TheAnswerPlan

A related problem occurs when people become sick while covered by one insurance carrier, but then are forced to leave that carrier and search for another, either because they change jobs or because the original insurer cancels the policy. The original insurer covers the first phase of the illness, but any new insurer tries to avoid paying for its subsequent treatment. These problems also affect other people. Large companies with health insurance plans that pay for any and all conditions, preexisting or otherwise, attract employees with medical problems, thus contributing to companies’ health insurance costs. In addition, uninsured people with such problems may generate unpaid hospital bills, which then must be paid by everyone else.

It is not surprising that private insurers refuse the obligation to pay for clearly foreseeable medical expenses. If they charged a fair premium, it would be roughly equal to the future medical expenses plus the cost of administering the policy. People with preexisting medical problems would have nothing to gain by purchasing such insurance. Still, many people face severe financial problems because they have high medical bills and no health insurance.

Before turning to solutions, it is worth asking why we do not have a similar problem in a related field: life insurance. The answer is that most people have the opportunity to buy life insurance that is "guaranteed renewable" long before they develop a serious illness. As a result, they can continue paying premiums and can expect a large payment to their beneficiaries even if they are diagnosed with a terminal illness. Interestingly, most individual and family health insurance policies sold in the 1950s were also guaranteed renewable. If a person became sick while covered by a health insurance policy, that person could count on coverage for medical bills indefinitely into the future. Today, it’s almost impossible to find a health insurance policy that is guaranteed renewable. Why? There are apparently three reasons. First, because state regulations impose onerous burdens on any insurance company that sells such policies, they have been partly regulated out of existence. Second, the tax law has encouraged the development of a health insurance system that is almost entirely employer-based, despite the increasing mobility in U.S. labor markets; when people switch jobs, they almost always have to switch health insurance policies, and the new carrier typically tries to avoid paying for preexisting illnesses. Third, government policy has encouraged health insurance to evolve into prepayment for the consumption of medical care. To a large extent, real health insurance no longer exists.

A popular solution to the problem would force insurers to cover preexisting illnesses, often with no additional premium. Many state-mandated health insurance benefit laws already attempt to do that with respect to certain health conditions. Under proposals being exacted in many states, insurers will not be able to deny anyone a health insurance policy, or charge a higher premium, because of a preexisting condition. Under one variation of this idea, the insurance company unluckly enough to attract someone with a preexisting condition would have to eat the loss. Under another variation, the losses that insurers incur would be subsidized by a tax imposed on all health insurance sold in the state. Another approach would create state risk pools that would allow patients with preexisting conditions to purchase health insurance at subsidized rates. In most states that already have risk pools, the losses are covered by taxing the health insurance premiums of everyone outside the pool.

Each of these proposals would use health insurance as prepayment for the consumption of medical care rather than allowing real insurance to be bought and sold in an unregulated marketplace. People who are already sick would pay premiums well below the actuarially fair value of their insurance. The losses would be subsidized by forcing others to pay more than the actuarially fair value.

In other words, these proposals would force some people to pay for the medical expenses of others. Although, the objective may seem humane, the proposals are highly regressive, imposing special burdens on low-income families in order to benefit middle- and upper-income families. As is the case with existing state-mandated benefit laws (which also primarily benefit the middle class), the proposals would raise the price of insurance, thereby imposing a tax on low-income consumers or causing more of them to forgo health insurance altogether. If there is a social reason to bail out uninsured people with high medical bills, the efficient way would be through direct monetary payments to those people. An income-related system of disability payments would accomplish that goal. If there is a social reason to subsidize health insurance for some, the efficient and fair way to do it would be to make the subsidy income related, giving the most help to those with the greatest need. Our recent experiences with risk pools suggests that the size of the subsidy would not have to be that large. Currently, about 28 states have risk pools, which have been in operation for some period of time. In general, people with preexisting conditions are able to buy into the pool for premiums that average between 25 and 50 percent higher than comparable policies for other people. Even with the high premiums, these risk pools lose money. By one estimate, if this system were extended to all the states, the nationwide deficit would be about $300 million, less than one-twentieth of 1 percent of the nation’s annual health care bill. Under a system of public subsidies, with the subsidy falling as income rises, the taxpayer’s burden would be even smaller.

In an ideal health care system, real insurance, with actuarially fair premiums, would be encouraged and promoted. Government programs to help those in need would work within the context of a competitive health insurance market, rather than undermine the market. Moreover, many of the problems discussed here would never arise in an individualized health insurance marketplace. If health insurance were tailored to individual needs, not employer needs, it would anticipate job changes, the long-term consequences of recurring illness, and other problems. If health insurance were sold in a competitive marketplace, it would probably resemble life insurance. Because guaranteed renewable policies are valuable and desirable.