One of the ongoing factors in the Health Care battle in congress is the issue of pre-existing conditions (PECs). It’s one of those issues where it is hard to strike a compromise that is fair to both consumers that have PECs and the insurance companies (and, by extension, their customers).

On the other hand, if all pre-existing conditions are covered no matter what, there is little incentive to get health insurance until you need it and an incentive to get something high-deductable until you need an insurer that’s going to cover whatever it is that ails you. Some, such as Megan McArdle, argue that this is not really such an issue, but I would expect it to become a much larger one as people get accustomed to the idea that they cannot be denied insurance due to a PEC. As it stands, I know someone that was uninsured, needed surgery, and cheated a single-issue insurance company by not disclosing it.

On the one hand, if PECs are never covered, people who happen to get sick while ininsured are forever locked out of the system even if they’re uninsured for brief periods of time. Or even if you were insured at the time, but for one reason or another have to switch insurance carriers. Further, PECs are frequently used by insurance companies for the sake of rescission.

Rescission, for those of you that don’t know, is when a policy is retroactive vacated. Insurance companies claim to do this when a customer was not up-front about a PEC. The problem is that some of the PECs used to vacate policies are things that a customer doesn’t even know about or that does not strike someone as significant (particularly if it’s something that hasn’t come around in a while). For instance, someone with a family history of heart illness or that had an irregular heartbeat in 2003 could find his policy vacated in 2009 when the insurance company finds out and argues that it needed to be informed.

The current balance that has been struck is that as long as one has maintained consistent coverage without a lapse over 30/60/90 days, they cannot be denied coverage on the basis of a PEC. State laws vary as to what length of lapse is acceptable and how long PEC coverage can be denied. In Cascadia, you have to have a lapse for greater than 60 days or so and if you have one they can deny you for up to 12-18 months. Further, rescission is generally only available to single-issue policy holders. In other words, you generally are not cut lose when covered through your employer.

This strikes me as a not-unreasonable balance, though I’m not sure it’s sufficient or proportional.

To take an example from the Truman-Himmelreich household, there was a snafu in the paper work for Clancy’s COBRA coverage* that lead us to find out, more than 60 days after coverage lapsed, that she had not been covered. So by default, we’ve already got a lapse that prevents anything pre-existing from being covered for a year. And I believe Cascadia is the most generous state I’ve lived in as far as this goes. I don’t believe Delosians are similarly protected, though I could be wrong about that.

As mentioned above, you generally have to have some sort of penalty for people that let coverage lapse during health, but the difference between enrolling in 70 days and enrolling in 59 days should not be that dire. A more fair approach would be to say something like “PEC do not have to be covered for whatever time period one was uninsured.” So we would not have any PEC coverage for 70 days. That seems fair to me. We would not have an incentive to wait as long as we wanted until we needed it since the longer we waited the longer it would be before we were completely covered. As it stands, we would have to wait nearly as long (within six months, anyway) as someone that went five years without coverage.

Rescission is a tricker issue. On one hand, insurance companies ought to be able to deny people that cheat the system. People should not be able to do what my friend did. The law didn’t stop him, but that’s only because the insurance company did not know. Meanwhile, however, insurance companies have picked up the practice of taking someone’s money until they suddenly have need of the services offered and only after that investigating someone’s application form and finding some (alleged) discrepency.

If an insurance company is collecting someone’s money, they ought to be relatively assured that they have coverage. Only those cases where insurance companies have reason to believe that fraud is involved should they be able to rescind. Insurance companies say that’s what they’re doing now, but frankly I do not believe them. They have too much financial incentive to do otherwise.

My proposed solution to that would be similar to the previous. Once an insurance company has been collecting premiums for a specified period of time (I’m inclined to say six month or a year), they should not be able to rescind a policy. Someone that hasn’t made any substantial claims in a year but continues to pay their premiums has demonstrated a degree of good faith. Someone that needs knee surgery is not going to pay $300-800 a month for a year just to collect benefits. Someone that is at risk of a heart condition didn’t start buying insurance with the plan of having a heart attack in a year’s time.

Now, both of these cases would have an exclusion for outright fraud. The difference between that and now is that the insurance company would have to prove that any reasonable person would know that a PEC was relevant. In other words, a heart attack a year before the policy could be considered fraud, but a heart murmur four years prior would not. A pack-a-day smoker that does not disclose his habit would be game, but family history that may have escaped their mind would not. Beyond that, the insurance company has the option of paying for (or splitting the cost of) a complete physical rather than not worried about it until it suddenly becomes very convenient to do so.

The other issue at play is that as medical records become more electronic, it’ll become harder and harder for people to knowingly (or unknowingly) hide PECs. There are questions as to what the insurance companies should and should not have access to versus the right of doctor-patient privilege, though it could well be that a compromise could become that if a person submits all of their medical records that there can be absolutely no rescission. Right now it’s not easy to collect that information, but it’s one of those things that (for better or worse) is going to become a lot easier in the coming decades.

