The Actuarial Insanity of Health Insurance Reform

I realize that television journalists are required by the constraints of time to compress complex issues into one-sentence sound bites, but these oversimplifications can prove more than a little misleading. A prime example keeps coming up in the discussion of the health care insurance reforms being considered by Congress. I have heard more than one television reporter comment on “the health insurance companies’ practice of denying coverage to people with pre-existing conditions.”

The average listener cannot help but interpret that statement to mean that health insurance providers routinely deny coverage to all people with pre-existing conditions. This, however, is not the case.

On the contrary, the vast majority of people with pre-existing conditions are fully covered. This is because they obtain their health insurance through group plans provided by their employers. It is illegal to deny or delay coverage to a person with pre-existing conditions who enrolls in a group health insurance plan.

If the insurance companies can be said to have a general “practice,” it is to cover people with pre-existing conditions, not to exclude them.

Pre-existing conditions only come into play when a person seeks individual health insurance—often due to job loss, relocation, divorce, or death of a spouse. Even then, health insurance companies cannot deny coverage to people who have had “continuous coverage” as defined by the Health insurance Portability and Accountability Act (HIPPA). In addition, Medicaid and Medicare do not deny coverage to people with pre-existing conditions. That means the very young, the very old, and the very poor also are exempt from the threat of exclusion due to pre-existing conditions.

The only people who can be excluded from coverage for pre-existing conditions are those seeking individual health insurance who have not had continuous coverage. Yet the vast majority of these health insurance consumers are not denied health coverage, either. Rather, the coverage of the pre-existing condition is merely delayed for a waiting period. However, all other conditions are covered. For example, if a person has heart disease, he or she might have to pay out of pocket for heart medications and treatment for 12 to 18 months. Yet if that person becomes ill with the H1N1 flu, breaks a leg, or comes down with pneumonia, he or she is covered for those conditions.

So who, really, is denied coverage? Adults between the ages of 18 and 65 who make too much money to be covered by Medicaid, who are not eligible for group insurance, and who have a life-threatening diseases. Is this a shame? Yes. Is it common? No. Should it be addressed by Congress? Perhaps, but not by mandating coverage by private health insurance.

The foundation of all insurance—property insurance, life insurance, health insurance, etc.—is the concept of shared risk: a large number of people pay a relatively small amount of money to protect themselves against the unlikely but financially devastating cost of some kind of disaster—a home burning down, an untimely death, or a catastrophic illness. For private insurance to work, the amount of money the policyholders pay, the premium, cannot be an arbitrary number. Rather, the premium is calculated using actuarial science, which balances expected losses against expected earnings.

Requiring private health insurance companies to cover people with pre-existing conditions is an act of actuarial insanity. It forces to the health insurance providers to assume all the risk with no way of adequately sharing it. It would be like forcing car insurance companies to insure a motorist who just had an accident, and to pay for the accident. It would be like insuring a house after it has burned to the ground, or insuring a ship after it has sunk.

A better solution would be to leave actuarial integrity of private health insurance intact and have the government assume direct responsibility for the small number of people who actually are denied coverage because of serious pre-existing conditions. This will save private health insurance for the millions who benefit from it while extending help to the unfortunate few who cannot obtain coverage due to serious illnesses.