David R. Henderson  

The Pre-Existing Condition Exaggeration

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One of the claims that many supporters of ObamaCare made during the debate in 2009 and early 2010 is that many people could not get insurance because of pre-existing conditions. I was always skeptical of this claim for a simple reason: pre-existing conditions could easily cause you to pay more because, after all, you're higher risk. So, for example, someone who lives far from a fire hydrant has a "pre-existing condition." But that generally doesn't stop him from getting insurance on his home.

So why would a health insurance company turn you down flat rather than just price higher?

I can think of one main reason: your pre-existing condition is so extreme that the premium would have to be so high that the insurance company would not offer it. Why bother offering something that is so expensive that almost no one would want it?

So then the question becomes: how many people would be turned down because of pre-existing conditions?

Health economist John C. Goodman writes:

Then, on the eve of the passage of the ACA [the Affordable Care Act], virtually every Democrat who appeared on TV to defend it had one and only one message to offer: people were being discriminated because of pre-existing conditions. And how many of those people are there? Well for the first three years under the law, anyone denied insurance because of a pre-existing condition was able to enter the new (ObamaCare) risk pools and pay the same premium a healthy person would pay. How many did that? About 107,000. That's out of a U.S. population of approximately 314 million!

That gives a sense of the size of the problem. Let's say that there's a lot of inertia and that only one third of the people turned down for pre-existing conditions decided to enter the ObamaCare risk pools. Then that's one in one thousand people. And for this we got ObamaCare with the huge disruption it's causing in millions, and possibly tens of millions, of people's lives?

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COMMENTS (19 to date)
John Goodman writes:

Good post. And, if employers were allowed to buy for their employees the kind of insurance that is personal and portable, the problem of preexisting conditions would rarely arise.

Jardinero1 writes:

I sell insurance for a living and my experience, the last four years, is that the high risk pools were largely adequate to deal with the very real problem of the chronically ill and those with uninsurable pre-existing conditions. A system of transfer payments, for health insurance, along the line of food stamps, would have been sufficient to deal with affordability for those who truly lacked the resources to pay. That was all that needed to be done.

Ross Levatter writes:

Really excellent points here!

Taylor Davidson writes:

I'm also a broker and while I concur with Jardinero1, the issue is even more of a non-problem than that.

The only reason the risk pools are necessary is the disproportionate number of people who get (due to govt incentives) then lose employer sponsored coverage. If everyone was in the individual market the only real point of exclusion you would end up with would be either pre-existings at birth or MAYBE in their early 20s when they go off their family's coverage (though in that case they could probably just split off with a continuation of coverage if there was an existing health issue).

The point is the number of people with problematic pre-existings under those conditions would be vanishingly small, nearly zero, i.e. individual coverage WORKS, just like all other normal insurance.

Insight writes:

Good points by all but the denominator in the post is misleading. Many of the 300M are in employer plans or medicare, neither of which is changing much under OC.

Although only large employer plans really work well. Small employers (and their employees) have a lot of the same problems as individuals.

RPLong writes:

Not really on topic, but definitely related:

In terms of drug costs, inexpensive regular medications like statins and beta-blockers cost payers far more than big ticket drugs like chemotherapy. The small-but-frequent claims are ultimately much more costly than the rare-but-expensive claims. This is intuitive to many economic thinkers, but not usually very intuitive to the general public.

MG writes:

I think Paul Gregory (see Hoover Daily Report) may have already come up with a good rallying cry on this issue:

A New 1 Percent: The Tiny Sliver Of Obama Care 'Winners'

Essentially, millions have already been screwed, many more are living on borrowed time before they are screwed, and all to badly address the problems of a small number of people, not all of whom had found themselves unavoidably uninsurable. And of course, the dishonesty of the sell...

Andrew_FL writes:

Properly speaking describing someone with a preexisting condition as "higher risk" is not quite correct. There isn't a "risk," as far as the condition is concerned, there is a *certainty*. Risk is a probability of something happening, not something that has already happened.

That being said, I would concur with your points, otherwise.

Joe Teicher writes:

In 2007 I started at a small company where the only other employees had individual insurance or insurance through their spouses. I had never not had health insurance through an employer. I told them I wanted it and they tried to buy it for me. I have epilepsy and for that reason was flat out denied coverage. Luckily, the small company was part owned by a larger company and they were able to get me into that group. Otherwise, I would have been screwed. Maybe they could have looked harder and found someone to underwrite me. I'm not sure about that, but I do know that I was denied coverage because of a pre-existing condition that affects millions of Americans.

Seth writes:

@Insight - To say that for most OC won't change much is to look at the world with blinders.

For example, for 2013 I could buy a policy through eHealthInsurance.com that is comparable in coverage and price to what I pay through my employer.

For 2014 (eHealthInsurance.com is working), the rates for a comparable plan have tripled from 2013 in my area.

I encourage everyone to go to eHealthinsurance.com and search for 2013 and 2014 plans to see what's happening in your zip code.

So, while my employer plan isn't changing much (premiums will be up 20%), the cost of my option if I were to leave my employer has increased considerably.

I believe your statement ignores the cost of that option and the impact it may have on the decisions folks like myself will make.

MG writes:

Seth's point is VERY important. Many, many more thant those who have been immediately forced into the "market", are seeing their consumer choices/options (value and quality) shrivel.

I am essentially in that category. I have an individual, grandfathered plan. Any changes on our part (e.g., out-of-state moves on our part) or any changes on my plan sponsor's part, and we will be forced into the "market". Oh, since the "market" price for very similar plans is now about 80% higher than my grandfathered plan, we are going to pay sooner or later. In fact, we are paying sooner: premiums for our current plan have incresed 30% (y-o-y) two years in a row. They know their grandfathered customers are stuck.

