Sticker Shock, Obamacare and the Death of Medical Underwriting

Sticker Shock.  That is the reaction of many individuals when they look at their 2014 individual health insurance premiums.

For those who currently have an individual policy, the plans available starting in January will, in many cases, be considerably more expensive.  (We discussed the issue of costs under the Affordable Care Act (ACA) in our October 3, 2012 article entitled “Premium Costs under Health Care Reform.”)

However, not everyone will pay more.  In a number of situations, consumers will actually pay less, even without being eligible for a Premium Tax Credit from the Federal Government.

Residents in states that currently have highly regulated markets with guaranteed issue and community rating may see their premiums go down.  This is what has occurred in New York State, according to the State’s insurance regulators.  However, as the Manhattan Institute for Policy Research notes, New York State has some of the highest individual premiums in the nation.  Therefore, a drop in premiums does not mean polices sold in New York will be less expensive than policies sold elsewhere in the country.

Unlike New York, premiums will go up in a number of other States.  A primary reason for this is many states allow carriers to medically underwrite individuals who submit applications for health insurance.  Based on the assessment of the individual’s health, a carrier can decline to offer the person coverage.  They can also increase the premium the person pays or exclude coverage for certain conditions.

However, with the ACA’s requirement that carriers offer insurance to anyone who wants it, individuals who previously could not get coverage or who had to pay more for it can now get insurance at the same price as everyone else. This is one reason policies in 2014 are higher than those sold in prior years.  Medical underwriting lowered premiums for those who qualified for insurance by excluding people who did not.

Medical underwriting also served another purpose.  It evened the playing field.

Individuals know more about their health than an insurance carrier does.  Those individuals who are in poor health are more likely to buy as much insurance as they can afford, while healthy individuals are more likely to buy only what they need or not purchase insurance at all.  In the individual market, where the purchase of insurance is voluntary, not using medical underwriting can create a situation where premiums become unstable and eventually unaffordable.

If more individuals in poor health purchase insurance than those who are healthy, premiums will go up.  Each time this happens, the risk pool will lose some portion of its healthiest individuals.  Once this starts, the cycle becomes self-perpetuating.  Eventually, only those who most need health insurance are left.  At this point, premiums get so high no one can afford insurance.

The architects of the ACA understood the dangers of offering guaranteed issue on a voluntary basis.  In the absence of medical underwriting, they knew everyone needed to have insurance for the system to work.

For this reason, the law requires most individuals to purchase insurance or face a penalty.

Medical underwriting played an important role in assuring a stable market.  It benefited healthy individuals by making premiums lower than they would normally have been.  But, it discriminated against others who could not get insurance.  Jonathan Cohn put the issue succinctly in his November 17th article in the New Republic Online.  “A system that discriminates against some people inevitably discriminates in favor of others.”

The goal of the ACA is to provide universal access.  The task ahead is to encourage as many Americans as possible to take advantage of this opportunity.  Without medical underwriting, universal participation becomes the key to a stable health insurance market.

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