* – For those of you that don’t know about COBRA, it’s a pseudo-mandate by the government that requires insurance companies not to drop coverage if you lose your job. What happens is that you get COBRA paperwork after you lose your job (for any reason excluding malfeasance) and if you respond within 60 days and pay the bill, you’re retroactively covered.

The downside is that you have to foot the bill that your employer previously footed. In a case like mine, that’s diddly. But when employers are actually generous with their benefits, you can see your premiums jump three-fold or more, as was the case with Clancy. The other downside is that since COBRA was something that was thrust upon them by the government and the policy-holder’s employer, it’s not something that they’re excited about and it’s frequently the case that they don’t want your business.

On the other hand, President Obama’s stimulus package included a provision wherein the government will pick up 65% of the tab. For people like me, that means that COBRA is cheaper than penny-pinching employer-provided health care. For people that have more generous benefits like Clancy, though, it’s still going to cost more.


Category: Hospital, Statehouse

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18 Responses to Pre-Existing Conundrims

  1. trumwill says:

    Ordinarily, Hit Coffee tries to steer clear of partisan political issues. I may mention my political views, but I will rarely outline a case as to why I think I am right. The only counter-examples are issues where there is no clear right-left divide or where neither political party is proposing what I have to say.

    Health care is a partisan issue. Right now, congress is voting on a huge overhaul of our system. I know that on numerous fronts, including health care, many of you are very skeptical of our president, his party, and congressional leadership. That’s fine. But this post is not about Obama’s plan and what it will or will not do. Nor is it about how Democrats want to nationalize health care nor about how Republicans and Libertarians want a cut-throat society where people are dying on the streets for lack of affordable health care.

    Rather, this is an approach to a single aspect of our health care system. The laws making their way through congress are seeking to address the issue, and there are countless places where you are free to discuss in the ins and outs of his plan. I would make HC one of those places, but I’ve found that for the most part people that are critical of the president generally believe the plan is terrible and those that are generally supportive of the president view whatever the plan of the day is as being worthy of every reasonable person’s support. Everyone has a right to their view, but I find the conversations that typically ensue from partisan disagreement to be exhausting and non-productive.

    So please keep that in mind before commenting.

  2. PeterW says:

    I think that the PEC issue is more about feeling good about punishing mean people than about ensuring affordable coverage. As you correctly point out, not allowing insurance companies to charge risky patients more leads to adverse selection in which the only people with insurance are the very ill, and premiums spiral skyward as the below-average risks drop out. (In today’s regulation-happy environment, no doubt government will then start setting ceilings on premia and insurance companies will go out of business, perhaps replaced by The Public Option.)

    If you really cared only about the plight of the ill, it would be much more straightforward to subsidize healthcare once the patient is spending above a certain (high) ceiling. But this is one of those Hanson/Cowen cases where politics is not just about attaining a policy goal, but about expressing your wish to punish the mean faceless insurance companies.

  3. trumwill says:

    PW,

    If I had an iota of trust of insurance companies, I would not be so worried about their penalizing people that go without insurance until they need someone to pick up the tab. But just as you have to worry about such freeloaders, you also have to worry about insurance companies doing take-backs as soon as someone needs the insurance they thought that they had been buying over the last six months. I try to be as fair-minded as I can about big business, but health insurance companies are among the least-trustworthy businesses that I have ever done business with.

    Perhaps, in an environment in which we could choose between health insurance companies and they would have their reputation to sell off of, I might view it differently. Despite my problems with my auto insurance company, I don’t have the same distrust of that industry because I know I have options if I keep hearing bad things about my carrier. As it stands now, those that have to buy individual policies are such a small segment of the market and so filled with people with few options, it doesn’t seem as important to them as it does to other types of insurance companies.

    Anyway, I can’t really go on without getting into a giant discussion about what I think we should do about health care in this country, and that’s a discussion that really can’t be had without going into the areas mentioned in my first comment that are fraught with peril. Suffice it to say, we can do a lot better than what we’ve been doing and I think we can do better than the sorts of things that have been proposed by the White House and congress.

  4. trumwill says:

    I guess the point I am making is that it’s one thing to penalize people that skated by without insurance until they needed it, but what’s going on now is something different. A 70-day lapse in coverage simply does not justify 12-18 months without PEC support. Particularly when PEC can be so broadly defined.

    As it stands now, if Jack is insured, has a heart murmur, goes three months without insurance for one reason or another, and then six months in to a new policy needs heart medication… he can’t get it. Not because he was trying to cheat the system but because he went a couple months without insurance. That’s not a proportional response to his temporary lack of coverage for whatever reason. The fact that the insurance companies are completely prepared to act like it is would be another reason I don’t believe they’re acting entirely in good faith. Instead, they simply see a way that they can collect premiums and then stand a pretty chance of denying future claims in the event that they need to pay out.

