The real reason health insurers won’t cover people with pre-existing conditions

http://www.slate.com/articles/business/the_dismal_science/2012/03/pre_existing_conditions_the_real_reason_insurers_won_t_cover_people_who_are_already_sick_.single.html

by newmediaclay • 14 years ago

19 61 14 years ago

slate.com

zyfo• 14 years ago

Isn't this common knowledge? I'm pretty sure this was something that was mention in a seminar on information asymmetry when I studied Microeconomics 101 a couple of years ago.

guan• 14 years ago

It's still an information asymmetry story. From my cursory reading, the contribution is to identify what kind of information asymmetry is involved in healthcare, namely that it's more about the cost of treatment than about the probability of illness.

I know that health insurance is often used to teach asymmetric information models, but it wasn't always obvious that it's a good example. Someone selling a used car might know a lot more about the car's hidden costs than anyone else, but does the typical buyer of health insurance really know more about his or her probability of illness than a sophisticated insurer with good doctors and actuaries and a lot of data?

This led some economists to argue that the problem in health insurance markets is not asymmetric information, but rather too much information—the insurer already knows you will be a bad risk. This research makes it clear that there really is asymmetric information and spells out what it is.

Loic• 14 years ago

Read the The Cartoon Introduction to Economics Volume One, page 50. Everything more or less is there.

ars2• 14 years ago

This article demonstrates a very common mistake: People think health insurance covers health bills.

It doesn't. It covers unexpected health bills, which is a very different thing.

Any type of situation that is expected to happen can not be covered by insurance, it needs to be covered by savings instead.

However many people want insurance premiums to be a type of forced savings plan, which is why there is such a huge argument in the US about health insurance.

Those opposed to government regulation want to handle the savings on their own. Those who like government regulation want it to force people to save for health care costs.

anonymoushn5• 14 years ago

I came here to say just this. In the United States, though, we use "Insurance" to refer to a very expensive form of prepaid health plan. We keep costs up by making laws that prevent employees from knowing how much their prepaid health plan costs. Just in case people might want to react to the high costs by not purchasing a plan, in the near future everyone in the U.S. will be required by law to purchase a prepaid health plan.

yuhong2• 14 years ago

They did limit the profit of the health care providers which happened to reduced lobbying.

tptacek15• 14 years ago

It's the nature of the social contract that we give up certain freedoms to gain the benefits of society; that's what contracts do: they bind us.

It's not hard to make a list of "freedoms" we're mostly happy that people give up: the "freedom" to drive 100mph through school zones, the "freedom" to sell patent medicines with Pfizer branding on it, the "freedom" to set tire fires on our lawns. Those "freedoms" are respectively outweighed by the cost of collisions, of medical fraud, and of toxic and repulsive clouds of smoke.

When societies adopt single-payer health care systems, they're expressing a judgement that the "freedom" to take individual control over how to finance health care at the lowest possible price is outweighed by the cost to society of the uncertainty of health care costs.

And, setting aside principle for a moment, your health & well being is in fact one of the most important uncertainties in your life. You could be hit by a bus tomorrow, or stricken with a disease that outstrips your ability to pay for care. With the exception of a tiny, tiny fraction of people in society, nobody can truly provide an assurance of their ability to provide for their own care. So, to bring the principle back into the picture: if you're ideologically opposed to single-payer or socialized or mandated health insurance, it would seem that you must also support the idea that people who can't pay for their care must be denied care.

There's a wide variety of pragmatic objections to single-payer insurance, many of which are probably valid. But if we're going to bring "freedom" and "choice" into the picture --- ideology, in other words --- we should be clear about what the tradeoffs are.

onemoreact2• 14 years ago

In the US the insurance companies also negotiate the costs with various heath care providers. It's possible to pay 6,000$ / year in premiums, never hit your deductible so the insurance company does not pay anything out of pocket and still save money.

bunderbunder4• 14 years ago

Last time I saw a hard figure on it, which was admittedly a long time ago, was while I was working at an immediate care clinic. Uninsured folks were getting billed roughly 170% what insured folks were thanks to these negotiated rates.

tptacek15• 14 years ago

Without sparking off a huge thread on free markets versus socialized medicine, the idea behind single payer health insurance is that nobody has to worry about "expected health bills", because everyone shares a giant risk pool in which uniformly low premiums end cover everyone by shifting expenses from people who do get sick to the (larger) pool of people who don't.

