Health Insurance and Pre-Existing Conditions: A Blast from the Past

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’spremium 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?

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