There is much talk about “pre-existing conditions” and their effect on health insurance. One of the reasons that politicians find it so difficult to replace, let alone repeal the “Patient Protection and Affordable Care Act” (and how many untruths are in that title? Every word, including “and”) is that covering pre-existing conditions is popular. Very popular.
Here’s the problem. It doesn’t matter how popular it is. It doesn’t matter how many people want it. It doesn’t matter how great the idea sounds. Requiring insurance to cover pre-existing conditions without allowing that insurance to charge for that coverage commensurate with the extra cost destroys health insurance.
Let me break that down for you.
In statistics there’s a concept called the “expectation value.” It’s simply the “numeric value multiplied by the probability of it happening. It’s also the average that would happen over many, many cases. Like this.
The probability of getting “heads” in a fair coin toss is 0.5 or 50%. Suppose you got a dime every time the coin came up heads. The expectation value would be $0.10 * 0.50 or $0.05. One nickel. Flip the coin a thousand times and you would expect to get pretty close to $50.00 averaging that $0.05 per flip.
If you have multiple things that could you simply sum up the expectation values of each of the things that can happen to get the total expectation value. For example, a standard die can give you a number from 1 to 6 with each face having a probability of 1/6. So for the total its 1*1/6+2*1/6+3*1/6+4*1/6+5*1/6+6*1/6 (please remember your PEMDAS, particularly the MDAS portion). That’s 21/6 or 7/2 or 3.5 Roll the die a million times and expect a total of about 3,500,000.
Well, that’s how insurance works. Each of the things that insurance has to pay for has a cost–how much insurance will have to pay to treat it. And each of those things has a probability of happening. Different people will have different probabilities of various things. A person who’s young and healthy will have low probabilities of most things. An older person will have a higher probability of many things than a younger person. A smoker will have a higher probability on some things than a non-smoker. A heavily overweight person will have a higher probability of some things than a person of normal weight. A biological male (worded so to avoid arguments some people will raise) will have a higher probability of certain things than a biological female. And vice versa, a biological female will have a higher probability of certain things than a biological male.
Insurance, actual insurance, basically pools that. You, as an individual, might hit the medical “jackpot” where the “prize” is a really expensive medical condition. You don’t know that in advance. What insurance does is allows the expectation value of many people to be averaged. Each person pays for their risk, the insurance company invests the money in the meantime. And by simple statistics, some people at the end will find that they didn’t have any expensive medical expenses and others will. Some will get more in benefits than they get in premiums. Others won’t. But that’s okay because they were paying for the risk. They did not know ahead of time which category they would fall into.
I don’t know about you, but so long as the premiums are commensurate with the risk, I hope the insurance company wins that bet and I don’t have any major medical expenses.
That’s actual insurance. It’s balancing the risk that something might happen against the cost of it happening.
Of course, insurance companies don’t sit down and try to figure out each individual risk factor in each individual and calculate that against all the possible things that might affect them. They use “actuarial tables” as a shortcut. A person in this age range, with that weight range, of this sex, and non-smoker will likely cost so much on average. When I first got private insurance I had to pay a bit more because I was heavier than the insurance company liked. I was okay with that because my weight made my risk higher. Fortunately I was always a non-smoker so I had that going for me.
It’s like car insurance for young people costs more because they’re more likely to make expensive claims. Your particular kids might not (in which case good for you for teaching them well) but in general, that’s how it works.
But now we come to the other aspect that gets rolled into “insurance” when it comes to health. That’s not “insurance” per se, not risk sharing, but rather analogous to a maintenance contract: you agree to pay a certain amount and routine stuff is taken care of. Annual exam. Glasses. Birth control if you use it. Stuff that isn’t so much risk as certainty. In this case you’re simply arranging payment in advance to cover this stuff, or most of this stuff since there’s almost always a copay (always in my experience, but there might be some plan out there that doesn’t).
There’s no risk sharing here. The premiums have to cover the cost of these routine items completely over and above the cost of any actual risk sharing coverage. When everybody has similar costs here, well and good. Everyone has an annual exam, that sort of thing.
But then there are pre-existing conditions. A pre-existing condition–something you had before getting insurance–is not a risk, but a certainty. There are three ways to deal with that. The first is simply not to cover the pre-existing condition.; you can be insured for other things, but things related to the pre-existing condition are on your own. You can charge more for coverage of that condition, make it a “maintenance contract” issue, where you have a fixed payment rather than paying for each treatment, specialist, or what have you piecemeal. Or you can raise everyone’s premium to cover the cost of your pre-existing condition.