    I was actually pondering this post before our own COBRA mishap, but it may well be the fact that we were almost left in the cold may have pushed me over the edge on writing it. I shouldn’t have had to drive to the company’s corporate headquarters on a day that we were leaving town in order to avoid being a PEC “deadbeat”.

  5. web says:

    As far as PEC is concerned – sorry, no sale. You shouldn’t be allowed to be turned down for having a PEC. I’ll allow for some leeway on the idea of increased premiums, but not to the level of “well fuck I can’t afford that” either.

    I say this having now lived in two states where a lapse of even one day of coverage means that my PEC, however benign it is, isn’t covered, and living in a world where the dishonest “insurance” companies will insist that every other thing that might happen to me, up to and including any injuries I might take if I were in a car accident, were somehow “related” to the “not covered” PEC. I also say this having watched the dishonest “insurance” companies do precisely that to relatives of mine.

    If I had an iota of trust of insurance companies

    That is precisely the problem. The insurance companies, for over two decades now, have proven themselves unworthy of trust.

  6. trumwill says:

    What do you propose to do about cases where people go completely without insurance until they come down with something? Adverse selection has the potential to be a real problem if people are free to wait until they’re sick to buy insurance. The only really good counterargument I can think of is that people will buy insurance in case of an accident or in case they come down with something really quickly. Not sure how true that is, though. I know that I would be willing to go quite a bit longer without insurance if I knew that I could get insurance whenever I saw something coming down the pipe.

    I think that there has to be a balance. And I think a balance is possible. Being uninsured for one day should not preclude PEC for any substantive period, but being uninsured for six months should. That’s why I like my system of basing the no-PEC period based on how long you were previously uninsured. It prevents my friend from scamming the system, but does not prevent me from getting reasonable insurance if I accidentally let things lapse for a couple months.

    Another idea may be that if someone was insured when the pre-existing condition was discovered then it doesn’t fall under PEC because t’s less likely that they suddenly got insurance because they knew they would need surgery. On the other hand, if something comes and goes (cancer that goes into remission) someone could buy insurance only when it becomes a problem. In that vein, I suppose that under my plan it’s possible that someone buy insurance one month out of three so that they can get insurance that covers any new problem within two months, but I think you can settle that with contracts (you sign a six-month contract for health care and if you break that contract they won’t insure you again for a year). Or maybe the no-PEC period could be designated not by how long you’ve been without insurance at the time you sign on to the plan but instead how many months you’ve been uninsured within the last year.

  7. trumwill says:

    The only really good counterargument I can think of is that people will buy insurance in case of an accident or in case they come down with something really quickly.

    On further reflection, I am almost certain this is not the case. If PEC coverage was required, what you would likely see is a form of emergency health insurance, whereby in the case of an accident or sudden illness, you’re covered, but not for prolonged illness. The idea being that you can go to a traditional carrier for that (and they’d have to cover you!).

    I actually had a policy once that served this function. Basically, they had a non-renewal policy where they could fail to renew your policy every six months and it is almost certain that if you got cancer, they’d do just that. But if you got into a car accident, you’d be well covered up until that date. It was a near-worthless policy*, but would become a lot more valuable if PEC had to be covered.

    * – This is sort of topical. I got the insurance policy for one reason and one reason only: so that I wouldn’t have a coverage gap. Even though I had no real PEC at the time, but I did have asthma in junior high and who knew what they could attribute to that? The low-trust environment is a big part of the problem here.

  8. ecco says:

    Sorry, if this steps out of the bounds you mentioned earlier, but isn’t adverse selection easily solved by a mandate such as with car insurance. At least we’re all supposed to buy car insurance or at least that’s the intent in most of the states I’ve been in. The mandate would also improve the pools.

  9. trumwill says:

    Mandated coverage is a potential solution (and one that Washington is looking at), though it’s not as easily implemented. It’s easy to take away someone’s driving privileges for failure to pay for insurance. What do you do for someone that refuses to buy health insurance? Or can’t buy it? There are a lot of answers to that question, but none are simple as simple as taking away someone’s car keys.

  10. Brandon Berg says:

    What do you do for someone that refuses to buy health insurance?

    You garnish their wages, same as you do if they won’t pay their taxes. Which is pretty much what a mandate to buy something is: a tax. The major difference is that people actually pay their own fair share, unlike with income taxes, which force a small minority to subsidize the majority.

    Or can’t buy it?

    Obviously you can’t get blood from a turnip; you’d have to set some income floor below which people don’t have to buy health insurance. But they should still be required to make whatever contribution they can for any care they receive.

