG technology is already out there. Any condition worth treating as the basis of an exclusion under a “pre-existing condition” clause can be assigned a probable cost of care to age 65 (when Medicare kicks in). Under an occurrence model, if you contract a condition that your insurer would exclude for new insureds, and you leave that insurer, the insurer would pay into some fund or other the “DRG” for that condition, as it exists when you leave.. (If you’ve had the surgery, the DRG is less than if you haven’t had the surgery.) Your new insurer can price your insurance with an exclusion for your pre-existing condition and tap the pre-existing condition fund to pay for your care of that condition.

    I can imaging several ways to implement a pre-existing condition pool, from Medicare as a secondary payer for all, to a Fed-like clearinghouse. These are details, and, of course, the devil lurks in them. But at least the structure would rest on a technically sound insurance foundation.

    My view of “free-loading” is based on Justice Roberts’s view that mandatory participation is a tax. The services are going to be provided, and they are going to be paid for. The only question is who is going to pay for them. If everyone is going to be insured, we might as well just announce that everyone IS insured under Medicare UNLESS they sign up for a private plan. Medicare premiums would be assessed as part of the income tax, with a credit for payments to private insurers. The Federal government would subsidize private premiums sufficiently to create a level playing field. Private plans could have high deductibles if people want to self-insure, but the mechanics of an occurrence-based high-deductible plan would demand some creative thinking at the policy-design level.

    Of course, there’s no reason any party that controls the House, the Senate, and the White House shouldn’t be able to pull all this together before the next recess…

  2. What we have here is rampant excusal for bad decisions. I won’t say stupidity. People must be insured. If they choose not to be, there are consequences. It’s rather simple.

  3. Allan, thank you for your thoughts. I look forward to reading them in greater detail this afternoon.

    Have a safe flight and I look forward to discussing further either here or via e-mail. I’m reachable at jason.chung[at]nyu.edu.

  4. Jason, I’m glad that you are willing to talk things through in a rational manner. That is refreshing. I understand your desire to level the playing field something that I strongly agree with. That is something that government sometimes has to be involved in, but generally something that can be managed in a contractural basis.

    For now I will leave out Constitutional considerations along with the long time protection of a stable government that requires a Constitution with teeth whether or not we agree with the law, That is why we have an amendment process.

    I will also temporarily leave out the idea of federalism and experimentation in the 50 states where if one state developed a superior idea the others might follow. That is why I don’t object that much to Romneycare or California’s desire for single payer.

    I will also temporarily leave aside all these comparisons with foreign nations that have less ethinic diversity and whose outcomes despite what many believe are worse than the outcomes in the US. One can attempt to use different ideas, but one shouldn’t generalize about results.

    The first consideration is how a person pays for healthcare. We have a safety net, Medicaid that in a real world should be more integrated into the private healthcare model. That should exist in one form or another based upon the system we develop for the rest of society. How to handle the rest is at issue. A free marketplace has been estimated to save between 30 and 50% so I believe a free markeplace would help more people buy affordable healthcare. Since my time is limited at this second let me only delve into the charity aspect. Charity can be private or from the government. The first consideration is that the marketplace not be upset with government dollars. Therefore any charity from the government should arise from revenue unconnected to the healthcare sector. In that way we won’t discourage people from buying healthcare insurance. We also need only to make sure that affordability involves basic care (quite extensive and expensive) because any expenditures that aren’t necessary increase premiums and make people more reluctant to carry insurance which is what I think we all desire. Insurers need to be able to contract directly with the individual so healthcare can be tailored to meet those needs.

    I’ll stop here as I am near ready to board a plane and if you wish continue the discussion when I am on terra firma we can surely do so..

  5. Allan, I agree we have the same goals so I’m delighted to continue a dialogue. I simply do not share your view that taxation for services is necessarily socialist or that, even if you classify it as so, it’s necessarily a bad thing. Let me explain my reasoning.

    As we agree on some governmental intervention in healthcare markets, I think we’re discussing the merits and cons of degrees of intervention which is a nice place to start. In my view, there is a central practical problem that impede a truly free market when it comes to taking a contractual view of the health care market.