That last one is that the PPACA does. It’s not risk sharing like standard insurance. It’s wealth transfer taking money from those who got their insurance before they had expensive medical conditions and using it to provide for those who waited.
And that’s the problem right there. It provides an incentive for people not to get insurance until they have an expensive medical condition.
Consider auto insurance. Imagine if auto insurance covered “pre-existing conditions”. A person could eschew insurance, wait until they have an accident. Then, while waiting for for police and emergency crews to come in, call an insurance company and get the liability insurance since it will cover the “pre-existing condition” of the accident you just had. Then, later, when you’re ready to get your car fixed (or totaled out) you get the collision coverage and have that pre-existing condition covered.
In such a case, why would anyone do anything else?
So some people start to drop out of insurance figuring it’s cheaper to just wait until they have something that needs coverage to get it. This just means that the costs of covering folk with pre-existing conditions is split between fewer people. Meaning that the cost per person goes up. The increased costs encourage other people to leave, raising the costs still further. And so on. And so on. Until all that is left is people with pre-existing conditions and the premiums are such that there’s no point in having insurance anyway.
In an attempt to mitigate that we have the various mandates. Employers must provide insurance. If your employer does not you must have your own coverage. But that has its own problems including the fact that it simply doesn’t work. The fines (excuse me, tax) simply are not enough to outweigh the rapidly growing cost of insurance and it’s simply not politically feasible to raise the fines enough to do so.
And so something has to give. Mandated coverage means that other coverages, those not specifically required, get cut back or dropped, deductibles go up to try to mitigate the cost, premiums go up to try to recover revenue. Insurance becomes more expensive with less coverage for everyone, not just those with pre-existing conditions.
But, hey, free birth control is worth it, right?
The Writer in Black 
No, the “expected value” is the sum over the set of all values of X sides the probability of each X. Thus, the Expected Vale of a roll of a six-sided die is E[X] = 1(1/6) + 2(1/6) + 3(1/6) + 4(1/6) + 5(1/6) + 6(1/6) = 1/6 + 2/6 + 3/6 + 4/6 + 5/6 + 6/6 = 2.5. And that for discrete values. The expected value of a continuous variable like cost would require integral
LikeLike
Check your math. 1/6+2/6+3/6+4/6+5/6+6/6 = (1+2+3+4+5+6)/6 = 21/6 = 3.5
My degree is in physics, I am quite familiar with integrals and how they would apply to continuous variables but that was a bit more involved than I wanted to get into here.
LikeLike
You look funny with the Beard Charlie.
LikeLike
I have a tiny disagreement, or perhaps clarification, with this bit of the analysis – “You can charge more for coverage of that condition, make it a “maintenance contract” issue, where you have a fixed payment rather than paying for each treatment, specialist, or what have you piecemeal.”
A pre-existing condition doesn’t come with a known cost in advance, it comes with its own expected cost. So three folk with pre-existing condition XYZ may finish up having actual health costs from that condition of zero, $36,000 and $520,000. The “expected cost” for that condition might have been, say, $28,697. So pre-existing conditions are perfectly compatible with real risk-sharing insurance. Provided the insurance company is allowed to charge a market insurance premium – which will be similar to the expected cost for that condition.
LikeLike
Well, it’s a mix. You’ve got known costs, that you’re going to have. And then you’ve got risks related to the condition that go up from there. I was trying to simplify for people who don’t seem to understand the concept and why requiring coverage of pre-existing conditions without allowing the price to reflect the greater cost of providing the coverage.
Indiana, back when I first got private insurance, required insurance companies to cover pre-existing conditions. But they were allowed to charge more to cover the higher expectation value. I was perfectly okay with that even though it meant my premiums were higher.
LikeLike
I suspect many have little understanding of what was accurately explained here . Polls have consistently shown people favor covering pre-existing conditions until they find out THEY have to pay more for others to get it.
LikeLike
Obvious, but completely correct. A pre-existing condition, like, say diabetes, is an unfortunate accident of life. But nothing justifies the coercive transfer of the financial burden it creates to other individuals. Those needing help have the right to seek voluntary charity — of which much is available — buy they do not have a right to stage armed robbery to get funds for their medical expenses. Nothing changes when the government stages the robbery for them via the coercively-imposed fraud of requiring the purchase of “insurance” providing such coverage. It is a fantasy that should deceive no one.
LikeLike
You may be correct from a philosophical position, but the current political situation is pretty far removed from that. Polls show that public wants pre-existing conditions covered, and at this point, failure to do that is likely to lead with the Republicans getting kicked out of office. So the issue isn’t whether they should be covered, but how to do it, since deciding not to do it means you won’t be in office much longer to do anything else on your agenda.
