Not so simple Teresi

While I believe a healthy dose of the free market is necessary for a well functioning health care system support a system,  Amanda Teresi’s arguments miss a fundamental point: the free market can never solve the health care crisis.  This does rest upon some concern about health care as a special moral good, although that certainly holds as well. No just by its very nature free market health insurance does not work.

The central contention in Teresi’s argument is if people will be able to purchase portable insurance in a free market than many of the current problems including coverage of preexisting conditions would disappear. What would be a free market in health insurance? Given some of Teresi’s arguments it seems to fair to suppose that a government regulatory agency would ensure the solvency of the insurance company.  In addition I doubt that she would argue against a regulatory system that requires rates to have some basis in fact.  For instance if a carrier wants to charge more to women than men it must provide data to support this.  No mandates in the type of benefits offered.  No restrictions on underwriting methods used.  No limits on the rates offered.  In other words a basic set of regulation to make sure that a carrier can keep its promises and isn’t discriminate bases on non-economic factors.

So why wouldn’t this work? Lets take the easiest piece first.  Teresi makes a quick mention of rescission, the practice of insurance companies looking at members who join and then have high costs in the first few years of a policy.  The idea from the insurance companies point of view is that if a member has high costs during even after underwriting then there may have been fraud in the application.  Not paying the costs for these members reduces the overall costs of company and would allow the company to either offer cheaper policies or earn a higher profit so companies would continue to include rescission clauses in a free market for health insurance.

This idea of rescission seems like common sense but cases in the House Energy and Commerce Committee has heard several rescission horror stories.  Most of the cases came from any material errors clause, errors that would change the accepantace of the application.  Since most companies use an underwriting system that scores every disease and condition, forgetting even a minor condition is a material error.  In contrast most people have a gut feeling that only willful errors, deliberate mistakes should be the basis for rescinding policies.  While companies have stopped implementing this practice because it is a P.R. nightmare and several class action lawsuits were brought against companies.  The lawsuits were never brought trial whether material but non-willful errors like the one just described are not valid elements of a contract under common law.  So in a free market it is possible that some companies would continue to use a material error and we would still have companies that meet their legal promises but still deny care.

Rescissions are a smaller issue compared to portability.  Would the free market provide for a portable solution?  Probably not.  Under current law insurers can charge individuals based on how long their policy has been in force.  These charges typically increase with the length of the contract and are separate from age increases that company may charge. For instance a company might offer new 35 year old policyholders a rate of $250 per month for coverage, new 36 year old policy holders a rate of $260, and $280 for a 36 year old second year policy holder.  The extra durational charges are data based and flow from the fact that the more time that has passed since the initial underwriting the more chance a policyholder will have a significant disease.  In particular healthy people who can be re-underwritten will start a new policy every year, leaving only the unhealthy to face the higher costs of the extra durational charges.  So even if you have insurance before a major health event and the policy is guaranteed renewable you still might see charges spiral until the insurance becomes unafforable.

The economic nature of health insurance limits possible market solutions.  Issues with rescission and durational charges are just two areas where a minimal regulation solution would not actual solve current health care problems.  Others might argue that the market would solve them, for example the same issue of increasing premiums year after year exists in life insurance and the market has developed a solutions in level premium policies that charge more than the risk would argue in the beginning years of the policy and less in the future.  But given that these policies would be such a radical departure from current policies, how long would it take for them to be marketed?   There is no simple answer to the health care reform.  It requires hard debates and discussions about what the country wants out of the health care system and then effective regulation to implement these decisions.

Hat tip to Mount Virtus for the orginal article link.

Disclaimer: I am employed by Ingenix a subsidiary of United Health Group and these are my views and not the views of Ingenix or United Health.

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