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Pre-Existing Conditions and Fire Insurance

When it comes to health care, I continue to be amazed at the utter nonsense that gets tossed about when the discussion comes to insuring pre-existing conditions. The problem seems to be that no one who understands insurance has anything to say about health care legislation, because the question of why you may not want to guarantee issuance of insurance at a given rate no matter what pre-existing conditions the patient has is really not hard to understand. Consider this little vignette:

Caller: Hi, I’d like to buy some home insurance, please.

Agent: Sure, I’d be happy to help with that.

Caller: Does the insurance cover loss from fire?

Agent: Of course. That’s just one of many coverages you get with our insurance. Can you tell me a little bit about your house?

Caller: It’s three bedrooms, two baths. Worth about $300,000. What will the insurance cost me?

Agent: It depends on a few more pieces of information I have to gather from you, but about <pause> $800 per year.

Caller: That sounds great. Sign me up. Do you need my credit card?

Agent (laughing): Just a moment, sir! I need to get more information to give you an accurate quote. Can you tell me about the condition of your home?

Caller: You mean, right now?

Agent: Um…yes.

Caller: It’s on fire.

Agent: Your house is on fire?

Caller: Yep. Can we speed this up a bit?

Agent: Sir, we can’t insure your house against fire if it’s already on fire!

Caller: Why not? Just because it’s a condition that existed prior to my call?

Agent: Well, yes.

Caller: That’s outrageous! I demand you issue me insurance!

Agent (after conferring with management): Sir, it turns out we can offer you insurance on your home…

Caller: See? I knew you could be reasonable.

Agent: …for $350,000.

See, here’s the thing. Insurance is based on the principle of distributing money in a pool of similar risks from insureds who don’t experience the insurable event to those who do experience the insurable event. If someone enters the pool who has already had the insurable event, it’s simply a transfer – there’s no insurance. Person A needs $100,000 in surgeries, and gets an insurance policy that costs $1,000. Where does the rest of the money come from? It doesn’t come from the insurance company, and I think perhaps people don’t understand that point (and Republicans are truly abysmal at explaining it). The rest of the money comes from other insureds. Consider this situation: rather than get private insurance, you and twenty of your fraternity brothers from college – all about the same age and health – decide to form your own mutual insurance network. Everyone agrees that if anyone gets sick, the whole group will pitch in equally to pay the medical bills of the sick person. Now, suppose one person says “can we take my mom in as well? She has early-onset dementia and was just diagnosed with lung cancer. She’d be glad to join the group and pay an equal share, because fair is fair!” Do you think it is fair that mom pays the same amount?

The insurance company makes money if the money they pay out is less than the money they take in, but they also stand to lose if they underwrite the risks poorly and pay out more than they take in. And insurance companies don’t systematically rip people off by underwriting policies super-conservatively. In fact, the evidence seems to be that insurance companies rather frequently fall prey to pressures to move more product, and underwrite policies too aggressively.

The social-justice question can be separated from the health care insurance question. If you feel that everyone should have their medical bills covered, no matter what, then create a federal umbrella program for high-risk insureds and pay for that program with taxpayer funds. That’s explicit: let the cost of health insurance cover the actual cost of health insurance, which involves conditions the risk pool doesn’t have yet, and represent the welfare or charity – because that’s what it is, of course, when others pick up the expense of those unable to pay – as exactly that. After all, the federal government offers flood insurance to landowners who can’t get insurance at a “reasonable price” because the land floods all the time; that is a similar welfare situation in which taxpayers have decided they are willing to foot the bill because it’s a social good that people live or build on the flood plain. (I’m not sure why, but that’s the import of the federal flood insurance program). So there’s precedent for the government taking over pools that are too risky for private markets.

Again, this isn’t rocket science and it isn’t hard to explain. Why doesn’t someone get on television and explain it? How about a commercial using my script?

Categories: ACA, Analogy, Good One, Insurance, Rant
  1. May 4, 2017 at 3:41 pm

    Anyone who works in journalism – as I used to – knows that they can lose their job any day, and along with that, eventually, health insurance. It’s not like the person voluntarily withdrew from the insurance pool. And I suspect many employers will simply stop providing insurance under this new law. And so you’ll have new people entering the insurance marketplace and some of them will have pre-existing conditions. When I turn 65, I’ll get Medicare and they’ll be no question of pre-existing conditions. So maybe you’re right a federal program is needed, or maybe just a single-payer system.

    • May 4, 2017 at 3:43 pm

      …or, make the insurance portable, so you don’t have to withdraw from the pool!

    • Mike
      May 4, 2017 at 4:28 pm

      tips, can you demonstrate that is how the new bill would work? It is my understanding the targeted audience is just as Michael outlined; that is, the person who games the system. It is not set up as a punishment those who lose their coverage through a job loss and then within a reasonable timeframe, go out and get individual coverage.

      • May 5, 2017 at 6:44 am

        Mike, the original GOP bill got rid of the insurance mandate, requiring everyone to buy insurance. But it allowed insurers to impose a 30% surcharge on the premiums of those who let their coverage lapse for at least 63 days. That would keep people from gaming the system. The new plan, just passed, lets states get waivers that would allow carriers to set premiums based on a person’s medical background instead of a general age pool (like your employer plan or Medicare). In other words, much, much, much higher costs for pre-existing conditions, and some of that cost will be subsidized by the federal government. But how much?