LikeLike
And this is why we can’t have nice things. Because requiring that will destroy insurance, sooner rather than later. Doesn’t matter how much people want it. Reality is reality.
LikeLike
Not for nothing, but last week Anne Coulter and Rush Limbaugh made the case that pre-existing conditions need to be separated from regular health insurance. No details, but to me, it sounds like “preparation of the battlefield” to right leaning audiences to get ready to accept some sort of government healthcare to cover pre-existing conditions.
LikeLike
That COULD be ok. I think about “how does one get into an uncovered pre-existing condition problem” — and it seems to me it’s mostly a function of 1) lousy bridge insurance, to cover those times when you have no (or much less) income, and 2) failing to have insurance at the time the condition first appears.
The ACA mandate was supposed to fix both reasons, but didn’t really explicitly talk about reason 1) much (most folks can’t afford COBRA on unemployment pay, and it’s limited-time anyway), and did a poor job of fixing it.
If you wanted to change peoples’ priorities, maybe you should 1) find a way to pay for a limited amount of bridge insurance explicitly as welfare or charity, so the people who don’t have a choice due to lack of income can be usually be covered when the condition occurs, and 2) NOT automatically provide pre-existing condition coverage for new policies.
Sure, there will be exceptions to the scenarios covered by such a policy change, and maybe you can provide a limited needs-based/relatively high hassle welfare or charity grant system to cover those exceptions, but this sort of policy would perhaps incentivize people to think about the need to have _insurance_ (as opposed to prepaid health care).
Cost reduction would be important to this too, of course.
LikeLike
Completely agree. And I have a pre-existing condition.
LikeLike
Used to be, when we went on vacations, we would pay a local teenager, Cathy, to take care of our cat.
But it appears Cathy got in trouble. The zoo asked her to take care of their elephant, and she refused. Turns out that was discrimination. The new law says that Cathy can’t charge different prices for different pets. It certainly seems fair: Elephants need care, too, and it’s not their fault that they are elephants.
Cathy is still in business, but she charges $1000 per day for cat sitting. We don’t go on vacations.
LikeLike
I thought the article was worth passing along but then I read your comment so I passed it on and printed out your comment for framing. Priceless
LikeLike
Yup, as much as some people would like, you just can’t outrun math…
LikeLike
We are not heading toward a national medical insurance system, but a medical welfare scheme.
Most likely it will be run by government bureaucrats, controlled by politicians, and be called something like “Medicare for All”.
Politicians will call it affordable, but it won’t be – either for individuals who pay their own premiums, or for the taxpayers who provide the funds for the government to subsidize everyone who does not pay their own premiums.
LikeLike
Reblogged this on I Didn't Ask To Be a Blog.
LikeLike
Please edit your copy before publishing.
LikeLike
You forgot the comma.
LikeLike
I extend the auto insurance/medical insurance analogy one step further. Imagine a car insurance policy that covered any problem, not just accidents. Then it would make sense for the insurance company to give you every incentive to do regular maintenance — oil changes, tire rotation, brakes, etc. — or people would just run the car until the engine seized due to lack of oil and demand their insurance company fix it. Prepaid checkups at the doctor are similar; it makes financial sense for the insurance company to give customers incentives to perform regular maintenance, especially since it’s hard, medically, to distinguish between an “accidental” cancer and a “lifestyle caused” cancer.
LikeLike
Our pre-Zerobamacare insurance system covered pre-existing conditions, with conditions. When you signed on with a company that offered insurance, you had a fixed window to sign up. There were no exams or medical questions. But if you allowed the window to close, you were on your own regarding pre-existing conditions. The risks were estimatible, and were included in the premium.
Preconceived conditions can be covered in a rational insurance plan, provided there are eligibility windows. We did it in the past.
LikeLike
All of that is valid, but you made one very important oversight.
Insurance contracts are valid for one year. After that first covered year, you have a pre-existing condition.
So if you “win” a major illness, you’re covered for under a year. If the plan is through your employer, and you’re unable to work, it’ll most likely be significantly less than that as you become unemployed.
The government has some backstops if you’re disabled enough to receive social security, but approval for that often takes years.
There are a number of genuinely difficult questions here that almost everyone is ignoring in favour of beating on the strawman of their choice. (And the Left actively has incentive to do so, since they want single payer. Keeping the focus off core issues as the status quo degrades is in their interests.)
I agree, people will game the system.
I also agree that health insurance companies are almost unspeakably vile. (I have a chronically ill family member. I deal with the morass on a regular basis.)