    My point is that there is an inherent imbalance between the bargaining parties. Suppliers generally hold power due to lack of competition caused by high barriers to entry (which isn’t a terrible thing in the industry as safety and quality should be high by necessity). That leaves buyers holding the bag. The government stepping in as a collective bargaining agent is meant to counteract that advantage – at least as it relates to “essential” services (used in a more liberal way that defined by the ACA). My original point was that places like Hong Kong and Germany (I’ve lived and used medical services in both) both enjoy a hybrid model of public-private healthcare and this is a model that could be replicated either through Medicare expansion coupled with optional supplemental insurance offering a higher standard of care in private institutions. This scheme would reduce stress on the public system as the incentive for joining the private system would be there – you get quicker care and more “non-essential” coverage. Now, this wouldn’t necessarily fly culturally in a place like, say, Canada which generally (but not always) has a more traditional egalitarian, exclusively single-payer approach to health care but it would likely work here.

    As for our disagreements about taxation, I think I can distill my main point to this – I want governments to offer citizens more bang for the buck. I’m particularly agnostic as to how this takes place but what is absolutely clear is that Americans are getting ripped off – they pay too much per capita for far too little coverage and sometimes unconscionable costs. That’s an absolute fact. Yes, the top end gets unrivaled care but too many slip through the cracks. The healthcare market needs urgent reform and I’m all ears as to how it can be done. The quickest and most thorough way, in my view, is for government to intervene given the deficiencies of the healthcare marketplace I described above.

  6. Jason, I think I should touch on your point to Bobby. Do you believe in single payer or Medicare for all? If you do then you have a model that already exists. How would you reform the Medicare model to make it sustainable? Alternatively, are you thinking of a Medicaid for all model which is more likely to develop from the Medicare for all model? How do you make either of these ideas sustainable?

    Jason, I should add that we are both looking for the same results. Good healthcare, affordable cost and reasonable access to healthcare for all. I simply believe that the socialist method doesn’t work long term and doesn’t provide the appropriate balance of those three pillars of healthcare. My free market is based upon some government involvement especially in the contractural area. Adam Smith and most of the non anarchistic libertarian Austrian economists recognize the need for government. Additionally, my comments regarding free market thinking permit charity whether it come from the private market or government as long as its impact on the free market is minimized.

  7. “Allan, I have to say that I don’t view pooling wealth via taxation for the exchange of life-saving services to be an example of state-sanctioned serfdom.”

    It is not a matter of what you think rather a matter of political philosophy. I believe in individual freedom and the Constitution. You are free to believe and think whatever you want. You can even believe the state has the right to force the individual to spend money enriching private entities and private individuals. The question is where does that type of logic stop?

    Some people actually believe that Cuba has a great healthcare system. I am not saying that you do or anyone else on this list does, rather that type of system is not adaptable to our present Constitutional Republic. A further question involves the idea of federalism. If one wishes to completely change the way our government was created and functions then one can suggest almost any political idea. However, one has to recognize the dangers of such changes.

  8. Peter. that is not true. You are like the thief in the night that says your life or your wallet.

  9. Allan, you’re free to not participate in the slavery of Medicare you now enjoy.

  10. Allan, I have to say that I don’t view pooling wealth via taxation for the exchange of life-saving services to be an example of state-sanctioned serfdom. In fact, I’d argue that it’s really the core of what a successful state should provide in exchange for our taxes.

    Bobby, I agree with your assessment of the current political climate. Generally, I’m not in favor of a technocracy but I do think it’s important for those in public service to remember what the government does well by design – provide baseline services for the benefit of the whole population including vulnerable and unprofitable members (at least in the near term). Treating government like the market wants companies to do simply doesn’t work – you can’t downsize your population or write off their needs and still claim to represent the people.

  11. The alternate view is that Democrats view human citizens as slaves of the state.

  12. Steve, I totally agree that it is all about what insurers whil reimburse you for. Totally.

  13. The pre-existing condition problem was not so much about uninsured people buying insurance but people being denied insurance because of some illness that they had had in the past (defined as a “condition”) that they no longer had. In the individual market, where people were still medically underwritten, this was a problem. Also a problem is that people would either be terminated after a renewal or would be given a premium increase that was so high at renewal they had to drop the policy. And they would then be unable to get one at another carrier because of their pre-existing condition.

