Reinventing the Individual Health Insurance Market

The health insurance industry has been under attack for years. There are those who would like to do away with it completely. While those voices have grown louder in recent years their political success has been limited at best. For evidence, just look at the campaign for the Democratic presidential nomination: no major candidate called for a government-run, single-payer system. The two remaining contenders have both explicitly taken such an approach off the table.

Yet there is one aspect of the industry that is under intense attack: the individual market. Again, this isn’t new. In the past, however, most of the attacks have been unfocused or ill-informed. Critics tended to ignore unique aspects of the coverage targeted at individuals and families buying insurance outside of work: it’s a voluntary decision. To maintain affordable premiums carriers must weed out potential buyers who are certain to incur substantial claims.

For example, carriers will often reject an applicant who is a regular user of a particular prescription drug. This strikes many as wrong, if not immoral. Just because someone needs a certain medication is no reason to deny them insurance.

Yet, when the monthly prescription costs exceeds the monthly premium, what else can the carrier do? Insurance is about spreading risk. In a voluntary market where people can choose when to purchase coverage, it means they need to buy insurance before their known risks exceeds the premium. Otherwise, they are simply asking other consumers to subsidize them. This dynamic, known as adverse selection, is at the root of much of the problems facing the individual market.

It’s not the only cause, however. Carriers exacerbated the problem by mishandling their approach to managing adverse selection. The most obvious mistakes involved how rescissions were handled. Even the industry’s most ardent foes admit carriers need to protect themselves from fraud. If an applicant knowingly and intentionally lies about material information on an application for coverage, the carrier should have the right to revoke the coverage.

It’s identifying when the misstatements are knowingly and intentionally that creates a gray area. Carriers chose to be aggressive in applying their right to rescind coverage. Now they’re paying a huge cost for this posture in the form of large fines, law suits and horrendous publicity.

The rescission issue is the hammer being used by lawmakers, regulators and pundits interested in reshaping the individual health insurance market. That their proposals would be more likely to do more harm (in the form of higher prices and less consumer choice) than good seems almost beside the point. They want change. They want it now.

While their changes are often off target their goal may not be. Perhaps the attack on the this market segment is what’s needed to prod the industry to reform itself. Perhaps it’s the motivation needed to reinvent the individual health insurance market, to make it stronger, more valuable and more respected than in the past.

I’ll be writing about the opportunities for reinvigorating the individual market over the next several days. I hope you’ll share your ideas, too. Please post your thoughts on ways to reinvent individual health insurance products, the way they’re sold, administered and used. By the end of this dialogue we’ll at the very least have built a list of alternatives to some of the misguided proposals currently being considered in Sacramento, Washington D.C. and elsewhere. At best, someone who can actually implement the changes may be inspired by your thoughts and meaningful change will follow.

Stay tuned.  

10 thoughts on “Reinventing the Individual Health Insurance Market

  1. Agree with what Alan said. Health insurance has become over-commercialized, and is run like a business instead of a public good.

    I think money really blinds people to whats morally right.

  2. The article states ” we need to weed out” the people we don’t want to give coverage too, again I ask where are these people supposed to go.

    I’ll tell you what is going on in this country, people who are severely injured are losing their homes; their cars, everything they own, they are losing their friends, and falling into depression. Their only recourse is bankruptcy, then when they have nothing and living on the street, they might get medicare, which won’t pay for most services anyway, so guess you pays with higher rates?

    This is what is going on everyday in this country because the insurance industry has to “weed out” people, so they can make huge sums of money on wall street for the executives, investment houses and wall street insiders.

    I hope, no I pray that many of the people above get severely injured or someone in you family, just so you can go through the pain of losing everything, for the insurance company!

  3. Paulette-

    Comparing the Health Industry to the Nazi regime. I would say that is an irrational argument. The Nazis wanted to get ride of sick people. The health Industry is trying to help sick people. You write as though you are educated so I am stunned by your comment. The lack of compassion is outstanding. 6 Million Jews died, and you dare compare that with the Health Industry. I do understand your thought process, no matter how convoluted. The health industry in no way wants to rid the world of sick people. The health industries goal is make sick people healthy. Until the Health Industry starts killing people or putting them on trains to concentration camps, lets keep the the Nazi comparison out of it. As a Jew, I am appalled with Paula’s train of thought. The Nazi’s were a regime bent on taking over the world. The health Industry is here to help, if you are willing to help yourself first. It might not be the perfect system, but a comparison to the Nazis attempt to ride the world of sick people is pretty far fetched. Thanks for the laughs Paulette.