Part of the philosophical idea behind single payer is that people have minimal control over financially devastating illness and injury, and one thing society can do that individuals can't is allow everyone to share the risk, transforming a small probability of an untenable expense into a certain probability of a manageable expense.

You're right, and usefully so, to point out that private health insurance is treated like a utility instead of an insurance plan; knowing that also allows consumers to select high-deductible plans, and to take advantage of HSAs for tax-advantaged funding of the health care bills they do expect.

But single-payer insurance can handle both problems (routine billing and catastrophic coverage) coherently.

anarchotroll7• 14 years ago

Individuals can opt into an insurance plan. That's sharing risk.

What "society" (government) can do is force everyone to share THE SAME risks

single-payer insurance == monopoly

chernevik3• 14 years ago

Individuals can share risk, that's what insurance does.

The transformation of insurance into a savings scheme puts considerable distortion on that model. It becomes impossible to see what payment is for expected treatment, and what is for risk assignment. The model then encourages people to use more ("I've already paid for it") and to pay no attention to cost. And it encourages the attitude that any problem should be paid for. It's hard to exaggerate the impact of these effects on health care's crazy cost structures.

The real problem isn't people who are riskier, it's people who are costlier. Someone with a prior condition isn't a risk, they're a cost. Insisting they should have "access to insurance" is simply insisting on cost redistribution. The circumstances under which that cost redistribution is a good idea socially should be an entirely different question than the efficient structure of health care payments.

These concepts are deliberately obscured by the political rhetoric around "health insurance", precisely to obscure the cost shifting nature of the project and to create a sensibility that the problems is somehow the greed of financiers. (Obscuring the cost drivers is also a goal, it's a very large industry that employs a lot of people, many of whom, at many levels, stand to lose a good deal if the system were ever seriously rationalized.) It's a very effective rhetorical strategy, especially given the abstractions around risk, but it shouldn't be confused with an actual discussion of the economic problem.

jberryman• 14 years ago

> It doesn't. It covers unexpected health bills, which is a very different thing.

I see conservatives (not trying to label you) make this argument a lot, and I think it is a mischaracterization of 1) what most people mean by health insurance, and 2) what health insurance and health plans are really about: pooling risk and creating groups that can negotiate for lower prices.

Re. 1: just skim the wikipedia article for health insurance (http://en.wikipedia.org/wiki/Health_insurance); the distinction between health plans vs. what you mean by "health insurance" all gets rather confused.

tptacek15• 14 years ago

The conservative objection to single payer health insurance is that single payer may be a terrible way to achieve cost negotiation. In a system of guaranteed issue private insurance, people could tune their exposure to risk by selecting plans with greater or lower deductibles, and then use HSAs to set up a rolling facility for paying their day-to-day coverage costs.

The fundamentals of the system we're moving towards in the US is actually a conservative plan from the '90s: an exchange-based market for private health insurance coupled with guaranteed issue and a mandate for coverage. That plan was itself a response to the original liberal vision of universal health insurance: nationwide government-run single payer insurance.

joedev2• 14 years ago

I agree. You hear the phrase "I don't have healthcare" too often used when what the person really means is "I don't have insurance." If you live in a developed country, believe me, you have health care.

Not to be pedantic but I will stand on a soapbox for a moment: I'd also point out that we all have the ability to care for our health. Health care is a daily activity which requires no insurance, and often no cost.

crag• 14 years ago

"Any type of situation that is expected to happen can not be covered by insurance, it needs to be covered by savings instead."

Yeah right. Until you run out of money. Then what?

In your world, you die. Good for everyone, until it's you or someone you care about. Then, like everyone else, you off running to the SS office to apply for (Medicare) disability.

The whole point of insurance is to protect against risk. Else why have it at all?

anonymoushn5• 14 years ago

Insurance is for unexpected events. Paying for expected events using insurance is not a worthwhile thing to do because you must pay for the cost of care plus the cost of running the insurance company, which is more expensive than just paying for the cost of care. So, if someone is worried about running out of money due to foreseeable medical expenses, buying insurance to cover those foreseeable medical expenses will cause him or her to run out of money earlier.

sunsu2• 14 years ago

Great article! I just don't agree with the author's confidence in the "guiding hand of the government" in his conclusion. I would much rather have the freedom to purchase future options to buy healthcare rather than have my freedoms removed because the of the fear that the "average 20-year-old" may not have enough foresight to think about his/her future.