    What the author says is perfectly true about the problem of insuring people with serious illnesses. And “freeloading” patients is a problem where people can agree that the freeloader should be penalized. But that’s assuming that the freeloader could have bought insurance but didn’t. I don’t find the statute clear about whether insurers with a state waiver would be allowed to raise the premiums at renewal of people at renewal who got sick. I’m also skeptical about the affect on people if area rating is eliminated. I used to see small groups get priced out of the market all the time because one of their members got ill. This not only penalized everyone else, it made everyone else lose their insurance, where they were then thrown into the medically underwritten world of the individual market.

    I am not, by the way, saying that the article wasn’t both good and useful. Only that I found it a bit incomplete.

  14. The author left out a a solution – increase the size of the pool and therefore spread the risk over a larger field which would be much less of a burden on all premium payers.

    That solution is Medicare for all – a pool of 300 million people.

  15. The GOP is now under the control of a faction that denies the very legitimacy of a “commonwealth,” a society with ANY aggregate moral obligations to one another. Humans exist to serve the “market,” not the other way around.

    Though, it must be noted, those of them in Congress will most certainly continue to avail themselves of their 70% taxpayer-subsidized health plan premiums under FEHB.

  16. Thank you for this article. The authors make an elegant point about the necessity of the individual mandate.

    Of course, this begs the question of as to why, if mandates are designed to increase participation and smooth out collective consumption costs, we aren’t looking harder at mandatory single-payer health insurance, funded directly through taxes, for baseline services and care (much as Jwood notes).

    Even go-to bastions of free market principles, like Hong Kong (where I worked for a short while), have a well-funded public health care system through government-run hospitals. Those with sufficient funds trade health care for cost while those with health care trade health care for time in non-urgent cases (since a public system will always face constraints). Other countries like Germany and France, and increasingly Canada, already marry a robust state-funded or run health care public option with private services as well.

    There is no reason that the US couldn’t replicate such a model of a public system for public baseline care with funds being collected via the IRS. However, this entails shaking the myth that federal bureaucracy is always hopelessly inefficient and that the private sector is much preferable. The reality is that any large system can lead to waste but the federal bureaucracy is remarkably good at one thing – collecting and distributing tax dollars to fund US priorities. It’s time for us to leverage it.

  17. Thanks for explaining, good article. I’d like to know an economists perspective how quality plays into the economics of health care delivery? The way I see it, since we can’t discriminate on quality with health care this is the biggest problem in trying to subsidize it or give it away “for free”.

    My idea is to convert the current VA system into the “basic” government plan that may end up being lower quality, but would cover all. Then, you could have no pre-ex because there could never be a situation where someone does not maintain continuous coverage.

    All of these plans attempt to give-away “insurance”, which is not possible because insurance assumes that the insured has skin in the game. I say instead of that, give them some less expensive form of health care that someone would prefer not to be a part of and create the incentive for them to want to be on a private plan.

    Without a variation in quality, we can never talk about giving all people the same. You can’t give all people the BMW and expect it to be sustainable. eventually we’ll all have the Kia, because of trying to give all the BMW.

  18. Thanks for sending this to me.

    From the perspective of economic analysis, this analysis is impeccably correct. We all teach it that way — separating insurance against risk from redistribution.

    The authors are careful to acknowledge that there are issues of “liquidity”–I would have used the word “affordability” as a form of preemptive, protective reaction strike.

    One might get at the issue of redistribution by stipulating that no household should be asked to devote more that X% of its disposable income to health insurance and out of pocket spending. X could be made to rise wit income.

    I recall at in 1992, conservative policy wonk Stuart Butler, then of the Herritage Foundation, proposed such a scheme in JAMA. I think recently then Heritage chief deMint also made some such suggestion.

  19. When working to reduce costs one of the first things that should be addressed is marginal care. Marginal care leads to large expenses for little or no benefit.

    The problem is that too many complain that consumerism doesn’t change the amount of marginal care with the rational argument that no one can know for sure when the care will prove to be marginal. At the same time another or the same person will point to medical care that they believe is marginal care even though they can’t be sure of that either.

    A lot of marginal care is in a gray area. We should be thinking of marginal care as a risk factor that can be quantitated into a statistical risk that can be compared to other risks that are known. We have to recognize that in healthcare we take statistical risks all the time so we should be willing to do the same with this type of risk.

    The question becomes whose risk is it? In my opinion it is the patient’s risk and the patient should decide how marginal care should be managed and be willing to take responsibility for those costs just like they do with other risks involved in healthcare decisions. That type of attitude leads to effective consumerism that I saw practiced in my office and the hospital years ago when coverage was more limited and society less forgiving.

