A Black Eye for Health Insurers - and Why We Need Group Health Plans

Anyone who is wondering why the Obama administration is demonizing health insurance plans should listen to Act 3 of This American Life from late July “The Fine Print.” [The piece is around minute 33 of the radio show.] Host Ira Glass interviews Congresswoman Jan Schakowsky, and plays selected clips from her subcommittee, which interviewed CEOs of insurance companies that offer individual policies. The first patient interviewed was a woman whose individual health plan was rescinded (recission) because she had not divulged seeing a dermatologist for acne prior to applying for the policy. Her aggressive breast cancer was not excised for a few months while she fought the insurer – she believes the cancer spread during that time.

The insurance company executives argued that they needed to protect all of their policyholders from fraud – and that these recissions allowed them to offer less expensive policies. The execs argued that they gave the boot to only 1/10 of a percent of policyholders. However, this represents a significant financial boost for these plans. The top ½% of patients represent about 20% of costs in a commercially insured population – so it doesn’t take many recissions to boost a bottom line. The personal cost is enormous for patients with serious illness having to battle their illness and an insurer simultaneously.

I believe that there will be increased regulation of insurers stemming from the problem of recission. This might be a good idea, but doesn’t address the root cause.

The underlying problem here is that individual health insurance policies are subject to gaming on both sides. People with illness wish to hide their illness to gain coverage, and people with no illnesses take the gamble and don’t pay for coverage. Health insurance should be the transfer of wealth from healthy people (who pay premiums and get little benefit) to sick people (whose premium payments will never cover their illness). This requires large, stable insurance groups, such as employers, so that individuals with known illnesses can maintain coverage. Optimally this also requires an individual mandate, so that the Americans who have already won the “health lottery” by being healthy continue to pay into the system. Some have advocated individual policies so that patients (aka consumers) have skin in the game. Recissions of individual policies shows the need for stable insurance groups to maintain equitable affordable coverage.