6 ms·

The real reason health insurers won’t cover people with pre-existing conditions

19 points by newmediaclay 15y ago

drucken 15y ago
Extremely well-written article. It also clearly demonstrates one of the reasons why markets alone are simply not sufficient/appropriate for some problems. The rest of the developed countries outside of the US have long understood this with respect to health care.
zyfo 15y ago
Isn't this common knowledge? I'm pretty sure this was something that was mention in a seminar on information asymmetry when I studied Microeconomics 101 a couple of years ago.
- deleted 15y ago
  [deleted]
- guan 15y ago
  It's still an information asymmetry story. From my cursory reading, the contribution is to identify what kind of information asymmetry is involved in healthcare, namely that it's more about the cost of treatment than about the probability of illness. I know that health insurance is often used to teach asymmetric information models, but it wasn't always obvious that it's a good example. Someone selling a used car might know a lot more about the car's hidden costs than anyone else, but does the typical buyer of health insurance really know more about his or her probability of illness than a sophisticated insurer with good doctors and actuaries and a lot of data? This led some economists to argue that the problem in health insurance markets is not asymmetric information, but rather too much information—the insurer already knows you will be a bad risk. This research makes it clear that there really is asymmetric information and spells out what it is.
- Loic 15y ago
  Read the The Cartoon Introduction to Economics Volume One, page 50. Everything more or less is there.
ars 15y ago
This article demonstrates a very common mistake: People think health insurance covers health bills. It doesn't. It covers unexpected health bills, which is a very different thing. Any type of situation that is expected to happen can not be covered by insurance, it needs to be covered by savings instead. However many people want insurance premiums to be a type of forced savings plan, which is why there is such a huge argument in the US about health insurance. Those opposed to government regulation want to handle the savings on their own. Those who like government regulation want it to force people to save for health care costs.
- jberryman 15y ago
  > It doesn't. It covers unexpected health bills, which is a very different thing. I see conservatives (not trying to label you) make this argument a lot, and I think it is a mischaracterization of 1) what most people mean by health insurance, and 2) what health insurance and health plans are really about: pooling risk and creating groups that can negotiate for lower prices. Re. 1: just skim the wikipedia article for health insurance (http://en.wikipedia.org/wiki/Health_insurance http://en.wikipedia.org/wiki/Health_insurance); the distinction between health plans vs. what you mean by "health insurance" all gets rather confused.
  - tptacek 15y ago
    The conservative objection to single payer health insurance is that single payer may be a terrible way to achieve cost negotiation. In a system of guaranteed issue private insurance, people could tune their exposure to risk by selecting plans with greater or lower deductibles, and then use HSAs to set up a rolling facility for paying their day-to-day coverage costs. The fundamentals of the system we're moving towards in the US is actually a conservative plan from the '90s: an exchange-based market for private health insurance coupled with guaranteed issue and a mandate for coverage. That plan was itself a response to the original liberal vision of universal health insurance: nationwide government-run single payer insurance.
- anonymoushn 15y ago
  I came here to say just this. In the United States, though, we use "Insurance" to refer to a very expensive form of prepaid health plan. We keep costs up by making laws that prevent employees from knowing how much their prepaid health plan costs. Just in case people might want to react to the high costs by not purchasing a plan, in the near future everyone in the U.S. will be required by law to purchase a prepaid health plan.
sunsu 15y ago
Great article! I just don't agree with the author's confidence in the "guiding hand of the government" in his conclusion. I would much rather have the freedom to purchase future options to buy healthcare rather than have my freedoms removed because the of the fear that the "average 20-year-old" may not have enough foresight to think about his/her future.
- DanBC 15y ago
  There's no reason they have to be exclusive. The UK has dual public / private provision of healthcare. (Personally, I would never use private health care in the UK. I know people who have.)
  - anarchotroll 15y ago
    If you can opt out of public helthcare, then it is fine. But if you can opt out, I wouldn't call it "public" anymore. If you can't opt out, then choosing private basically means paying for both.
tptacek 15y ago
I read this yesterday and was unimpressed; it seems that the finding here is "adverse selection", which is more or less the classic canonical problem in insurance. Did I miss something?
- davidw 15y ago
  My read of it is that it's not just adverse selection, but a situation where instead of both parties having a vague idea of what their costs may be, one party now has a really good idea about their costs, and is therefore in a much better bargaining position.
  - tptacek 15y ago
    Sure; adverse selection and asymmetric information are two sides of the same coin.
  - FireBeyond 15y ago
    Not so much that, to me - both parties have a great idea of what their costs might be, but the consumer has the critical information - "of the options open to me, which will I choose, if any?" The "ignorance" is in "likelihood of utilization", not "cost of utilization".
- dalke 15y ago
  You missed that this was describing research which shows adverse selection is a "at least partly" behind the problem. Without research, you're just hand-waving that it might be a problem, but you don't know if it's actually a significant influence. Quoting from the article: Hendren didn’t invent the idea of markets falling apart because customers know something that companies don’t. Nobel prizes were awarded to a trio of economists in 2001 for developing this idea of adverse selection in the 1970s. But his use of the concept may at least partly resolve the puzzle of why those with pre-existing conditions can’t get insurance. Another quote: This individual mandate is a natural fix to the problem of adverse selection in health insurance: It keeps the lowest-cost participants from opting out, and as a result the market doesn’t unravel.
RyanMcGreal 15y ago
All the more reason to take economics out of it and provide health coverage via universal single payer insurance.
- davidw 15y ago
  I'm pretty happy with the health care system here in Italy. It's so much less of a hassle than in the US: get sick? go to the doctor, no paperwork, no forms to fill out (which, in Italy, is really something of a minor miracle), but "economics" are always with us, because health care is a scarce good.
  - RyanMcGreal 15y ago
    > health care is a scarce good. It's true that every health care system rations care. The difference is that a universal system rations based on medical need (triage) whereas a market system rations based on ability to pay.
    - simplefish 15y ago
      This is not true. Your ideal universal system may ration on medical need. There might even be one in existence that does so... ...but I really doubt it.
joedev 15y ago
The entire concept of insurance is to share risk. (Egyptians had the bright idea to combine grain together onto shared barges so if one sinks, none of us loses our entire cargo.) Risk carries an element of unpredictability. If a scenario is predictable, there is no risk to be shared, ergo by definition a scenario with little risk (e.g. known diagnosis and treatment plan) is absolutely and unsurprisingly not fitting for insurance.
tomx 15y ago
As a UKer, it strikes me the US system of health insurance is just inefficient, even if only from a time management perspective. Do 300M people really have to negotiate their own insurance, and research carefully all the terms and conditions and so on?
- anonymoushn 15y ago
  No, generally we have less than four options for insurance provided by our employer. When we are not employed, most of us cannot afford to carry insurance.
- ars 15y ago
  Do 300M people really have to negotiate their own home purchases/rent? Or cable tv? Or car insurance? Or home/renters insurance? Why do you single out health insurance?
anarchotroll 15y ago
It just doesn't make any sense for a health insurer to cover people with pre-existing conditions. Insurance is all about risk; if you have a pre-existing conditions, there isn't a risk involved anymore, since you already know you have a problem (unless the provider doesn't cover anything that derives from that pre-existing condition which would also increase processing costs).

