Medical Underwriting: It’s Better than the Alternatives
Paul Krugman says the opposition to ObamaCare is conducting a campaign based on “blatant fear-mongering, unconstrained either by the facts or by any sense of decency.” The proponents’ case, by contrast, has been principled.
Hmmm…..Krugman and I must be listening to completely different sound bites. Over the past few weeks I can’t recall a single TV appearance by a proponent that did not involve an anecdotal horror story in which a hapless victim is abused by a mean insurance company. Is the purpose of these anecdotes to make us feel sympathy?… To get our checkbooks and make a contribution?… Or is the purpose to make us fear that we too could be abused?… In other words, to scare us??
[Interestingly, Krugman himself wrote a column only a few days earlier in which he based the entire argument for ObamaCare….on….on….you guessed it….a fear-mongering horror story! I’ll let readers decide whether the delivery was “unconstrained by facts or any sense of decency.” (David Henderson gives the rest of the story here.) Meanwhile, I predict that abuse of the sick by insurance companies will become more likely, not less likely under ObamaCare — a subject I’ll reserve for another day.]
Just how scared should we be? It’s been illegal to rescind a person’s insurance because of a change in health status since the passage of HIPAA in 1996. It’s also been illegal for any employer to discriminate against employees because of their health condition over the same period of time. So it’s only in the “individual market” (less than 10% of the total) that people get charged premiums which tend to reflect their expected health care costs.
Okay. So how well does the individual market work? Better than you might think. In his new book, Health Reform Without Side Effects (previously reviewed by me at the Health Affairs blog), Mark Pauly shows that the market works better than the health insurance exchanges ObamaCare would replace it with and better than the small group market that Obama would leave largely untouched. Moreover, with a few reasonable reforms, the individual market would work better still.
On My Own
Let’s briefly review the positive side of individual insurance:
Choice of benefit packages. Whereas in most small and even medium-sized businesses, employees have little, if any, choice of health insurance coverage, in the individual market people typically have a great deal of choice. This is important. If you want to persuade people to voluntarily insure, you’ve got a much better chance if you give them what they want.
Guaranteed renewability. Despite some well-publicized cases that have become fodder for political debate, individual insurance has historically been guaranteed renewable in the same rate class. This means the insurer cannot single you out either for cancellation or a rate increase because you happened to get sick. As noted, this has been a nationwide requirement under federal law ever since the passage of HIPAA. And, contrary to some misinformed rhetoric, people in the individual market are always in large pools and rate increases are the same for everybody in the pool.
The same is not true of group insurance, however. A small group is a self-contained group; and in most states insurers can increase rates (sometimes a lot) just because one employee had an expensive health problem. Moreover, group insurance is never guaranteed renewable for the employee. Once you leave your job, you ultimately leave your health plan as well.
Portability. Individually owned insurance travels with you on your journey through the labor market — both from job to job and when you leave and reenter the market. Except in a few isolated industries, group insurance is never portable.
More accurate entry prices. Because of health underwriting, premiums charged to new entrants tend to reflect expected health care costs. In most discussions this is treated as a disadvantage. And for the 1% to 4% of people with an expensive-to-treat, pre-existing condition, it is bad. (More on that below.) But to the other 96% of the population, more accurate pricing is a good thing. And it’s not just personally good for them. It’s also socially good. Inaccurate pricing creates perverse incentives. Those who are overcharged will underinsure, and perhaps not insure at all. Those who are undercharged will overinsure.
Community rating (and guaranteed issue), Pauly argues, is comparable to imposing an excise tax on the vast majority who are healthy in order to subsidize the few who are less healthy. No matter how desirable the goal, the method is wrong. Economic theory teaches that broad-based taxes are always superior to excise taxes; and in health care this lesson is particularly important because there are adverse social consequences of the decision of healthy people to stay uninsured. (Wherever community rating is imposed, it always seems to increase the number of uninsured.)
Okay, so what’s the downside of individual insurance? The complaints most often heard are that people with pre-existing conditions may face exclusions, waiting periods and even denial of coverage altogether. While Pauly acknowledges that individual families may find themselves in tragic circumstances (the kind President Obama has encouraged everyone to write to the White House about so they could be publicized), the dimensions of the problem are actually quite small.
For example, Pauly finds that “exclusions affect very few people and often have modest effects when they do.” Also, “in unregulated markets, waiting periods are rare and brief (if coverage is delayed, it is usually for only a month or so), but exclusions are common, though usually limited to two years or less.” As for denial of coverage, this is also overblown. According to one study, “Almost every potential buyer, even with a chronic condition, was eventually able to get an insurance offer if [he/she] persisted in searching among companies despite being rejected at the first application.”
What about the oft-heard complaint that high-cost patients get trapped in pools with escalating premiums? Turns out that “only about 15% of the higher cost of a chronic condition actually shows up in the higher premiums paid by people with such conditions in the individual market.” Individual insurance is not only portable across jobs; it appears to also be portable across health conditions as well.