  11. Robert Reicg III says:

    -{This comment has been redacted by Trumwill. I would appreciate it, Robert, if you would honor my requests about not turning a discussion about one aspect of health care into a bromide on our health care proposals currently under consideration.}-

  12. trumwill says:

    Brandon,

    Garnish their wages and give them to whom? Who gets to be the default company? What gets to be the default plan? This sort of thing actually works with a Public Option. Or you can have a bidding war for who gets to be the default company, I suppose, but then you get into what kind of plan it should be and how much it would cost. This is actually something where a Public Option makes more sense, though that’s another can of worms (and I don’t want to get into it). But I’m looking for less ambitious solutions.

  13. rob says:

    For the lawyers who hangout here, are insurance companies and their employees immune to criminal prosecution?

    When anyone else signs a contract, has no intention of honoring it, and then violates it, we call that fraud. If a company is involved, people might get to go to prison for RICO violations. Sometimes, when committing a crime results in someone dying, the criminal is charged with felony murder.

    I have a feeling if a couple of insurance company CEOs got to spend the rest of their lives in federal prison for felony murder, the rest would start honoring the contracts really, really fast.

    Trumwill, is ‘conundrims’ a play on words I’m too dense to get, or just a typo?

    At the very least, insurance companies need to see a cost for dropping people. I would propose returning all premiums plus interest, credit card rates seem fair.

  14. Brandon Berg says:

    Will:
    I’m not opposed to a public option in principle, as long as it’s not subsidized, but I really don’t trust the government to leave it that way. It’s a sure bet that a bootleggers-and-baptists coalition would drive the price up by lobbying to have it cover every treatment and condition known to man, and then nobody would be able to afford it without a subsidy.

    So I think the best option would just be to fine people for not having health insurance, and treat it as regular tax revenues. Or maybe use it to partially reimburse hospitals for the treatment of people it can’t collect from. When people get tired of throwing their money away, they’ll buy insurance.

    Mind you, as a libertarian I’m not particularly keen on the idea of a mandate anyway. But it seems like the least of the evils, given that true laissez-faire is not politically viable. At least this way the government stays more or less out of the way, and it keeps redistribution to a minimum.

    I don’t know whether you remember this, but about a year ago an insurer’s group offered to stop taking pre-existing conditions into account in exchange for a mandate.

  15. Brandon Berg says:

    Actually, I guess the devil is in the details with respect to mandates, too. I’m told that a few states have essentially banned true insurance (i.e., the high-deductible kind where you pay for routine expenses out-of-pocket), requiring people to buy expensive low-deductible insurance. There’s a very real danger that a federal mandate would do exactly the same thing, again likely thanks to the efforts of a bootleggers-and-baptists coalition.

    The bottom line, I think, is that no government-based solution is going to work well. The political process just does not, as a rule, produce good policy.

  16. trumwill says:

    Rob,

    It’s a typo. For some reason spellcheck doesn’t work on the post title field.

    As far as fraud goes, it’s pretty hard to prove forethought. They don’t successfully challenge everybody’s claim even if they give it their best shot. If you could prove that they knew of the pre-existing condition but insured them anyway, though, that would apply. Tough to prove.

  17. trumwill says:

    Brandon,

    We’re veering into general health care policy, where I’d rather not go. Everybody’s got an opinion.

    Regarding different states, though, I know that my aforementioned worthless policy was prohibited in some states. The one I can remember is a notoriously goo-goo liberal midwestern state, so I assume that the sticking point is either the policy does not cover enough or they do not want insurers to be able to cancel policies every six months.

  18. David Alexander says:

    The only really good counterargument I can think of is that people will buy insurance in case of an accident or in case they come down with something really quickly.

    As others have noted, mandating insurance is key to preventing this from happening, but the Dutch skate around this problem by mandating that those who opt out of insurance must have what would be the equivalent of an American health savings account (HSA) in order to pay for health care expenses, and in case one wants to crawl back into the insurance market, one would have to turn over the assets in the HSA to buy into the insurance policy.

    Mind you, at the age of 26, thankfully my healthcare needs are relatively low, and what I’d end up paying in premiums per month would dwarf my healthcare spending for the year, so I’d like to have some degree of flexibility to opt out and have an HSA in lieu of paying $200 to $300 a month (from my current $900 wages) to pay for healthcare that I don’t need. At least with car insurance, I have the option of not buying a car and using public transit, car rentals/sharing, and biking to get around…

    a few states have essentially banned true insurance

    I’d like to see an approach with “true insurance” with high-deductibles and low premiums because they’re great on catastrophic care, and allow one to spend as needed for insurance, but they’re not viable options for those with chronic conditions that require frequent doctor visits for proper health maintenance, and I’d imagine some people with serious conditions would opt out of seeing the doctor because it isn’t covered. Plus, due to the discounted rates that doctors and hospitals provide to insurance companies and Medicaid/Medicare, the lost revenues are made up on those of us who pay cash…

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