One of the most important factors in buying health insurance (either an individual or group policy) is whether the insured person has a \u201cpre-existing condition.\u201d Generally speaking, if you have a medical condition that has required medical attention\u2014and you still have it at the time that you apply for new insurance\u2014you\u2019re going to have some difficulty buying a standard policy.<\/p>\n
Why are pre-existing conditions such a big deal?<\/p>\n
Most policies limit or deny coverage for people with pre-existing health problems. Politically, this is a major issue; actuarially, it\u2019s just common sense. In the last year or two, the politics has been getting the better of the common sense. In this column, we\u2019ll consider the matter from both perspectives, so that you can understand how to make the best insurance-buying choice. Even if you have a pre-existing condition.<\/p>\n
It\u2019s a central tenet of free-market insurance that any person can buy coverage\u2014as long as that person is willing to pay high enough premiums and accept low enough coverage limits. If the premiums are too high and the coverage limits too low, a rational individual will choose to avoid health insurance and pay cash out-of-pocket for whatever (hopefully minor) medical expenses he or she incurs. This option not to buy overpriced health insurance coverage is an important signal to insurance companies about how effective their pricing models are. Take it away and prices tend to rise for everyone. Why? Because, when a healthy person chooses to opt out of the available health insurance marketplace, he or she leaves people who tend to be in worse health\u2014on average\u2014than in the pool of insureds. And, if many healthy people leave, a kind of negative critical mass occurs: So many sick people remain that they drive up claims costs sharply.<\/p>\n
Economists call this \u201cadverse selection.\u201d<\/p>\n
Some insurance experts argue that adverse selection causes insurance costs to rise so fast that no rational healthy consumer will ever buy available coverage. The only people left in the risk pool are those who expect to make claims greater than the premiums they pay. This leads to a counter-intuitive conclusion: If an insurance company can sign up a customer with a preexisting condition at an exorbitant premium, the insurance company probably doesn\u2019t<\/em> want that customer. Why? Because that customer has decided that the coverage he or she will receive in exchange for the seemingly-high premium will outweigh the seemingly-high cost. And will be inclined to make claims.<\/p>\n Some insurance experts have written that people with preexisting conditions \u201care better at predicting\u201d their future medical needs than healthy people who don\u2019t have as much experience in using health care services. But the federal government doesn\u2019t seem to believe this theory.<\/p>\n Currently, the Affordable Care Act (ACA) has established a government-run Pre-Existing Condition Insurance Plan (PCIP) that offers health insurance coverage to those denied coverage because of their conditions. The program\u2019s current financial status hints at the high costs that come from insuring people with histories of cancer, diabetes, heart attack, stroke, etc. The health care cost per participant in the PCIP is currently projected to be nearly $30,000 a year; this more than double what government actuaries projected when the ACA was passed into law.<\/p>\n Of course, the PCIP is merely a transitional program. By 2014, the ACA will prevent insurers from discriminating in any manner based on pre-existing conditions: by law, cancer victims and stroke survivors will be able to buy insurance at the same price as healthy applicants of the same age and gender.<\/p>\n In other words, under the ACA, all<\/em> people are required to buy government-approved health coverage. The healthy can\u2019t opt out; they have<\/em> to subsidize the sick.<\/p>\n This is the scheme\u2019s vaunted hedge against adverse selection\u2014the so-called \u201cindividual mandate.\u201d But this mandate blinds the health insurance marketplace to its critical pricing signals.<\/p>\n Suppose the Company X offers all insureds the a medical insurance policy for $10,000 per year, based on data showing that the annual medical costs of all insureds is about $8,000, on average. A consumer who expects his expenses to total just a few hundred dollars\u2014and there are some people who have such few and minor health problems\u2014won\u2019t sign up. The coverage isn\u2019t worth it.<\/p>\n But consumers who decide that they will use more than $10,000 in medical services each year will enroll.<\/p>\n Now, suppose that Company X researches loss histories for people who\u2019ve had cancer and concludes that its average annual medical expense for each of them is $15,000. On first glance, Company X should be able to charge an annual premium of $20,000 to people who\u2019ve had cancer and stay well ahead of the projected medical expenses. But things don\u2019t always work so logically. In fact, rising premiums often create a so-called \u201cdeath spiral.\u201d Each time Company X raises its premiums, it chases away more relatively-healthy people and attracts an increasingly expensive set of sick insureds.<\/p>\n Again, this is why the individual mandate is so important to the ACA\u2014if everyone is forced to buy health insurance, the healthy will end up paying in more money which funds the medical care provided to the sick.<\/p>\n The origins of the ACA\u2019s tools against adverse selection reach back almost 50 years. In December 1963, Stanford economist Kenneth Arrow published a paper in the American Economic Review<\/em> titled \u201cUncertainty and the Welfare Economics of Medical Care<\/a>.\u201d Arrow identified five principal \u201cdistortions\u201d in the market for health care insurance:<\/p>\n Arrow argued that the only good solution to these pricing problems was to force everyone to buy the same, basic coverage.<\/p>\n\n