Both of which are largely beside the point.
There are people being left in desperate straits. The government and the market have both been actively been interfering with the ability of charity to handle the problem for over a century. Neither is accountable, nor cares about the welfare of any random individual. Leaving it solely in the hands of either power center is contraindicated (and split between the two, they’d merely conspire) but there simply are no other rivals still standing.
The best way forward? Your guess is as good as mine. But I’m sure, whatever it is, that we won’t take it.
LikeLike
I have never had a policy work that way. Ever.
LikeLike
I think there are actually federal stipulations that prevent insurers from offering longer-term contracts to people, say as long as 5 or 10 years. Avik Roy has written on the subject and suggested giving people more flexibility to negotiate the length of their insurance contracts would allow for lower fixed costs. Thanks for a great article WriterinBlack.
LikeLike
It’s not a matter of the year contract that is not how I’ve seen it work, but that if you have something happen while covered, then the next year that’s a “pre-existing condition” and not covered. Once I have a covered incident (like my diabetes, or my palpitations, or my allergy treatments, or my cholesterol issues, or any of the stuff that essentially mean that I’m getting to be an old fart) it continues to be covered so long as I continue to keep insurance in force. It worked that way before Obamacare. And has continued to work that way since.
LikeLike
“…Requiring insurance to cover pre-existing conditions without allowing that insurance to charge for that coverage commensurate with the extra cost destroys health insurance…”
And I would say Obamacare is working perfectly because that is the goal. In many discussions I’ve had over this subject, a point I made continually is the purpose of Obamacare is to be the bridge to single payer. You destroy the private health care insurance industry and all you have left is Medicaid or Medicare. And that is what the regressives have wanted from at least the Wilson years.
Will Trumpcare fix his? Let’s just say I’m got negative waves on it. The one thing that would help off the bat is letting companies compete across all 50 states and that was not in this bill (it will be in future bill…and I’ll respect you in the morning….). And that would be, unlike Obamacare, constitutional.
Let’s just pray Ryan et all surprise us and do something good.
LikeLike
So maybe the scope of the article was just to narrowly focus on preexisting condutions and premiums but just out of curiosity what aboubt the nearly 50% drops in bankruptcies since ACA? Ive read estimates that say 3 out of 5 bankruptcies are due to medical bills. So if 27% percent of Americans under 65 have preexisting conditions and medical bills for them potentially go up and Medicaid is cut by $880 billlion wouldnt that cause a potential spike in bankruptcies, wouldnt the healthcare lenders get stuck with the bill in the end? Would that also cause insurance deductables/premiums to go up? Lastly what about the fact that insurance premiums have grown at a slower rate the past 4 years under ACA than the previous 7 under Bush before ACA?
LikeLike
Going to looking about this differently than just looking at it from actuarial numbers and risk perspective: I think you need to be more honest and open about how this needs to be looked and be honest with yourself. For your example analogy above with auto insurance is simply ridiculous and is purely an apples and oranges comparison. You need to be intellectually honest with yourself and others. I think you are smart enough to extend your range at looking at this — this is what people are looking for — more fair and balanced look at the situations. By far most car accidents will not cause death or large bodily harm whereas the health insurance co along with the statistics ( no you can easily google it up yourself) will and do use (and they are mostly right) the threat of if you don’t have very expensive healthcare 50 or 55 (with many pre-existing conditions they had no control over) to Medicare age you will be in much larger danger of dying. People will and pay OR DO ANYTHNG (like bankrupting their lives — desperstion) to keep this dire situation from happening. The insurance companies and industry very much know this — thus the cost spiral occurring (simply free market supply/demand — the demand in health will ALWAYS outstrip the supply — always). So, Apples and oranges comparison. Also you talk to ANY good friend doctor and they know from lots of experience that your health outcome is predetermined 50% by genes and family history that you can’t control and 50% environmental which you only be able to control. So let’s have people already pretermined pay for everything largely because of this unfortunous situation. Sounds like pushing future of mankind wanting to go back to eugenics thinking in order to try and have the upper hand here. Do you really want that. And lastly noted, you are being very much a hippocrit for probably when you worked for company that more evenly distributed health care costs to keep it down more affordably to pay out when your older (it was ok for you to go along with that back then right?) and also that you are probably more than ok when you hit be able to get the Medicare. That’s hippocritical of you and you need to look yourself in the mirror! Now I do believe (mostly I’m republican) in free market determining outcome of MOST things — but things that force people to lose everything in many cases (which hits older much much harder and a lot being their “fault” getting there”) life or death situations, then I do think