19 points by newmediaclay 15y ago

Extremely well-written article. It also clearly demonstrates one of the reasons why markets alone are simply not sufficient/appropriate for some problems. The rest of the developed countries outside of the US have long understood this with respect to health care.

zyfo 15y ago

Isn't this common knowledge? I'm pretty sure this was something that was mention in a seminar on information asymmetry when I studied Microeconomics 101 a couple of years ago.

deleted 15y ago
[deleted]
guan 15y ago
It's still an information asymmetry story. From my cursory reading, the contribution is to identify what kind of information asymmetry is involved in healthcare, namely that it's more about the cost of treatment than about the probability of illness. I know that health insurance is often used to teach asymmetric information models, but it wasn't always obvious that it's a good example. Someone selling a used car might know a lot more about the car's hidden costs than anyone else, but does the typical buyer of health insurance really know more about his or her probability of illness than a sophisticated insurer with good doctors and actuaries and a lot of data? This led some economists to argue that the problem in health insurance markets is not asymmetric information, but rather too much information—the insurer already knows you will be a bad risk. This research makes it clear that there really is asymmetric information and spells out what it is.
Loic 15y ago
Read the The Cartoon Introduction to Economics Volume One, page 50. Everything more or less is there.

ars 15y ago

This article demonstrates a very common mistake: People think health insurance covers health bills. It doesn't. It covers unexpected health bills, which is a very different thing. Any type of situation that is expected to happen can not be covered by insurance, it needs to be covered by savings instead. However many people want insurance premiums to be a type of forced savings plan, which is why there is such a huge argument in the US about health insurance. Those opposed to government regulation want to handle the savings on their own. Those who like government regulation want it to force people to save for health care costs.

