David R. Henderson  

Scandlen on Individual Insurance

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Greg Scandlen has an interesting post today on the market for individual insurance. Many of the comments are informative also. Some highlights:

According to a recent report by Milliman, based on new reporting by carriers required by the National Association of Insurance Commissioners (NAIC), there are only 10,300,000 people covered by individual health insurance - three percent of the population of the United States. And denials would happen only at the time of application for coverage, not after someone is already covered. The trade group America's Health Insurance Plans (AHIP) reports that 87% of all applicants for individual coverage are accepted.

Brian Liechty states a problem with the 87% number:
The only reason that AHIP reports "87% of all applicants are accepted" is that most people don't even complete an application. A substantial number of these individuals seek counsel through a qualified health insurance agent. The individual's situation and options are discussed, and in about 80% of the cases the application is never submitted because it's known to be a waste of time: The individual would not meet underwriting criteria and/or won't pay for it.

The correct statement from AHIP should be, "87% of the submitted applications are accepted". The number of applications approved compared to the number of people truly interested in purchasing one is closer to 10-15%, not 87%.


Notice, though, that "would not meet underwriting criteria" is very different from "won't pay for it."

Insurance agent Beverly Gossage responds to Liechty and then expands on the policy issue:

As a health insurance agent for group and individual policies who has been appointed in 23 states, I can tell you that you are right about agents advising some individuals not to apply if we know that they won't be accepted; however, my experience has been closer to 80% of those who seek a private policy qualify, certainly not 10%-15%.

Here is what I came to realize: Most of those folks seeking private policies, who would most likely be declined, developed high risk conditions while on an employer plan. When the employer plan stopped for whatever reason, they sought a private policy. Had they been on a private plan before they became ill, they would not have been forced to the high risk pool.

Most of these folks would have been far better off if the employer had added to the employee's salary and let them purchase their own private policy like they do auto and home owner's insurance.


Devon Herrick points out that it's typically only when people buy individual health insurance that they realize how expensive it is, and they often adjust to that by abjuring first-dollar coverage. Ralph @ MediBid has a further insight, based on who makes decisions in firms that buy health insurance for their employees:
It has more to do with choice, and spending our own money. In a group situation, the HR [Human Resources] person often chooses for all, and the squeaky wheels get what they want. In the individual market people are deciding for themselves, and spending their own money, and people make better decisions on their own behalf.

And how about this story from Ralph@MediBid:
I was visiting a urologist in FL, who is a client of mine, and the office manager said they had a client who come to them and said she was covered by Blue Cross. She went for surgery, and had a stent installed. They billed Blue Cross, and they told them that her coverage had lapsed, so they would not pay. They billed the patient, and the patient said that they would have to take it up with Blue Cross because [O]bama said that they were not allowed to cancel people's coverage when they got sick. The doctor explained that they still had to pay premium, and the patient said that Obama never said that, so she keeps coming to the doctor for uncompensated care.

Free lunch, anyone?


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COMMENTS (12 to date)
John Goodman writes:

It is important to note that in a free market for health insurance people would be able to insure in advance against the onset of pre-existing conditions. That way, they would not be penalized if they needed to change health plans. John Cochrane has described how this would work and I have summarized his thinking at this post at my blog:

http://healthblog.ncpa.org/rational-health-insurance/

Insight writes:

John, what happens to people who don't buy the health status insurance (or let it lapse) and then get sick?

JG writes:

Always seems like these insurance arguments are complicated. Why not if we're going to approach it like anarchists treat insurance policies as a commodity. If I buy insurance and then I get really sick, the value of my insurance policy has gone way up. If I would prefer money to medical treatment why can't I sell my insurance policy back to my insurance company?

I'm sure there's obvious hazard here, but I rarely hear people endorsing these ideas. Many people choose not to receive end of life treatment that their insurance is legally required to pay for (if they have it), why should insurance companies make any money at all off of this? Why shouldn't people be able to make that economic choice? Maybe if people could choose to give 500k to their family instead of spending 1mm on a treatment unlikely to work and that might leave them miserable they would make better health care choices?

Bryan Willman writes:

What about COBRA?

When I left Microsoft I discovered some interesting (and useful) things.

a. Private insurance with the same level of coverage is not available at any price. Period.

b. Because I was going from a group policy to a private policy under the switch-over rules, there was no insurability - they could demand I live in the state, not be covered by medicare, etc. But they had to take me.

So, of the whatever percentage of people (80%?) who apply for private coverage and get it, what fraction of them are coming from group care, covered by some rule like COBRA, and are in effect automatically enrolled so long as they pay the bill?

John Roccia writes:

@JG: That's really interesting. It's essentially like saying you can insure against catastrophic medical expenditures, but if your number comes up, so to speak, you can choose to take your "payment" either as a million dollars in medical treatment or 500K in cash, for example.