  20. I have no idea about the extent to which so-called waste can be identified in real time even by doctors and, if it can, how much of it is really either defensive medicine or intended to increase revenue or both in which case there is no incentive for doctors or hospitals to eliminate it and it would be hard for the patient to decline it even if he wanted to.

  21. I suspect that most of that 30% is tied in with what we decide to do and not so much how we do it. We know that a lot of surgeries, since that is what you mentioned, should never be done to begin with. We also know that the more expensive alternative is also frequently chosen when there is a less expensive option that has comparable results. My direct experience is that a lot of the wasteful testing and lengthy stays we used to have are disappearing, though we still have a way to go.

    On the insurance side, it is unfortunate that medical care is still too frequently dominated by what you will reimburse us for. As an example, we expect to start our high risk, pre-operative optimization clinic soon. It will be funded our hospital as we expect to get essentially no reimbursement from the insurers. However, we expect to save more in other hospitalization costs so we are going ahead.

  22. Oh, one other thing. How the hell does a patient know if something is wasteful or not? When you are in the hospital, you haven’t a clue and you’re drugged, and fearful. No amount of consumerism changes that (a new perspective I’ve gained).

  23. A close relative went through surgery and a hospital stay. The waste is enormous. I had hopes that EMRs would dent that, but alas, it seems not. I agree Paul. The definition of “waste” is elusive, but I think we all know that of the 30%, at least half could be eliminated.

  24. Re: ” Claims expense is driven by rates of use of services.” Agreed, and mostly agree with your 4 points. But this list misses a key element: the rates of use of services is hugely wasteful, as too many services provide no benefit, marginal benefit and even harm. Rand estimates 30%, Nortin Hadler estimates up to 50%. Patients are by and large checked out, as many pay little or nothing and they assume if the doc/hospital system suggests a test or procedure it is a signal of benevolent caring…..alas, that too often is not the case.

  25. “Underfunded high risk pools are certainly not a good solution – and for this reason ACA supporters are often unimpressed by this as a solution to rising premiums.”

    That is their history. They were underfunded in most states, and so expensive in some that they were not affordable. Also, IIRC, a majority of them or at least a large minority had a 6-12 month waiting period until pre-existing conditions were covered.


  26. The service utilization problem may be on the way to partly resolving itself. The incidence of smoking in the U.S. is down drastically from 30-40 years ago thanks, in part, to high cigarette taxes. Soda consumption seems to be in secular decline, organic food is on the rise, and so is prepared food with fresh ingredients at the expense of less healthy packaged foods. I have no idea how long these positive trends should take to show up in improved population health to drive down per capita utilization of healthcare services.

    It is unfortunate that obesity rates in the U.S. are now about double what they were as recently as 30-35 years ago. I attribute that to a combination of bigger portion sizes and the proliferation of fast food restaurants. Since actual food costs are only about one-third of revenue for most restaurants, it’s not hard to increase portion sizes to offset rising labor costs in order to sustain the perception of value to keep customers coming in. Requiring restaurants, at least the larger chains, to post calorie information is a step in the right direction..

  27. David and Craig: Outstanding article. It is astonishing how little politicians and even most “advisors” know about the basics of health insurance. The pre-ex is just one such item. David, I know you know about Rhode Island. As I recall, my former law firm hired you as an expert in a healthcare anti-trust matter while I was running BCBSRI. In RI, BCBSRI voluntarily stopped using a pre-ex in the 90’s. It just plain got to be too much trouble, spawning litigation and bad press; and the pain wasn’t worth it. Instead we used a limited open enrollment period with medical underwriting to determine premiums in the individual market. While there were always complaints, it seemed to work well, but it helped that back then (before 2010 or so), we were the only insurer in that market in RI. We used a Pool A and B approach for the medical underwriting with significant differences in premium; and then we softened the actuarial slope for age differences, making it a little easier on the 55-65 group, but not enough to scare off the 26-35 group. Balancing act, but it worked. One of my children (perfect health) had a $95/month premium (this is before any type of subsidies), and another of my children who had a significant pre-ex, paid (or Daddy paid) $350/month.

    You seem to acknowledge the futility of using pre ex’s; and seek other ways to resolve the issue, but it always comes down to WHO pays. General taxes (high risk pools subsidized heavily by state or federal government) is a cop out: the easy way out that blunts making the important choices. But you make a good point that it removes some bad incentives/decisions from the individual market.

