Pearls of Wisdom: Health Insurance and Pre-Existing Conditions

Senator Ron Johnson’s June 26 op-ed in the New York Times is fundamentally wrong about health insurance.

In it, he argues that there should be a free market in health insurance. That it would be better and less expensive if it was managed by private industry like any other product.

I guess there could be some definition of “better” under which that is actually true, but I can’t think of a good one.

Let’s compare health insurance with a type of insurance that is easier to understand. Most homeowners have homeowners insurance which, among other things, will pay a benefit if their home burns down.

A basic principle of houses is that some people have fires. It is pretty rare, and very unpredictable. That is important to the way the insurance works. The basic idea of insurance as a concept is that of risk pooling. Instead of a few people having devastating losses when their houses burn down, everyone has a small loss, paid out in the form of insurance premiums. The insurance company essentially divides up the cost of the few fires among all of people, not just those who actually have fires. Most people agree that is a good thing. Most people would rather have a small known cost of fire insurance, rather than the very large but rare cost of a fire (even though they pay a little more than their proportional share, because the insurance company has to make  a profit too). The fact that fires are rare and unpredictable is an important part the way the insurance works:

  • If almost everyone had fires, then each home owners share would be almost the cost of a fire, and there would be very little point to insurance. Most people would not be better off with insurance in that case.
  • If people knew in advance if they would have a fire, insurance would not work. People who knew they would not have a fire would not buy the insurance, leaving the few people who were going to have fires to pay premiums equal to the full cost of a fire, which would not benefit them (as per the previous point).
  • If someone has a fire, that (generally) does not mean that the person is particularly prone to having another fire. If you do have a fire — after your home is rebuilt or fixed, you continue the insurance.

Now let’s think about how that applies to health insurance.

People vary a lot. Some people are young and healthy. Some people are old and infirmed.  People who are young and healthy have much fewer medical expenses than old people.

Some people have chronic illnesses. According to the Center for Disease Control (CDC), about half of all adults in the United States have some long term chronic disease. Over 23 million, for instance, have serious enough arthritis to interfere with their normal day-to-day activities.

These differences in age and presence of chronic conditions mean that the fire insurance model can not possibly work for health insurance. Unlike a house fire, health care costs are much more predictable. There is always the risk of catastrophic, unexpected medical issues, but young, healthy people can generally assume they are unlikely to need as much health care as an older, sicker person.

If each person decided whether or not to get health insurance, those who are healthier would tend not to get insurance (and on a few rare occasions, those people would get some unexpected medical issue and go bankrupt) and only the less healthy people would get insurance. The insurance company would have to charge enormous premiums (since almost everyone with a policy would be making claims).

Generally, there are two ways to get around that:

  1. In most developed countries in the world (outside of the United States) everyone gets health insurance. Then it is like the fire insurance I discussed above. The total cost (of either fires or medical care) is divided equally among all of the people.
  2. In the United States, most people get health insurance as part of groups, typically through employers. The insurance company makes a deal that everyone who works for the company gets insurance. That prevents people from making individual selections (which the insurance company calls “adverse selection”) and ensures that everyone is reasonably healthy when they sign up (because they are working full time).

In the United States, however, these solutions do not work for everyone because some people are self employed, or have jobs with employers that don’t supply health insurance, etc. The Affordable Care Act attempted to establish both of the two options in the United States to keep insurance prices down. Everyone was supposed to get health insurance either through a group, or individually.

Since everyone was required to get health insurance through the ACA’s mandate, the insurance companies were required not to reject people who already had a pre-existing condition.

This is important to many people. Imagine if you are one of the many millions of people with a medical condition that is under control but requires medicine (which you pay for through insurance through your job):

  • You might want to move to another part of the country (Mark Zuckerberg moved from Massachusetts to California to start Facebook).
  • You and your friends might have a great idea, and want to leave your jobs to start your own business, like in Steve Jobs’ parents’ garage.
  • You might decide to earn money in the sharing economy: driving your car for Lyft and renting out your spare room through AirBnB.
  • Etc.

Those things would be a lot more difficult and a lot more risky if you lose your health insurance. The elimination of protections for pre-existing conditions, like the policies proposed in the House and Senate’s new health care bills, means that workers with those pre-existing conditions would be in many ways trapped in their current jobs. They would be completely unable to afford insurance on the private market, and therefore unable to take any sort of economic risk.

Let’s think about it. Which freedom really makes America great? The freedom to decide for yourself if you should have health insurance, or the freedom to leave your job without worrying about health insurance for you and your family?

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