I personally would love this option: I have a DNR on myself and have discussed with my family how much I would hate any life support, extended treatment, etc. - especially if it had a low chance of success. I'd much rather not burden my family with that, and they agree with me. However, my insurance policy's price certainly includes the cost of the chance of such treatments being necessary, so I'd love to either not pay that extra price, or be able to "cash in" in the case of catastrophe.

In fact, I wouldn't mind if it simply functions more like my car insurance plan - if my car is damaged, my insurance company will assess the damage and write me a check. Whether I spend that money on actually fixing my car is irrelevant. That would be nice - and handing customers their own money to buy health care with would certainly cut into the moral hazard a bit, don't you think?

Collin writes:

Answer me this:

1) So the insurance companies denies about 15%. Any ideas on these people?

2) It sounds like once you sign up for an insurance policy that sooner or later a consumer will get a "pre-existing" condition and not be able to fire an insurance company.

3) Would you vote for a bill that gives an employee the option to be directly paid (voucher) to buy their insurance? This did get voted down a few years ago.

4) Should we use genetic testing to determine pre-existing conditions because everybody would have a pre-existing condition?

Bryan Willman writes:

[Admin, please delete my accidental double post]

re: Collin - under US law there are at least some circumstances in which you can force a switch. But you'd have to read COBRA and HIPPA and other legislation (and state rules) to sort it out.

So the bigger issue is (usually, I think):

Person A has group coverage (via work usually.) They leave that group (quit, get laid off, etc.)
If they don't timely act to buy private coverage, or cannot afford it, it's very hard to get in to regular coverage again. Once someone is in regular coverage, switching companies is apparently somewhat easier (but I might misunderstand the law.)

John Goodman writes:

@ Insight

The same thing that happens to people who don't buy life insurance and then die. They are on their own.

@ JG

Good idea. Especially for the terminally ill.

@ Bryan Willman

COBRA lasts only 18 months. It is no substitute for personal and portable health insurance. Unfortunately, laws in practically every state prevent insurers from buying this type of insurance for their employees.

@ Collin

When you buy life insurance you are effectively insuring against the possibility of developing a pre-existing condition (like cancer). Once you get it, you can't be concelled or singled out for a premium increase and you can retain the insurance for the rest of you life. Health insurance could work the same way.

@ John Roccia

What you are describing is the casualty model of insurance. It's what I think we would have in health care if the market were allowed to provide it.

Pandaemoni writes:

I am highly skeptical of Ralph@Medibid's story. Double hearsay is bad enough. Double hearsay over the internet is worse, and double hearsay over the internet that features a person as egregiously stupid/greedy as that (I presume fictional) patient can't carry much weight. I reminds my of the story I read on 9/12 that said the poster's mother saw the Muslim employees of a local food shop in Manhattan that I frequented were "celebrating" the 9/11 attacks. If you're inclined to believe that sort of thing, that's terrible. If you are a bit more skeptical though, your hogwash alarm goes off.

Maximum Liberty writes:

When debating healthcare, we often talk about the bigger issues around some sort of individual market (coverage issues, subsidies, etc.), but we miss some of the interesting small points.

My favorite small point about the benefits of increased use of the individual market is that -- assuming that insurance companies can't cancel you when you get sick -- insurers will invest a lot more in disease management and prevention programs that have a direct (though much longer-term) return to them. Today, people usually change health insurers because they change jobs. Then they change again when they hit 65. Imagine the insurer's incentives if they believe that they will have a substantial number of their insureds for life. I would think that they would take issues like smoking, substance abuse, and obesity very seriously. I could see discounts strongly linked to substance testing and actualy use of that gym membership.

And I bet the explanation of benefits would be a heck of a lot easier to read if they viewed it as one of the reasons that profitable insureds move to new insurers.

Max

Insight writes:

"The same thing that happens to people who don't buy life insurance and then die. They are on their own."

Well no, it's not the same because in this case, the people are already dead.

The uninsured people who get sick are alive, but unable to pay for treatment. As a society we seem unwilling to let these people die, at least not explicitly. The threat is not really credible.

Billy R writes:

As a young healthy person, doesn't it make more sense to forgo my employer offered health insurance, and purchase private individual insurance. I've found very similar (to employer offered) individual plans that have a deductible that is somewhat higher (but I could afford) and a premium only $20$ more per month.... BUT it is mine no matter what happens to my job- freeing me from the chains of my career.

If I were laid off, and/or could not find a job, instead of being stuck with un-affordable COBRA, or no insurance, as long as I would continue to pay the private insurance premium, in theory the insurance cannot kick me off.

In this case, for a healthy person who can "lock in" an affordable plan, such a private plan would be more robust in the face of unknown future employment and health risks, would it not?

(*this month I need to decide whether to enroll in my company plan or not...)

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