Pearls of Wisdom: Freedom to Afford Insurance

Pearls of Wisdom: Freedom to Afford Insurance

While many conservative members of the House have argued that the AHCA will give people the freedom they need to pick a health care plan that works for them, the truth is very different. By eliminating protections for people with pre-existing conditions, the bill will not only cut coverage from those who need it most, it will make it much more difficult for millions of Americans to switch jobs or even move across state lines.

Health insurance is uniquely important in the United States, but it still follows the same general principles as other types of insurance. The basic idea of insurance is that there is some serious risk that:

  1. Only a small part of the community will actually realize
  2. It would be a serious problem for those few people
  3. We don’t know (in advance) which people will be affected

One of the clearest examples is that of fire insurance. Very few people’s homes get destroyed by fire each year, but if your home does get destroyed, it would be very bad for you -- you might lose (for example) $50,000 worth of stuff which you could not afford to replace. In the United States, on average, people experience a fire once every 344 years. Assuming each fire destroys $50,000 worth of stuff, that means that if each person paid a premium of about $145 per year, there would be enough money (on average) to pay each person who had a fire $50,000.  Obviously a real insurance company would need to price policies to make a profit, and start out with some money to avoid getting into trouble if they have a bad year.

Another potential issue with insurance is adverse selection. That means that somehow people know that they are more-or-less at risk (violating the third point we made above) and those more at risk have a greater tendency to sign up for the insurance.  Say, for example, that most houses are made of bricks that are fireproof, but some are made of wood, and only the wooden houses have fires. Then, if you start an insurance company, and price your insurance based on the overall statistic of one fire every 344 years (say you don’t know that some houses are brick and some are wood) -- you could lose a lot of money because mostly people with wooden houses will sign up for your insurance, and those people have fires much more often than people with brick houses.

Actual fire insurance companies mitigate that risk by not having one average rate for the whole country, but by checking each house, and having different insurance rates for different types of houses. The insurance companies also only insures houses that have passed “code” inspections, meaning that they were built in accordance with certain building code rules. They cover things like electrical wires being installed correctly, so as not to create a fire hazard. The also only insure houses that have not already been damaged by fire at the time you get the insurance. (Houses currently on fire have a much higher probability of burning down than houses in general.)

Other types of insurance, like health insurance, have the same general principles. Most people are relatively healthy most of the time. A very small number of people have medical issues which turn out to be very expensive. But without coverage for pre-existing conditions, many health insurance companies used to do what fire insurers do to buildings that didn’t pass code inspections: they refused to cover them. In a way, people with pre-existing conditions are like people living in wooden houses, but with one very important caveat: they can’t move out. By treating these people as risks to their bottom line instead of people in need of healthcare, insurers saved money but left millions at risk of death and bankruptcy.

A lot of people get health insurance through their employer.  When they sell health insurance through employer plans, the insurance companies are able to avoid adverse selection. Anyone working must be in at least somewhat good health, and if you get all working people you probably have a good cross section of the population of healthy people as a whole.  Of course, health insurance provided through employers does not do much to help people who do not have employers that offer health insurance.  

One fundamental difference with health insurance is that most people get sick gradually over time, not as a result of one event (like the fire example above). If someone gets diabetes or cancer, or asthma, or arthritis, that person is much more likely than another person to have a series of expensive medical treatments over the course of many years.

What if that person wants to move to a different part of the country? Or change jobs? Or retire? Or get married? Well they are already sick! In the past, an insurance company did not generally give a health insurance policy to someone who is already sick, because those people were more expensive to cover. This means that people with pre-existing conditions were unable to change jobs or move across the country, because if they dropped their current health coverage it could be nearly impossible for them to get insurance again.

Under the Obamacare rules, companies were not allowed to reject people because they had pre-existing conditions. It actually was not a huge problem, because the rule applied to all companies and most had roughly the same number of people joining from other companies as they had leaving to go to other companies.

The rules in the Affordable Care Act about existing conditions really made it possible for people to change jobs. Under the Republican proposal, we will be going back to the old days -- where a lot of people were stuck in jobs that they wanted to leave, because if they gave up their health insurance policy, they would never be able to get a new one. If Republicans aren’t concerned about the health of millions of Americans, maybe they should consider the damage this will do to businesses trying to hire workers, or our economy as a whole.