jberryman 15y ago
> It doesn't. It covers unexpected health bills, which is a very different thing. I see conservatives (not trying to label you) make this argument a lot, and I think it is a mischaracterization of 1) what most people mean by health insurance, and 2) what health insurance and health plans are really about: pooling risk and creating groups that can negotiate for lower prices. Re. 1: just skim the wikipedia article for health insurance (http://en.wikipedia.org/wiki/Health_insurance http://en.wikipedia.org/wiki/Health_insurance); the distinction between health plans vs. what you mean by "health insurance" all gets rather confused.
- tptacek 15y ago
  The conservative objection to single payer health insurance is that single payer may be a terrible way to achieve cost negotiation. In a system of guaranteed issue private insurance, people could tune their exposure to risk by selecting plans with greater or lower deductibles, and then use HSAs to set up a rolling facility for paying their day-to-day coverage costs. The fundamentals of the system we're moving towards in the US is actually a conservative plan from the '90s: an exchange-based market for private health insurance coupled with guaranteed issue and a mandate for coverage. That plan was itself a response to the original liberal vision of universal health insurance: nationwide government-run single payer insurance.
anonymoushn 15y ago
I came here to say just this. In the United States, though, we use "Insurance" to refer to a very expensive form of prepaid health plan. We keep costs up by making laws that prevent employees from knowing how much their prepaid health plan costs. Just in case people might want to react to the high costs by not purchasing a plan, in the near future everyone in the U.S. will be required by law to purchase a prepaid health plan.

sunsu 15y ago

Great article! I just don't agree with the author's confidence in the "guiding hand of the government" in his conclusion. I would much rather have the freedom to purchase future options to buy healthcare rather than have my freedoms removed because the of the fear that the "average 20-year-old" may not have enough foresight to think about his/her future.

DanBC 15y ago
There's no reason they have to be exclusive. The UK has dual public / private provision of healthcare. (Personally, I would never use private health care in the UK. I know people who have.)
- anarchotroll 15y ago
  If you can opt out of public helthcare, then it is fine. But if you can opt out, I wouldn't call it "public" anymore. If you can't opt out, then choosing private basically means paying for both.

tptacek 15y ago

I read this yesterday and was unimpressed; it seems that the finding here is "adverse selection", which is more or less the classic canonical problem in insurance. Did I miss something?

davidw 15y ago
My read of it is that it's not just adverse selection, but a situation where instead of both parties having a vague idea of what their costs may be, one party now has a really good idea about their costs, and is therefore in a much better bargaining position.
- tptacek 15y ago
  Sure; adverse selection and asymmetric information are two sides of the same coin.
- FireBeyond 15y ago
  Not so much that, to me - both parties have a great idea of what their costs might be, but the consumer has the critical information - "of the options open to me, which will I choose, if any?" The "ignorance" is in "likelihood of utilization", not "cost of utilization".
dalke 15y ago
You missed that this was describing research which shows adverse selection is a "at least partly" behind the problem. Without research, you're just hand-waving that it might be a problem, but you don't know if it's actually a significant influence. Quoting from the article: Hendren didn’t invent the idea of markets falling apart because customers know something that companies don’t. Nobel prizes were awarded to a trio of economists in 2001 for developing this idea of adverse selection in the 1970s. But his use of the concept may at least partly resolve the puzzle of why those with pre-existing conditions can’t get insurance. Another quote: This individual mandate is a natural fix to the problem of adverse selection in health insurance: It keeps the lowest-cost participants from opting out, and as a result the market doesn’t unravel.

RyanMcGreal 15y ago

All the more reason to take economics out of it and provide health coverage via universal single payer insurance.

davidw 15y ago
I'm pretty happy with the health care system here in Italy. It's so much less of a hassle than in the US: get sick? go to the doctor, no paperwork, no forms to fill out (which, in Italy, is really something of a minor miracle), but "economics" are always with us, because health care is a scarce good.
- RyanMcGreal 15y ago
  > health care is a scarce good. It's true that every health care system rations care. The difference is that a universal system rations based on medical need (triage) whereas a market system rations based on ability to pay.
  - simplefish 15y ago
    This is not true. Your ideal universal system may ration on medical need. There might even be one in existence that does so... ...but I really doubt it.

joedev 15y ago

The entire concept of insurance is to share risk. (Egyptians had the bright idea to combine grain together onto shared barges so if one sinks, none of us loses our entire cargo.) Risk carries an element of unpredictability. If a scenario is predictable, there is no risk to be shared, ergo by definition a scenario with little risk (e.g. known diagnosis and treatment plan) is absolutely and unsurprisingly not fitting for insurance.

tomx 15y ago

As a UKer, it strikes me the US system of health insurance is just inefficient, even if only from a time management perspective. Do 300M people really have to negotiate their own insurance, and research carefully all the terms and conditions and so on?

anonymoushn 15y ago
No, generally we have less than four options for insurance provided by our employer. When we are not employed, most of us cannot afford to carry insurance.
ars 15y ago
Do 300M people really have to negotiate their own home purchases/rent? Or cable tv? Or car insurance? Or home/renters insurance? Why do you single out health insurance?

anarchotroll 15y ago

It just doesn't make any sense for a health insurer to cover people with pre-existing conditions. Insurance is all about risk; if you have a pre-existing conditions, there isn't a risk involved anymore, since you already know you have a problem (unless the provider doesn't cover anything that derives from that pre-existing condition which would also increase processing costs).