  4. Dear Preceding Commenters:

    This established issue of health care vs. the insurance industry seems to be increasingly argued to the point of frenzy and I’m am compelled to state that I do not feel that it is because of the impending election at this point. That being said, I believe it is because we are running out of options. After working every angle of both health care, insurance, managed care and industrial insurance I will make another scary statement and that is to say I would not encourage someone to train in medical billing or administration in the insurance or managed care industry. It is truly going away as we know it along with the support jobs that enforce the infrastructure of the insurance industry. Anyway, “insurance” is a loose term whose original meaning began to transform into the “network” scenario in the early 80’s.
    I’ll spare you the long extrapolation of the insurance – union – network – industrial – HMO – self insured – time line that takes us from the beginning of “insurance” up to the present day.

    I believe the question to ask ourselves is: which entity is best to handle the large pool of money that would go toward advances in medical practice and discovery of cures, the private business sector with accountability laws to protect us or the US Government with the people enforcing accountablity? Is this an undeniable right for every citizen and how can we curb potential abuse of the system that society may be burdened to support.

    We know that abuse occurs now by means of insurance fraud, insurance CEOs reaping more profit than the providers of medical care that went to school for ten years, who pursue continuing education and try to hold up under the weight of student loans; we know that the pharmaceutical industry is misleading and unscrupulous with fee mark ups.

    Now we are left with the fear of, “what if Big Government takes over”. Rest assured, there will be mistakes, abuse as well as new compliance laws to curb the abuse.

    I say pay attention and tell the government how it is to be handled. Like everything else, this issue is up to the people and just because something is run by a government agency it does not mean we have given up a controlling interest in it’s operation.

    And you talk about business! Maybe businesses and corporations will be actually able to get down to business instead of trying to be insurance gurus in order to manage the risk involved.

    This is a hard one. While I am a supporter of capitalism and free enterprise, my choice is to also remain cognizant of the fatal issues of the Nazi regime.That being devaluation of any human life or allowing insidious genocidal reasoning. I dare say that did not actually begin with the Jewish culture but rather those who happened to be sick or disabled during the Stalin reign of communism which directly preceded the devaluation of the Jewish community who stood up to the abuse of the repulsive devaluation of the sick and disabled. Remember the three X’s on medical files? Three strikes, your out! Resources were deemed to be more important to strengthening of the developing Soviet Union Military rather than let society’s week and disabled live.

    Now, where are we?

    Come back~

  5. I ditto Alan’s reply to Mark. Let the government run health care and see what happens to your coverage. If it were that easy to get everyone in America covered, don’t you think it would of happened by now? Easy for someone who doesn’t fully understand the industry to bash it and use this as the reason “why people in other countries want to kill us, because we are barbaric”. I think the reasons some people want to kill us goes far behind Rate Increases and declines. And if someone wants to kill us because the health industry is a business, then shame on them. People will always find reasons to hate what they don’t understand, and once again it has nothing to do with Rate Increases and declines.

  6. I have been an expert witness in individual policy revisions and have learned quite a bit about the law in this area. As mentioned above, post claims underwriting is illegal in California; that’s that. If the carriers want to insulate themselves against this in the short run, then they should do real underwriting in the first place, leaving only the issue of material misrepresentation to be determined. But instead, they continue to use sub-par people and antiquated practices to underwrite their individual business. There’s no consistency, nor uniformity in individual underwriting. They deserve the bad press they get in this market.

    Still, the problems are real. I have not yet found an effective way to balance the competing issues of guaranteed issue policies versus an individual mandate. Until the political realities of this are brought to light in a legitimate discussion of the “free lunch concept” and its problems, the answers just aren’t there. The closest thing I have found is to make HIPAA conversions available to anyone, or to enhance the availability of the high risk pool.

    Finally, this issue is the Achilles heel of the health insurance business. It’s very profitable for carriers (cherry picking has it’s advantages to the stockholders!) and they want to keep it that way, even if it means a scorched earth policy ending in the government taking over the entire business. Alan, if you still think these decisions arent made with the bottom line in mind, you are kidding yourself!

