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Health Plan One spoke to National Public Radio recently and focused on rules around preexisting conditions and insurability. I thought it would be appropriate to be very specific about how health insurance companies view preexisting conditions, what they do with them,  how we can help you get health insurance, and why the system works the way it does.

Health insurance companies are in the business of, in fact, issuing “insurance” policies. Insurance means that a company will assess a person’s risk and then set a price of insurance, commensurate with that risk. To the extent that insurance companies do a poor job at assessing risk, they will not be in business very long, as claims will quickly outrun premiums. In fact, the average insurance company posts 3% of premiums in after tax profits and therefore does not leave a large margin for error.

Insurance companies typically do not want to insure chronic diseases such as diabetes. They also do not want to insure undiagnosed conditions or imminent surgeries. So, for example, if someone has hurt their knee and needs a $5,000 operation, an insurance company will not offer a $200 policy so that person can pay for his or her $5,000 operation. What they will do is say they will not insure that knee but will insure the rest of that person’s health needs, or they will say get if that person gets his or her knee fixed, then 6 months later he or she will be eligible for health insurance. Health insurance companies do not want open ended risks that they cannot assess.

So, how should someone seeking health insurance with a medical condition proceed to purchase health insurance? First question is do you qualify today for individual insurance? At Health Plan One, we can quickly review your health status and tell you what company would potentially offer you health insurance. Or we may tell you that you should review alternatives. Depending on your state and situation, alternatives may include a COBRA plan, a sole proprietor plan, or a HIPAA plan. Certain states like MI, NY, NJ, MA, and others have guaranteed issue plans: they may be a bit more expense but anyone can qualify for these plans. In other states, like CT and NH there are high risk pools, or plans that although expensive but anyone can qualify for.

Again, the ability for health insurance companies to accept all comers regardless of health status requires that everyone participates in the pool. It also requires that health insurance companies are allowed to allocate costs commensurate with risk. For example, age is a big determinant of your health risk: a 5 year old child typically requires much less care than a 60 year old male. Insurance companies will charge that older male 4 to 5 times the premium of the younger male. This may seem unfair to the 60 year old, but it seems awfully fair to the child. Unfortunately, the insurance market needs to allocate prices according to risk profile or it won’t work. Take NY, for example where age rating is not allowed and regardless of age you pay the same price. A PPO policy costs $1,500 dollars per month. This happens because everyone pays the same rate regardless of age. The younger people will ultimately opt out of the insurance pool, viewing it as unfair and too expensive. If the 18 year old opts out because it’s too expensive, then it gets a little bit higher for everyone, and ultimately, the price will reflect a 64 year old male and almost everybody will opt out of the insurance pool.

So how do we deal best with an insurance market that demands we allocate risk appropriately? High risk pools are an excellent way. People buy insurance to guard against future risk not current risk, so you can take the really high risk people and put them in a high risk pool and protect healthy people in an insurance market that reflects the actual cost of insuring against a future event you will have a highly functioning insurance market. Taxes or some other mechanism must be issued to subsidized to the high risk pool, although if everyone has insurance, over time the need for that high risk pool will diminish.

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