no third solution

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Pre-Existing Condition Exclusions Are Necessary

March 23rd, 2009

Another pair of lawmakers, this time in West Virginia, have introduced legislation that seeks to over-ride the laws of economics. Jay Rockefeller and Joe Courtney would like to “eliminate pre-existing condition exclusions from health insurance policies.”

The industry has some concerns about a practice, referred to in the industry as “bump and run”, the process by which an individual takes out a policy “with the intention of obtaining medical care within the first few months of coverage, then not paying premiums after medical procedures are paid for.” And rightly so. If insurance companies can’t deny coverage for pre-existing conditions, what incentive is there for anyone to purchase a policy, if they are healthy?


Insurance, as a business model is not rocket science. In short, it requires that there be a large pool of insureds, about which we have reasonably accurate predictions with regards to the class probability of certain perils and risks which might befall some of them. Insurance “works” because people have varying tolerances for risk. Many people (most of whom won’t become ill or die during the term) pay a modest premium to protect themselves and their families financial well-being in case they become ill or die during the term. These premiums then pay for the costs incurred by the small number of people who actually do become ill.

By removing the incentive to buy insurance when one is healthy as a preventative/protective measure against an unlikely misfortune, this legislation all but guarantees moral hazard. No rational person would purchase insurance until they needed treatment, which would essentially be the opposite of adverse selection: the only people with “insurance” would be people in dire need of immediate medical treatment. No insurance company, anywhere, ever, could survive more than a few days under this sort of regime.

Au contraire!” say the legislators. In fact, they are so bold as to argue that this legislation would actually serve to make insurers more profitable! I can’t make this stuff up:

Both lawmakers said the change should not hurt the insurance industry, but increase the pot of customers, thereby bringing down the cost of premiums.

“Im confident this measure is something the market can deal with,” Courtney said. “This will expand the market, increasing customers.”

The market will in fact “expand”, but the pool of actual customers will be greatly reduced. Since exposure to risk under this scenario is increased, it follows that premiums would have to increase. In fact premiums would likely exceed affordability for all but the wealthiest.

Additionally, the cost of premiums is not determined by the size of the pool of policy holders – there is not really a volume discount or economies of scale at play here. The cost of premiums is largely determined by the exposure to risk. If exposure to risk increases, if economic loss is experienced more frequently, then premiums go up. If not, premiums remain unchanged or decrease.

Further statements from Courtney and Rockefeller indicate a profound ignorance of how insurance markets actually function.

Both lawmakers … said the insurance industry is set up to pool risk, not to avoid it, and should take on more policies and claims.

Indeed, the insurance industry is set up to pool risk. But “risk” implies some degree of uncertainty, and a person with a pre-existing condition is anything but an uncertainty. If you try to insure your car after it’s been hit by a semi truck (i.e., a “pre-existing condition”) the insurance company will rightly deny “coverage” to you. Why this fairly straightforward concept is so difficult to understand in a different context is beyond me.

“If we’re going to have universal health coverage, we’ve got to get these insurance companies under control,” Rockefeller said. “They are in business in order to pay for people who are sick.”

Wrong. Insurance companies are not in business to pay for people who are sick. They’re in business to pool and assume risk at a slight premium, and to pay for people who become sick, which is hardly an insignificant distinction. At least their motives are clear, though: this is simply one step in the process of back-dooring us into “universal” health coverage, which in practice has been a pretty abysmal failure, everywhere it’s been tried.

One thing is certain: the new bill proposed by Joe Courtney and Jay Rockefeller is ignorant beyond comprehension, both of what insurance is and of how it works. I have no idea whether these legislators are lying out of malice, of if they’re truly ignorant yet well-intentioned, but it doesn’t much matter: in either case, they’re absolutely and demonstrably unfit for the respsonsibilites to which they’ve arrogated themselves.

no third solution

Blogging about liberty, anarchy, economics and politics