  7. Mark: And when government runs a health care system it’s a vocation? We are talking about human beings — and we’re also talking about limited resources, Health care is expensive. We need to deliver it as efficiently as possible so there’s resources left over for things like housing, education, publis safety, transportation and protecting the environment. This series of posts is not about ingoring the health care needs of people, it’s about making sure that it’s there when they need it. As for your comments on people in other countries wanting to kill us, those are simply tasteless, foolish and wrong.

  8. Wow, only in America, and we say we are a civilized country. This is why people in other countries want to kill us, because we are barbaric, but we don’t know it. Health Insurance should not be a business, it should be something our country does for it’s citizens and helps people become healthier.

    The problem with the comments above is that you do not see a difference between a widget and a human life! Some people even compare it to their cars, people are not cars. I notice most of these “business” comments come from Republican’s, you know the “Family Values” party, so concerned about the Abortion issue, but tough luck if you get sick or injured. Where are the people who need regular care supposed to go?. Maybe their condition was not their fault, got injured or in an accident. Since most of these people are so religious, I hope you tell that to God on your judgment day, tell him your disregard for human life ” is just business” see how that goes over!

  9. Alan,

    Alan,

    It is not the least bit a surprise that health insurance carriers use rescission to guard against false claims. Yet, post claim underwriting, the act of underwriting or determining the suitability of a risk after a claim as opposed to before policy issuance, is not only a public relations disaster, but poor insurer business tactic. (The California Insurance Code speaks to post claim underwriting as a violation).
    After almost four decades in the industry, I have had only two individual policies rescinded from insureds that were referred to me. As writing agent, I believed what they represented to me to be “true the best of there knowledge”. And on both occasions I was furious to have been brought in on their efforts to defraud the insurer. The insurer took the correct action.
    The dialogue that needs to be undertaken is what effect will guaranteed issue the process of issuing policies to anyone regardless of health) have on everyone in the state who wishes to purchase health plans. What will be the immediate and long term effects on; pricing, renewals, claims review, plan designs, etc. This discussion has taken place for years, but I fear that rather than extol the virtue of good risks over bad, insurers are merely doing what is most expedient and economical on all fronts.
    Finally, agents play a viatal role in field underwriting and need to be a continuing link in the issue of anny policy. I am curious as to whether the policies that created the publicized rescissions were generated by licensed agents or call centers.
    Alan, thanks for opening this topic.

  10. Another great article by Alan Katz, the Insurance Guru. You are absolutely correct in saying the carriers should deny someone with huge prescription bills every month. I think people forget that Insurance is a business, just like any other. If Joe Schmo were to pay 100% of the prescriptions he might understand where the carrier is coming from. I wish I had more insight and input on new and creative ways to improve the individual market, but I don’t. With such a complex system, I truly believe we need the best and brightest people working on this. Even then, we might not see the results working for 5-10 years. The fact that Kaiser is trying to be on the front line for reform is interesting as well. I have a friend that worked very high up on the totem poll for Kaiser. While working for Kaiser, he was forced to have coverage with them. Once he left Kaiser, do you think he continued his coverage with them? The correct answer would be no. I think its sad when a top player at a company doesn’t even hold the company in high regards. Clearly he didn’t think they were that great of a carrier after working for them for some 20 odd years. I might not have much input on how to fix the problem, but I think have some good ideas on how to prevent the problem from being so catastrophic. I personally feel that America is horribly out of shape. I was just at lunch and an overweight women was ordering Taco Bell. When that women loses her job or quits, and then she gets denied coverage, she is going to blame the carrier. She will say the carrier is in the wrong, when in my opinion, she is clearly in the wrong. We need to take responsibility and get healthy. Mind, body and spirit. While that particular women might be covered through a group, the fact that she is guaranteed coverage means something. If the carrier has to cover her, how are they going to compensate that loss. They will increase the rates for healthy people. So while I workout 4 days a week and strive to eat and stay healthy, these out of shape citizens are increasing my monthly premium. I’m not saying getting healthy will fix the Health Care Industries rising costs, but on an individual level it would certainly help. Hopefully I don’t offend anybody with my comments. I am not prejudice towards overweight people, I just think they need to take responsibility for their own health, and not be surprised when they get denied individual coverage. I wish I had the answers to this HUGE problem. I think I would be a very right man if that were the case.

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