What Exactly is a Pre-Existing Condition?
The definition of a pre-existing condition, prior to the enactment of the Affordable Care Act (ACA), was any health condition that a person knew of the existence of or sought treatment for in years prior to obtaining health insurance coverage. When seeking individual or family coverage, the insurance company could look back up to 10 years in some states. When seeking coverage in the group market the look back period was 6 months to 18 months, depending on size of group, whether or not the group was fully-insured or self-funded, and whether or not the applicant maintained continuous coverage.
Why Did insurance Companies Care about Pre-Existing Conditions?
With any form of insurance, the basic idea is to protect oneself from the financial burden of a catastrophic, unforeseeable event. This is true with life insurance, car insurance, home owner’s insurance, and prior to the ACA, health insurance. Insurance is a product we purchase, ideally for a nominal amount of money, where risk is pooled among a large group of people, so in the event of adversity, the insured member can collect benefits from the insurance plan to protect their assets and themselves from a substantial financial burden. We cannot purchase life insurance if we’ve already been diagnosed with a terminal illness. We cannot purchase car insurance to collect benefits on a car that’s already been in an accident, and we certainly cannot purchase home owner’s insurance after our house has already been flooded or burned down. Prior to the ACA, an individual could not purchase a single or family health insurance plan to cover the cost of a health condition that occurred prior to purchasing the plan. Medical underwriting, the process of evaluating the health history of a potential applicant, could result in four different outcomes:
⦁ The person could be declined coverage. (This was common with health conditions such as cancer, diabetes, stroke, heart attack, and other major medical health issues)
⦁ The person could be offered a plan with a risk-adjusted rate, and pay a higher premium than other people with no health conditions.
⦁ The person could be offered a plan with exclusion for one or more health conditions. (This was common with health conditions such as asthma, ADD, torn ligaments, recent surgeries, etc.).
⦁ The person could be offered coverage with no exclusions or risk-adjusted rates. This would occur if the person applying for coverage, to the best of their knowledge, was in perfect or near perfect health.
Pre-existing conditions are foreseeable, so under the true definition of insurance, they cannot be insurable. When we guarantee insurance for foreseeable medical expenses, we really aren’t insuring them, but rather, we are pre-paying for them. In the world of insurance, it’s extremely expensive to pre-pay for medical care, unless of course, the entire population participates in the risk pool. But there are two dangers in “insuring” the entire population, which many politicians also refer to as “Medicare for All” or “Universal Health Care”.
1.) When entire populations are “insured”, in other words, not paying for their own healthcare, there is a danger that healthcare providers will price gouge, because they can. Hospitals are especially guilty.
2.) Once price gouging begins, the government must step in to control costs, at which point we start to experience shortages (demand exceeds supply).
Since we cannot force people to be insured, it is much too expensive to provide insurance against a foreseeable cost. In fact, it’s unprofitable to do so. Imagine asking your neighbor to pay for your cancer treatment in exchange for $200/mo. It’s not going to happen, nor would any smart business enter into such an arrangement….. This leads me to the next part of this discussion.
The Affordable Care Act is Born
The Affordable Care Act (also known as “Obamacare” or the “ACA”, attempted to maximize the size of the risk pool by penalizing Americans who chose not to be insured under a plan with Minimal Essential Coverage (MEC). MEC is the government’s definition of what must be covered by insurance. The new provision in the law was dubbed the Individual Mandate, and non-compliance became punishable by the “individual shared responsibility payment“.
There was much to do in Washington over the Individual Mandate. Many believed the mandate was unconstitutional. After all, this is America, and never before has the government ever attempted to force any citizen to purchase a private product, punishable by law for non-compliance. The appeal went all the way to the Supreme Court, which upheld the law in a 5-4 vote, saying its requirement was authorized by Congress’s power to levy taxes.
The problem, however, lies in the fact that the penalty is just a fraction of the cost of the actual insurance, thus still allowing people not to participate in the risk pool. Because of adverse selection (the phenomenon that occurs when the ratio of net recipients to net payers in the pool is too high), health insurance costs have risen dramatically, to a point where those who don’t qualify for tax credits under the new law, can scarcely afford to purchase coverage.
The Affordable Care Act predominantly affects the individual and family health insurance market, but its tentacles also reached into the employer group market as well. For example, pre-ACA, groups could impose a pre-existing condition waiting period on new enrollees, if they allowed themselves to have a gap in coverage of longer than 62 days (large group) or 90 days (small group). But today, group insurance plans are forbidden from imposing any sort of pre-existing condition waiting period.
What Happens When Insurance Plans Can’t Prevent People from Gaming the System?
Basically, the elimination of medical underwriting (in the individual and family market) and pre-existing condition waiting periods (in the employer group market) has created a monster. Consumers have learned that they can forego non-emergent care, sign up for insurance during periods of open enrollment, incur large medical expenses, and then drop coverage shortly thereafter. The new law offers no protection for insurance companies, and ultimately, premium payers, against those who would take advantage of the system. Therefore insurance companies have been exiting the market and narrowing provider networks and drug formularies in a futile attempt to control costs.
A Couple of Simple Compromises
Politicians need to come together in bi-partisan support. Implementing the following simple compromises, I think we could easily appease those who wish to have a form of guaranteed coverage for those with pre-existing conditions, while still preserving the element of risk that keeps insurance affordable:
A Waiting Period
In my opinion, a short pre-existing condition waiting period of six months to a year would be a very good deterrent to prevent people from trying to game the system. Bring back the waiting periods, and we can still have guarantee issue (guarantee issue means insurance companies are forbidden from declining an applicant). Waiting periods can be waived with proof of continuous coverage.
Dental insurance plans impose waiting periods, and they work quite well. Waiting periods are not imposed for preventive care, but a person cannot join a dental plan and get a root canal two days later. With dental insurance, there is a one year waiting period for major dentistry. A person must have procured the insurance and paid into the plan for one year, before the dental insurance will pay anything for the root canal. This protects the insurance company from adverse selection (buying coverage only when it is needed). Something similar could be put into place for health insurance to prevent people from trying to game the health insurance system. Granted, there will be some who have to wait….but if we do a good job of educating the public about the rules, most people will comply, and maintain continuous coverage to avoid waiting periods.
Reinstating waiting periods would immediately cause the price of insurance to drop, and would be a simple compromise to allow people with pre-existing conditions to still have coverage, with the understanding if they don’t remain covered, there will be waiting periods should they try to re-enter the market.
Waiting periods would be a better incentive than the tax penalty for staying insured, and they would eliminate the need for the individual mandate.
High Risk Pools
Prior to the ACA, almost every state in the union offered “uninsurables” coverage through a state sponsored high risk pool. These pools were funded in part with tax-payer dollars or fees assessed on all insurance plans. The coverage was better than anything available on the market today. The premium balance was paid for by the insured on a sliding scale of income. If we took this same concept and required every state in the union to offer such a product, the Federal Government could grant money to the States to use in addition to local funding, to keep the insurance affordable for those who either cannot qualify for a personal insurance plan or who do not want to accept a medically underwritten offer.