using JUST the “free market” determining outcome will NOT contain the medical cost spiral we have been seeing for many, many, many years not just seeing it now. So, a hybrid solution that almost know one would like fully is probably the only solution (i.e. marketed areas gives better solutions and efficiencies and government laws regulates or caps or steps in when free market is getting way to greedy because of having a captive audience or customer base). Not real “pretty” or “simple” or even comprehendable to many, but remember they also said that back in early part of US also and we are still surviving and thriving and this model for the country today. Doesn’t look pretty but by and large has been “working” for the whole people better than other countries lasting close to 200 yrs. let us have an intelligent discussion of dealing with this situation instead of try to find a quick silver bullet to solve it!!!long with the statistics ( no you can easily google it up yourself) will and do use (and they are mostly right) the threat of if you don’t have very expensive healthcare 50 or 55 to Medicare you will be in much larger danger of dying. People will and do pay ANYTHNG (like bankrupting their lives) to have this from happening. The insurance companies and industry very much know this thus the cost spiral occurring. Apples and oranges comparison. Also you talk to ANY good friend doctor and they know from lots of experience that your health outcome is predetermined 50% by genes and family history tou can’t fonut and 50% environmental which you only be able to control. So let’s have people already pretermined pay for everything largely because of this unfortunous situation. Sounds like pushing future of mankind wanting to go back to eugenics thinking in order to try and have the upper hand here. Do you really want that. And lastly noted, you are being very much a bad Hippocrit for when you worked for a company that more evenly distributed health care costs to keep it down more affordably to pay out when your older (it was ok for you to go along with that back then right?) and also that you are probably more than ok when you hit be able to get the Medicare. That’s hippocritical of you and you need to look yourself in the mirror! Now I do believe (mostly I’m republican) in free market determining outcome of MOST things — but things that force people to lose everything in many cases (which hits older much much harder and a lot being their “fault” getting there”) life or death situations, then I do think using JUST the “free market” determining outcome will NOT contain the medical cost spiral we have been seeing for many, many, many years not just seeing it now. So, a hybrid solution that almost know one would like fully is probably the only solution (i.e. marketed areas gives better solutions and efficiencies and government laws regulates or caps or steps in when free market is getting way to greedy because of having a captive audience or customer base). Not real “pretty” or “simple” or even comprehendable to many, but remember they also said that back in early part of US also and we are still surviving and thriving and this model for the country today. Doesn’t look pretty but by and large has been “working” for the whole people better than other countries lasting close to 200 yrs. let us have an intelligent discussion of dealing with this situation instead of try to find a quick silver bullet to solve it!!!
LikeLike
You throw a lot of words out there that all come down to “But I want it!”.
Reality doesn’t care what you want.
And, strangely enough, the more government interference there has been in health are, the more those costs have spiraled.
You say you “mostly” believe in the Free Market but you don’t. You just declare that it doesn’t work for health care. You don’t even attempt to address why things like competition (particularly in the absence of barriers to entry) work to keep costs down.
And, you know, throwing every insult you can think of in this doesn’t help your case.
But you want it so Santa Claus needs to make it happen?
Got news for you, Santa Claus isn’t real. And if he were, he’d be magic and be able to do things us poor schlubs without an army of magical elves to make things happen.
And, dude, use some paragraphs.
LikeLike
I’ll be honest, I didn’t care a damn bit about what you had to say after this point for one simple reason. The fact that you’re accusing David of lying makes it clear that you’re not interested in having a meaningful discussion. You can’t grasp the possibility that someone, being perfectly honest with themselves, could possibly reach a different conclusion.
Either you lack intellectual honest, or you lack intellectual capacity.
Whichever it is, there’s not a lot of point in discussing much of anything with you.
LikeLike
I look at it as “car insurance” If you drive like an idiot, have a lot of tickets and accidents then your premiums are higher than the driver who is more careful. Most “pre- existing conditions” are results of your life style. Maybe if you pay higher premiums you may decide to live a healthier life.
LikeLike
No, I’m sorry. I would beg to differ…where is the statistical proof that pre-existing conditions are a result of your life style. A child gets cancer at age 2–“pre-existing conditions”??? A 22-year old gets multiple sclerosis (an autoimmune disease). Please explain how a life style led to that! What you’re saying in nonsense; ask any medical doctor or researcher to “blame” his patient for the serious illnesses which may arise and he/she would be shocked and or laugh in incredulity. Enough of this “blaming the victim” mentality and have some compassion for ill people with chronic diseases who do NOT choose to be ill!!
LikeLike