      • May 5, 2017 at 7:52 am

        OK, but now we’re having an intelligent and clear discussion about social justice – how much should taxpayers pay to make sure people with pre-existing conditions are covered? That’s a discussion worth having, but it shouldn’t be hidden since it’s really the key argument about how we legislate the health care system. Note again that if you make coverages portable, then after someone obtains health care for the first time there will never be a “pre-existing conditions” problem unless someone actively lets the insurance lapse…in which case, I think it’s easier to argue that it’s their responsibility (ok, maybe it lapses because they were unemployed? In that case add a small federal subsidy to the unemployment insurance system to keep that from happening for all but the chronically unemployed, who then end up in the Medicare/government risk pool).

        These aren’t impossible issues, but they’re impossible if we don’t address them clearly. The suspicious person in me thinks maybe these things are obfuscated because the people who want single-payer DON’T want to discuss these things clearly because they don’t want the taxpayers’ real answer.

  2. Eric
    May 4, 2017 at 4:27 pm

    everybody understands this. the problem isn’t that they don’t understand it. the problem is that its outside of the bounds of reasonable discussion to say what the obvious consequence of this is: health “insurance” is being used to solve a problem that insurance was never suitable for solving: what do you do about people who fall out of the pool through no fault of their own or who couldn’t afford to get into the pool before they got sick.

    If your answer is: tough noogies for them. Then fine. All you say above is right. But if you think that the problem needs a solution, and you think single payer is beyond the pale, then you have to play along with the fiction that the product you are selling is insurance.

    And by the way, there’s another fiction, which is that there’s private health insurance on the one hand, and government assisstance (or charity, as you call it.). How many people did you know, prior to ACA, that had half way decent health insurance that they bought themselves? I knew few. Good health insurance is almost always group insurance that you get as a work benefit. But that’s a way of employers paying you tax free. If you combine that with the comment “tipswatch” made above, its pretty clear why corporations like it this way: rather than the goverment paying my healthcare, they pay my employer to pay my healthcare.

    • Mike
      May 4, 2017 at 4:43 pm

      Eric, my wife and I had individual policies, and they were fantastic. I was even in the state supported high risk pool for awhile. Along came Obamacare, and we were forced into the market place policies. The premiums skyrocketed, while deductibles increased dramatically. Individual policy holders are pretty much the only group of insureds that have to bear the brunt of Obamacare, a group of only around 15 million people. As you noted, those getting group coverage through their work are still sailing along nicely, as the prior administration gutted the provisions of Obamacare that were intended to tax and restrict the fringe benefits associated with employer provided healthcare. Had the burden of Obamacare been more equitably spread, to include government workers and those on employer provided plans, there would be a much greater cry for fixing the mess than what we’re seeing currently.

      • Eric
        May 12, 2017 at 9:39 am

        possibly. or maybe if it had been spread more equitably it would have been much less onerous and people would have accepted the responsibility of paying for the least fortunate. but we’ll never know because we have a crappy political system and crappy journalism. (good blogs excepted.)

  3. Bruce Stratton
    May 4, 2017 at 5:56 pm

    Hi Michael:

    Please send future submissions to editors@safehaven.com. I have sold the site and am just helping out until the new owners get acclimatized.

    “One of our long time editorial partners, OIlprice.com has taken over the running of the site. Nothing will change at all as they are looking to continue publishing contributor content. But going forwards you should receive even more exposure as Safehaven will be added to their distribution network which includes Yahoo Finance, USA Today, CNN Money and many other news outlets. I’m sure you will be delighted with the extra exposure your pieces will receive and the increased traffic to your site.”

    A sincere thank-you for all your support in the past!

    Regards, Bruce

  4. Margo
    May 4, 2017 at 6:09 pm

    Do you think anything involving the government is reasonable?  Now I know you know better….

    From: E-piphany Reply-To: E-piphany Date: Thursday, May 4, 2017 at 4:11 PM To: Subject: [New post] Pre-Existing Conditions and Fire Insurance

    Michael Ashton posted: “When it comes to health care, I continue to be amazed at the utter nonsense that gets tossed about when the discussion comes to insuring pre-existing conditions. The problem seems to be that no one who understands insurance has anything to say about healt”

  5. Marie
    May 5, 2017 at 7:33 am

    Very clear and concise as usual. Aside from the social justice of caring for all citizens, there is a financial impact to making insurance out of reach for those with pre-existing conditions. Unable to get treatment for preventable or easily managed diseases, they often arrive in the emergency room with severe problems, e.g. stroke from untreated blood pressure. Hospitals cannot absorb all the burden of indigent care, so costs are distributed as higher charges for the insured population. And if they become disabled, taxpayers are footing the bill. Only the insurance companies benefit from excluding pre-existing conditions, not their customers.

  6. CharlesD
    May 22, 2017 at 8:28 pm

    Wonderful essay! Just noting the distinction between health care and health insurance now makes me sound smart! Thanks.

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