    Of course a strong mandate is essential, and the Republicans shot themselves in the head when they made that their rallying cry. Back in the Nixon era, Republicans backed strong mandates, but it was sheer game playing over the last five years that made them vehemently flip flop and oppose mandates. If it was in Obamacare, it was bad according to most Republicans. Of course that is arrant nonsense. Now they can’t back down on that very public platform point, and an individual market w/o both pre ex’s and a strong mandate doesn’t work for the reasons you stated.

    It always comes back to four things in insurance:

    1. Insurance premiums are driven by claims expense (at least 80-90% depending on the market);
    2. Claims expense is driven by rates of use of services. Our myopic focus on fees is misguided and divisive;
    3. Rates of use of services are driven by chronic illness (5% of subscribers account for 55% of claims expense and they are mostly the chronically ill); and
    4. Chronic illness is driven by unhealthy life styles.

    We cannot avoid these truths, but no one in media or politics wants to tackle rates of use of services. Sounds too much like rationing. I say reduce the NEED for services; don’t ration. Back to basics. Do it the old fashioned way of becoming healthier and needing fewer services. Sigh.

    It’s always been about the cost of healthcare and always will be.

    But that’s a subject for another day. Great perspective and great article guys. Of course, I’m biased.

  28. I think I missed the paragraph where the authors mention that a simple way to prevent the free-rider problem is to require (mandate) participation. If we are going to act under the assumption that everyone has a right to health care, then it seems to me we should act under the assumption that everyone is required to participate in the financing of health care.

    I don’t get to claim that I am a pacifist, that I don’t want to participate in supporting war machinery, and that therefore I don’t have to pay taxes for that. Or that I don’t drive a car, so my taxes should be reduced. Or that I have no children to be educated, so I needn’t support schools. We don’t talk about ‘free riders’ who pay less in taxes and then have to start paying the full amount when their first child is school age.

  29. Stated in the alternative (1-p), if I have an 80% chance of NOT have a $50k UTIL each year, then my summary 5-yr “conjunctive probability” of going 5 years without a problem is 0.8^5 = 0.327 (~33%).

    This is just a variant of the sequential “fair coin toss” stuff (independent events).

    Saying “20% over 5 years” seems to not equate to “20% per year.”

    On a lighter note, I once wrote and recorded a song about “Free Riders.”


  30. It’s unfortunate that the history of high risk pools prior to the ACA is abysmal. Politicians viewed their cost as too much money to spend on two few people many of whom are too sick to even vote and there are lots of other worthwhile priorities, both public and private that need and deserve funding.

    I’m most attracted to the idea of reinsurance partly because the cost is less visible to the individuals who ultimately benefit from access to health insurance that they wouldn’t otherwise be able to access. Setting the attachment point beyond which reinsurance would kick in is, in the end, a political decision based on reaching a targeted price level at which premiums would be affordable for most people. For example, if insurers wanted to target a premium of $300 per month for a 40 year old person, $100 per month for someone in their early 20’s, and $500 per month for someone in their early 60’s, the attachment point would have to be …?

    At the same time, we need subsidies to help people buy health insurance who may not be able to afford it on their own even if they’re healthy enough to pass medical underwriting. I like the concept of a sliding scale that would peg premiums at zero if modified adjusted gross income is 100% of the FPL or less, perhaps 5% of MAGI at 250% of the FPL and 10% of MAGI at 400% of the FPL or higher.

    Both of these concepts would be expensive to fund whether the tax dollars come from the states or the feds of a combination of both. It will be a mighty tough sell. It would be helpful if we also developed some useful strategies to attack underlying healthcare costs but that’s a whole separate discussion.

  31. I get your broad point, but, a question regarding your math:

    “Suppose there are 100 people who each have a 20 percent chance of incurring a $50,000 medical bill at some point in the next five years…”

    At some point in the NEXT 5 YEARS?

    Followed by

    “In expectation, 20 people will be sick each year…”

    So, “20% EACH year” will (randomly?) be afflicted (as you’ve stated), or once across the 5 year frame of your proffered model?

    Which is it? I’m having a recursive summational “contingent probability” problem here. I’m just dense today.

Leave a Reply

Your email address will not be published. Required fields are marked *