DanBC• 14 years ago

There's no reason they have to be exclusive. The UK has dual public / private provision of healthcare.

(Personally, I would never use private health care in the UK. I know people who have.)

anarchotroll7• 14 years ago

If you can opt out of public helthcare, then it is fine. But if you can opt out, I wouldn't call it "public" anymore.

If you can't opt out, then choosing private basically means paying for both.

tptacek15• 14 years ago

I read this yesterday and was unimpressed; it seems that the finding here is "adverse selection", which is more or less the classic canonical problem in insurance.

Did I miss something?

davidw2• 14 years ago

My read of it is that it's not just adverse selection, but a situation where instead of both parties having a vague idea of what their costs may be, one party now has a really good idea about their costs, and is therefore in a much better bargaining position.

tptacek15• 14 years ago

Sure; adverse selection and asymmetric information are two sides of the same coin.

FireBeyond• 14 years ago

Not so much that, to me - both parties have a great idea of what their costs might be, but the consumer has the critical information - "of the options open to me, which will I choose, if any?"

The "ignorance" is in "likelihood of utilization", not "cost of utilization".

dalke2• 14 years ago

You missed that this was describing research which shows adverse selection is a "at least partly" behind the problem. Without research, you're just hand-waving that it might be a problem, but you don't know if it's actually a significant influence.

Quoting from the article: Hendren didn’t invent the idea of markets falling apart because customers know something that companies don’t. Nobel prizes were awarded to a trio of economists in 2001 for developing this idea of adverse selection in the 1970s. But his use of the concept may at least partly resolve the puzzle of why those with pre-existing conditions can’t get insurance.

Another quote: This individual mandate is a natural fix to the problem of adverse selection in health insurance: It keeps the lowest-cost participants from opting out, and as a result the market doesn’t unravel.

tptacek15• 14 years ago

I think we're talking past each other. To make my review pithier: this is an article that could largely have been written from the Wikipedia article on "adverse selection".

RyanMcGreal2• 14 years ago

All the more reason to take economics out of it and provide health coverage via universal single payer insurance.

davidw2• 14 years ago

I'm pretty happy with the health care system here in Italy. It's so much less of a hassle than in the US: get sick? go to the doctor, no paperwork, no forms to fill out (which, in Italy, is really something of a minor miracle), but "economics" are always with us, because health care is a scarce good.

RyanMcGreal2• 14 years ago

> health care is a scarce good.

It's true that every health care system rations care. The difference is that a universal system rations based on medical need (triage) whereas a market system rations based on ability to pay.

drucken• 14 years ago

Extremely well-written article.

It also clearly demonstrates one of the reasons why markets alone are simply not sufficient/appropriate for some problems. The rest of the developed countries outside of the US have long understood this with respect to health care.

joedev2• 14 years ago

The entire concept of insurance is to share risk. (Egyptians had the bright idea to combine grain together onto shared barges so if one sinks, none of us loses our entire cargo.)

Risk carries an element of unpredictability. If a scenario is predictable, there is no risk to be shared, ergo by definition a scenario with little risk (e.g. known diagnosis and treatment plan) is absolutely and unsurprisingly not fitting for insurance.

tomx• 14 years ago

As a UKer, it strikes me the US system of health insurance is just inefficient, even if only from a time management perspective.

Do 300M people really have to negotiate their own insurance, and research carefully all the terms and conditions and so on?

anonymoushn5• 14 years ago

No, generally we have less than four options for insurance provided by our employer. When we are not employed, most of us cannot afford to carry insurance.

ars2• 14 years ago

Do 300M people really have to negotiate their own home purchases/rent? Or cable tv? Or car insurance? Or home/renters insurance?

Why do you single out health insurance?

anarchotroll7• 14 years ago

It just doesn't make any sense for a health insurer to cover people with pre-existing conditions. Insurance is all about risk; if you have a pre-existing conditions, there isn't a risk involved anymore, since you already know you have a problem (unless the provider doesn't cover anything that derives from that pre-existing condition which would also increase processing costs).

The real reason health insurers won’t cover people with pre-existing conditions

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