The Insurance Problem - Part II

In the case of the majority of Americans, the needed insurance reform is to ensure that they can keep their insurance in the case of job loss or a change in employer. Their health insurance needs to be portable. Reform should delink insurance and employment. But if insurance is not linked to employment, who will pay for it? And what happens to the ERISA exemption from expensive state mandated benefits? And most important, how will individuals be protected from preexisting conditions limitations and the threat or recession? In fact, if insurance is delinked from employment, won’t we be giving up all that is favorable in the current insurance of the majority of Americans? Let’s explore the issues by taking a look at individual insurance.

Individual health insurance is underwritten one person or one family at a time, much like you purchase homeowners or auto insurance. And, just like you can’t insure your house while it is on fire, you can’t get individual health insurance if you are already ill. Insurer’s use medical information to assess whether you are a “normal” risk as contemplated in the premiums you are to be charged. This is called Medical Underwriting. Standards and practices vary among insurers, but essentially, if you have a current medical condition, are taking medication or have been diagnosed, you may be uninsurable. In addition, insurers know that some applicants will not be honest when describing previous medical conditions and that some who claim to be normal risks know they are ill. Therefore it is common practice to examine claims, especially ones submitted shortly after a policy becomes effective, in an effort to determine if there was a “preexisting condition.” If the insurer believes they have found one, they may rescind the policy, usually returning premiums paid, but leaving the person uninsured. Medical Underwriting, preexisting conditions and recession are among the biggest issues in individual health insurance.

Delinking your health insurance from employment, and forcing you into the individual market doesn’t seem very attractive given the above discussion. But here’s a new take on how to solve the problem. John H. Cochrane writing in the August 14, 2009 edition of the “Wall Street Journal” suggests: “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….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.” See his full paper here (http://www.cato.org/pubs/pas/pa-633.pdf). Under Cochrane’s proposal insurance companies, rather than avoiding the sick, would compete to insure them. Combining his “insure your insurability” concept with a high deductible/HSA policy would eliminate the preexisting conditions issues with individually underwritten health insurance.