Insurance and Risk 101 blog
Insurance Risk, Preexisting Conditions and Adverse Selection under Health Care Reform
In light of the national health care reform law, the issues of mandated coverage and preexisting conditions, and what many say is either fair or unfair, please consider the following insurance definitions as you draw your own conclusion of what is “fair”.
INSURANCE: A system to make large financial losses more affordable by pooling the risks of many individuals and business entities and transferring them to an insurance company or other large group in return for a premium.
RISK: The chance of loss or the person or entity that is insured. (Author’s note: “chance” means it hasn’t happened yet and is not certain).
ADVERSE SELECTION: The tendency for people to avoid buying insurance unless they are sure they will benefit from it. In a health insurance context, this means that sicker people are more likely to buy insurance coverage than healthier people. Because of adverse selection and its increased costs to all of their insured members, insurers try to encourage healthier people to buy coverage by making it difficult or even impossible for individuals with pre-existing conditions to obtain coverage.
If insurance is intended to moderate risk, then “risk” must be prospective and uncertain. If the “chance of risk” is 100%, such as would be the case if preexisting condition exclusions are totally removed and individuals can apply for and obtain coverage for conditions after they have been diagnosed, then the arrangement is not really “insurance”; rather, it is an arrangement in which a party can wait to buy insurance until after he experiences a loss, and then have other folks pay for it. Such situations meet the definition of adverse selection to the benefit of a few and the detriment to existing members in the pool.
While I really like the idea of eliminating exclusions for preexisting conditions (which would require insurance companies to accept and provide benefits to people with them), I am sorry to say that the only way to ensure that individuals don’t game the system would be to have everyone insured! While the individual mandate in the current health care reform law would go a long way to accomplish universal enrollment and coverage, I don’t believe that such a mandate is either morally right or constitutional. If that’s the case, some degree of protection of our risk pools against exploitation due to preexisting conditions must be maintained.
I’d love to hear what you think.
Tony Kahmann, Benefits Utilization Consultant