Moreover, what problems there are in the individual market are more often than not exported from the group market because of the lack of portability there. It is probably fair to say that the defects of the group market get shifted to the individual market far more often than the other way around.
Another complaint is high administrative costs in the individual market, where only 65% to 75% of premiums are actually paid out in claims. By contrast, the comparable figure would be 95% for very large groups (10,000 employees or more).
One reason for high administrative costs is selling expenses — persuading people to buy. But where insurance is highly subsidized, selling expenses go down. With employer-provided insurance, for example, where the typical employee pays only 25% of costs, the takeup rate is about 90%. Pauly even raises the possibility that generous subsidies could pay for themselves (in terms of overall social cost) — which means that the decline in selling costs could more than offset the expense of the subsidy.
So what can be done to make the individual market work better? The most common proposals are disappointing:
- Online buying (touted by some on the political right) has lowered administrative costs and increased competition for some kinds of insurance, but for health insurance the gains appear very modest. (Underwriting and the exchange of information appear to be done largely offline on a personal basis.)
- Another idea often pushed by Republicans is voluntary buying associations; but these never last because healthier members eventually find they can do better by leaving the group.
- Health insurance exchanges (favored by the Obama Administration) usually come with price controls and regulations that undermine any potential benefits. Also, there is no evidence that administrative savings in Massachusetts are any lower than would have been produced by the subsidies alone.
Pauly has three suggestions that will have positive impact. First, individual insurance should be subsidized through the tax system. At a minimum, people buying their own insurance should get the same tax break employees get. A better approach is a fixed sum tax credit, along the lines suggested by Pauly and me some years ago in Health Affairs. Second, we need better functioning risk pools, and the need for such pools would be lessened if more insurance were guaranteed renewable (as it would be, for example, if employers could buy individually-owned insurance for their employees).
Finally, health insurance would be more attractive if people had more choices. One way to achieve that is to repeal mandated benefit laws, requiring insurers to cover providers, ranging from chiropractors to naturopaths, and services, ranging from in vitro fertilization to acupuncture. Alternatively (and although Pauly doesn’t advocate it), we could give people a choice of regulatory regimes by allowing them to buy insurance licensed in any of the 50 states.
Good post. Krugman is an idiot.
Fascinating. This post has made me realize how much of the White House argument for health reform is nothing more than scare-mongering and propaganda. In a very real sense, there has been no rational debate about the problems Congress thinks it is solving.
Let’s see, were going to take the market that is working better than any of the other markets and abolish it. That makes sense.
Medical underwriting is the most interesting aspect of health insurance. On the one hand, insurance is about managing risk, so you would want to underwrite based on health status. On the other hand, health status is somewhat random (minus the people who smoke/overeat), and at least some portion of health conditons are things that people cannot modify.
I definitely think that we shouldn’t be forced to purchase coverage for things like acupuncture or chiropractic work.
And in the end, medical underwriting does make the most sense.
However, in my own experience purchasing insurance on the individual market, I wonder sometimes how anybody gets insurance at all.
Individual insurance creates this odd incentive for me to not be treated for any health problems until they become really serious for fear that I won’t be able to afford my policy next year. It also creates incentives for me to do yearly wellness visits so that I have a history of “good checkups” to show next time I apply for insurance.
And I’m a healthy female, nonsmoker, under the age of 30. If I have to be that careful, how does someone who is 55 and 10 pounds overweight get private insurance?
John, great article. I hope the book isn’t a moot point by the time it comes out. What we needed were fewer restrictions on rating, more options for coverage and deductibles, more HSA/HRA plans, less reliance on employer sponsored plans, and more individual responsibility for day-to-day care. What we’re getting will be all the inefficiency and ineffectiveness of socialized medicine. Anybody who wants to know what’s coming should read your book “Lives at Risk.”
Excellent post, John.
Through the seven years that I have been helping groups and individuals find affordable health insurance plans in multiple states across the country, I have found that there are numerous advantages to owning a personal policy while one is healthy enough to qualify.
Other benefits (depending on your state and the carrier) not mentioned in this piece include:
1)generation to generation benefit–dependents may keep the same plan that they have been on with their parents (in many states this is already to age 26 by the way) and convert it to a personal policy without going back through underwriting. So even if they have a severe health issue, they can have insurance at standard rates.
2) newborns and adopted children may be added to the parents’ or sibling policy without underwriting within 31 days of the event just like group plans.
3) Virginia,
An insurance carrier cannot raise your rates on your personal policy due to your personal claims. Those rate increases are based on all the claims and potential risk of others your age in your state with that carrier. That is a security that you have in the individual market.
And there are more….
What hurts rates on individual policies is when they are forced to be guaranteed issue by the federal or state government. Insurance carriers can’t risk rate, so must assume that only the unhealthy will apply. Even when you mandate purchase, many of the healthy will choose to pay the fine. Imagine if a healthy 26-year-old and a hospitalized 85-year-old paid the same premium for life insurance. Who would buy it? For the same reason, exchanges also raise the rates of individual policies and reduce choice.
