Economic Effects of Health Care Reform: Insurance Costs with Pre-existing Conditions

This begins a series of posts about the recently adopted health care reform, a subject I have not discussed on this blog so far.  I will not be ranting about how wise or stupid the bill is.  If you want to hear me rant, buy me a martini.  As long you keep buying, I'll keep ranting.  Instead, I want to cover the effects that businesses will face.

Today's topic is health insurance cost impacts due to the access provisions.  The new bill mandates "immediate access to insurance for uninsured individuals with a pre-existing condition," and eliminates "pre-existing condition exclusions for children."  (I'm working off a summary, being no more inclined to read the entire document than any of our elected officials are.)

Why do insurance companies exclude pre-existing conditions?  We economists call it "moral hazard."  If people have a choice about whether they buy insurance or not, then those most likely to buy it are those who are sick or going to be sick.  This self-selection of the sick is mostly avoided through employer-provided health care.  When everyone who works at the ABC company gets health coverage, then there's less chance that only sick people are buying coverage.  However, notice that I said "mostly avoided," because today people who have pre-existing conditions, or suspect they are likely to get sick, seek out jobs with good health care coverage.

I expect three kinds of behavioral effects.

  1. Many people will not change their behavior at all, even if it would be in their self-interest.  They don't know about the law, they don't care about their future, or they intend to get around to it once of these days.
  2. Some people who currently have health insurance coverage will drop it immediately.  They save money, and they remain certain they can buy coverage whenever they need it.  Here's their risk: they are in an accident, get taken to the emergency room, get treated (the hospital cannot say no), get their huge bill, and the hospital trashes their credit rating.  That's about it.  If follow up care is needed, they simply buy insurance.  If they get a lump and their doctor says let's get a biopsy, they buy insurance.  Avoiding months, and maybe years, of insurance payments will cover an occasional doctor visit.
  3. Some people who currently don't have coverage will buy coverage when they get sick or injured.  Their care may be better (or maybe not), but it's quite likely to be more extensive and expensive.  Hospitals and doctors will be better off–they are more likely to get paid.  Insurers will be much worse off.  Those who didn't have coverage but can come up with a little insurance money can get millions of dollars worth of care for a small premium.  (And there are no longer any lifetime caps on coverage, either.)

The direct impacts:   This feature by itself looks good for health care providers (hospitals, doctors, drug companies) and very bad for insurers.  However, I don't know the magnitude of the impact, because I'm not sure how many people will stay in inertia, and how many will respond to the new incentives.  Certainly some will respond, and some won't.

What is the business impact of limits on pre-existing conditions?  If your company currently pays for health insurance for your employees, expect that cost to rise even faster than it has.  If I were advising an insurance company (I'm not, but give me a call if you run one), I'd err on the side of higher premiums rather than lower, because of the potential of many, many sick people signing up for coverage.  I would never recommend a company provide bad service, but some insurance companies might be better off with really lousy service when new customers apply for coverage.