Hazel Meade writes:

So why would a health insurance company turn you down flat rather than just price higher?

Because state-level regulations forbid you from doing so.
Many states already had "community rating". Which means they could not charge higher risk people more than a certain amount. Which means that if your risk level rises above that amount, it becomes unprofitable to insure you.

I'm surprised you don't already know this. This is a well established problem called "adverse selection".

Hazel Meade writes:


The term adverse selection was originally used in insurance. It describes a situation wherein an individual's demand for insurance (the propensity to buy insurance and the quantity purchased) is positively correlated with the individual's risk of loss (higher risks buy more insurance), and the insurer is unable to allow for this correlation in the price of insurance.[1] This may be because of private information known only to the individual (information asymmetry), or because of regulations or social norms which prevent the insurer from using certain categories of known information to set prices (for example, the insurer may be prohibited from using such information as gender, ethnic origin, genetic test results, or preexisting medical conditions, the last of which amount to a 100% risk of the losses associated with the treatment of that condition). The latter scenario is sometimes referred to as "regulatory adverse selection".[2]

Thomas Boyle writes:

I had a pretty scary personal experience with this - this is now a long time ago, but was relevant until recently. I lost my job at a small company and, a few months later (while covered by COBRA) I had a frightening and mysterious illness. No-one could tell me what it was, how severe it might become (disability, and even death could not be ruled out at the time), or much else about it. Meanwhile, aside from being frightening and mysterious (and somewhat painful), it did not stop me from functioning, earning income on contract work, and generally getting on with life.

Concerned about what would happen when my COBRA ran out, I spoke to a broker. He told me that, with a mysterious ailment it would be impossible to get coverage in the private market to replace my COBRA, even though I had no gap in coverage. He told me the only way I could get coverage was through the must-take state program (incredibly expensive) or to get a full-time job with benefits. He also pointed out that if my former employer should close (a real possibility) I would lose my COBRA as of that date.

I did not have a "pre-existing condition": I was insured, and was willing to continue paying for coverage. But, because of the employer-centric insurance system and its loopholes, I could be dropped from coverage after becoming ill, THEN treated as if I had a pre-existing condition.

I'm not one of those 107,000. I have a job, with benefits. But I am keenly aware of the risk of finding that a post-existing condition becoming a pre-existing one through the use of loopholes to throw me out of the system.

Oh, I'm fine, thanks. Full recovery.

Insight writes:

Seth: "while my employer plan isn't changing much (premiums will be up 20%), the cost of my option if I were to leave my employer has increased considerably."

You would have to leave your job with an employer plan and not go to another employer for this to make a difference. Most people in that 300M denominator never do that or even seriously consider it.

That certainly happens and the problem already exists for people with pre-existing conditions (in which case it has been called "job lock"). The number in that group is probably (significantly) higher than the 300k mentioned in the post.

So yes, if you take a comprehensive view you can say that OC touches many more people but then it isn't fair to say that only those already being denied coverage are being helped.

Mike Rulle writes:

Health Care is just so weird in this country, and I assume most of the developed world. What other service do we purchase without knowing its price? We know the price of insurance, but we have no idea what the price of the actual medical service provided is. Nothing is posted or advertised, except cosmetic and other voluntary medical procedures not covered by insurance.

Few seem to be aware that all third party reimbursements to doctors and hospitals are defacto negotiated depending on insurance provider. Those who pay directly are charged more, but that too can be negotiated. There is absolutely NO reasonable chance at price discovery----and competition--- available to human beings about any medical service. Just make the prices transparent for starters and the fog for all will begin to clear.

How did it get this bad? ObamaCare is clearly a joke. But we could not even get health saving accounts supported by politicians way before OC came along. It is truly bizarre.

Mark V Anderson writes:

I do think David Henderson mistates the problem a bit because he includes all those on employer insurance in the denominator. And I suspect the number of those who can't get private insurance because of pre-existing conditions is hard to know because many simply don't get insurance at all, and so they don't get recorded. So much higher than he says.

When I needed to buy private insurance a few years ago on ehealthinsurance.com, three out of four of my family members were rejected for pre-exisitng conditions. I was shocked at the ridiculous reasons they gave for this (such as for myself, I was on lipitor and I had a false positive on my prostate exam). I think the problem is that insurance companies take pre-existing conditions a lot more seriously because state laws force them to. As an example, ehealthinsurance tells you the premium before you apply, so the insurance company doesn't have the opportunity to charge more for worse risks. They have to reject for pre-existing conditions because that is the only say they have in the matter. I assume the up-front premium is an insurance regulation.

MikeDC writes:

If we're only talking about such a tiny fraction of the population, how come the insurance costs are going up so much?

I realize several things are driving costs higher, among them the fact that Obamacare has increased the things that insurance must cover, but my (perhaps ignorant) assumption was that the predominant cost driver was insuring previously uninsurables.

But if the previously uninsurables were such a tiny number, there's no way they could be driving the cost. So... what gives? Do insurers just expect that many more people to want free birth control and acupuncture?

Insight writes:


Once again it is the denominator. The previously-uninsured are going into the exchanges. The rest of the market with employer plans, etc. isn't in that pool. It is (some of) the people buying exchange plans that are seeing huge increases, not employers.

Also, the required coverages are not just free birth control and acupuncture. It is also includes lower deductibles (for those previous on high-deductible plans), maternity care, and elimination of benefit caps.

Also in individual cases, the new rating rules produce huge increases independent of coverages or pool costs (but decreases for others). Young males especially

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