In a “free” market (as close as the private insurance industry can be to one given government regulation) with risk rating, such is allowed in states like MO and KS. Underwriting is liberal on HDHP and rates are great. Just wrote a policy for a 63-year-old female for $150 per month. Worst case scenario her total claims in the year could not exceed $5000 and then the carrier picks up all claims, including doctor visits, prescriptions, surgery, hospital, etc. A risk she and the insurance company are willing to take.
Great post and great comments. This is the sort of thing you don’t find anywhere else — unless John Goodman posts at some other blog.
Had to correct my sentence fragment: In a “free” market (as close as the private insurance industry can be to one given government regulation) with risk rating, such is allowed in states like MO and KS, underwriting is liberal on HDHP and rates are great. Just wrote a policy for a 63-year-old female for $150 per month. Worst case scenario her total claims in the year could not exceed $5000 and then the carrier picks up all claims, including doctor visits, prescriptions, surgery, hospital, etc. A risk she and the insurance company are willing to take.
John,
This healthcare deal has been a big disappointment for all of us and I hope it can get repealed before the employer mandates kick in. We need to show the public how this is going to directly impact their wallet. My idea would be when retailers give a customer their receipt after a purchase we would show what the customer really paid and what they will pay once the healthcare fees and taxes kick in.
For example a customer spends $11.42 buying a family meal at Popeyes which is the total which appears at the bottom of their receipt. I would suggest adding an additional line directly under that total which would say “With Healthcare Tax this same purchase will be $13.28”. If we could get retailers and service providers all doing this then all of the sudden the reality of the costs of this thing may sink in to the average person and even the poor will realize healthcare is not going to be free to them either.
What do you think?
Beverly,
Nice to know. I should beef up my insurance knowledge.
I’m amazed that you were able to underwrite a policy for a 60 year old woman for $150 a month. The impression that I got from my insurance search was that EVERYONE was a huge liability. Even though I have never had a major medical problems, and am a healthy, active, person, I had to fight a denial for coverage.
Thankfully I had enough medical information to be able to prove that I was healthy, but had I not kept such good records, I would have been out of luck. Furthmore, the reason I was denied was a simple clerical mistake, which would have been cleared up had they called me to clarify.
Even though Krugman seems to have no sense of humor himself, his columns actually can be quite funny, once you get over the nastiness of them.
I totally agree with you intro to this. President Obama has been the fear-mongerer in chief.
Virginia,
Other factors besides age: ht, wt, meds taken, health history and recent physical and lab results, state underwriting guidelines, carrier guidelines, plan selected.
Glad the clerical error was corrected and you were able to get coverage.
Here is my email: beverly@hsabenefitsconsulting.com Let me know if I can help you. no charge.
I agree with Bruce. Krugman is a complete idiot.
I have read several posts about mandated coverages lately. First there is a difference between mandated services and providers of those services. As a chiropractor, I provide competition for services already covered by insurance. We do not add cost, we add competition. There are a number of economic analyses supporting this fact. The care I provide is less expensive and has better patient outcomes. We provide the kind of competition which brings down cost and improves outcomes.
Many thanks for skewering Paul Krugman, my least favorite former economist For a deeper critique of the Novel laureate’s wrongheaded health-reform arguments, see “Who Was Paul Krugman” at http://www.hydeonhealthcare.com/paul-krugman-health-care-reform.html .
Stephen, thanks for that link. It provides more evidence that the guy is intellectually dishonest. Hard to believe he was once a real economist.
John,
Thanks for your insightful article. Thank you for coming to the defense of underwriting. Costs will escalate if insurers are forced to work in the dark. And folks will become increasingly disengaged from the risk of health issues.
We have an aging population and face a huge challenge.
Underwriting gives us the informaion necessary to achieve a complex level of understanding. It’s ssential for making the most of resources to meet the challenges ahead.
I agree with Bruce and Larry. Krugman is a complete idiot, and a shify one at that.
Janice, too bad the health insurance industry did not defend underwriting while the debate was going on. You have to go to the NCPA web site to find a defense that you basically cannot find anywhere else.
John,
Good one. Do not give Krugman and inch. He will self distruct.
John I have a recommendation for a book worth reading as a result of this post of yours. It is “What’s So Wrong with being absolutely right” by Judy Johnson. I really don’t think that reports of people who are having life threatening problem with health insurance compares with “killing people by death committees”. Sure I am a Canadian and biased. No question but that does not mean that I can not recognize extremes from either side.
Hi,
I’m trying to find a list of states which do not require medical underwriting. I’m searching for insurance brokers for a corporate health insurance plan.
Any help would be appreciated, as I am new to this space.
Rob, send me a private email and I will do what I can to help. BTW: most of the guaranteed issue states are in the Northeast.