The Debate over Insuring Pre-existing conditions

One of the provisions of what we call "Obamacare" is that insurers can't choose not to cover people who have pre-existing conditions.  I have no issue with that, as long as insurers are allowed to adjust the cost of insurance coverage for those people so as to not automatically be forced to lose money.  A little explanation is in order.

A pre-existing condition is merely an illness, prior injury or other condition for which the person has sought medical treatment or been diagnosed as having, prior to their enrollment in a healthcare insurance plan.  So someone who has been taking prescription medications for high blood pressure must disclose this on their application for an insurance policy (unless they're getting coverage through a group plan) and the insurer should be able to adjust the premium this person will pay for coverage accordingly.  In the past they could have denied coverage, but that's no longer an option.

Remember, the purpose of healthcare insurance is to provide protection against an unforseen risk.  You don't know you will get ill, you don't plan to get ill or need medical attention, but insurance is there, just in case you do.  Unforseen risk.

Well, pre-existing conditions aren't an unforseen risk.  They are known in advance.  So the cost of treatment must be factored into the cost of premiums for the insured.  Again, I'm referring to individual plans. 

An insurer makes money by providing coverage with the idea that they will pay out less in claims than they receive from the pool of insureds.  Let's assume, just for the sake of argument, that an insurance company's administrative costs in providing coverage is 10% of what they take in, in premiums.  So if 100 people pay $500 per month, they take in $600,000 in annual premiums and they are left with $540,000 to pay out claims for those 100 people during that year in order to break even.  Any profit will come from the difference between what they actually pay out (insurance industry buzz-term = "claim's utilization rate") and that $540,000.

Now let's suppose that one of the plan's new enrollees at the start of their fiscal year happens to suffer from Hunter's Syndrome (I picked a rare, unusual case to make a point).  The best treatment available for this condition is a drug called Elaprase.  Annual treatment cost for Elaprase is $375,000 per year.  So if this insurer is forced to provide a policy to this person with that pre-existing condition, it will lose money on this group of patients unless the other 99 need medical care that is less than $165,000 for the entire year.  A losing proposition.

The law prior to Obamacare already provided for those who had insurance and a pre-existing condition to change policies without any limitations on their pre-existing conditions.  That's from a law passed in the late 1990s known as HIPAA (Health Insurance Portability Accountability Act).  In those days, if a group health insurance plan enrolled someone with a pre-existing condition and they had no prior coverage, the insurer would exclude benefits for the pre-existing condition for a limited period.

But group plans pool risk.  Group plans have their premiums adjusted upward when there is a very high claims utilization rate.  One person with a very expensive illness or condition can cause an entire plan's premiums to go up.  When I was administering health benefits for an employer with 200 employees receiving health benefits we once saw a year in which the insurer wanted to raise our premiums by 32%.  They'd spent over 95% of our premium dollars from the prior year on claims.  They'd lost money.

So I don't see how insurers that are in the business of turning a profit can afford to be forced to take on pre-existing conditions without being able to adjust premiums on those insured to help pay for them.  Pooling unforseen risk is fair to those who are sharing that risk.  Pooling the expense of an existing condition means all the healthy people are subsidizing the one with the pre-existing condition.  That's a noble sentiment and may be a workable solution if there are enough people to spread the expense among.

I don't see a workable solution for those with pre-existing conditions who have no insurance at present where they can just get insurance for the same cost as anyone else and then have their much higher medical expenses paid by private insurers.  It just doesn't fit into the model of insuring against unforseen risk and making a profit.  But mandating that everyone get insurance, to pool the risk among as large a group as possible is a step in the right direction.