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You are here: Home / Anderson On Health Insurance / Reclassification risk and the potency of the pre-exisiting condition protection argument

Reclassification risk and the potency of the pre-exisiting condition protection argument

by David Anderson|  October 26, 20188:43 am| 22 Comments

This post is in: Anderson On Health Insurance

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John Graves, a professor in health policy at Vanderbilt laid out a very simple thought exercise on Twitter. What happens to a population that has the following characteristics:

1) Initially the entire population has no pre-exisiting conditions and is classified as “healthy”?
2) The population has an annual 2% chance of getting a pre-exisiting condition that would lead to significant underwriting action in a pre-2009 world as they are now “sick”?
3) There is a 10% annual chance for a once in a lifetime event that would move a person to get screened for potential reclassification as “sick”.

Over a 25 year period upwards of 20% of this healthy population would be denied due to the development of a pre-existing condition. pic.twitter.com/8V6aUFBw9D

— John Graves (@johngraves9) October 24, 2018

 
In the first year, the percentage of people who get reclassified from “healthy” to “sick” is pretty low. But over time, a significant chunk of a pre-selected “healthy” population gets reclassifed as “sick”. And a priori we don’t know for sure who will get reclassified. This little table top model significantly under-estimates the actual exposure of reclassification risk if we assume that there is more than 10% chance of an annual rescreening event or we assume that a rescreening event can happen multiple times to the same person. This model implicitly assumes incredible job lock for people who are classified as healthy but know that they are really “sick” if they are to be screened.

ACA pre-exisiting condition protections are fundamentally an insurance policy against bad luck. In any given year the probability of any one person having bad luck is fairly low. Over a course of a lifetime, the probability of bad luck is reasonably high. Bad luck in health terms is fairly widely distributed, I don’t think it is uniformly distributed, but there is wide distribution of eventual bad luck. People either have very legitimate fear that bad luck will strike them or even more likely, a legitimate fear that bad luck will strike a family member or close friend. Bad luck without insurance can be financially devastating not just to the individual who has bad luck but to their family and social network. Protection against reclassification risk is quite valuable and quite visible.

I really liked this little model that Dr. Graves made as it shows the implications of reclassification risk under very favorable assumptions.

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22Comments

  1. 1.

    prufrock

    October 26, 2018 at 8:50 am

    I didn’t even get to age twenty-five before I had an uninsurable preexisting condition (cancer). It was a kind that runs in my family which adds another wrinkle to this thought experiment: what if you started with a completely healthy population, but were allowed to deem a percentage of them as having a preexisting condition because of a higher risk of heritable disease?

    There is a reason that Gattaca is the dystopian movie that scares me most.

  2. 2.

    ArchTeryx

    October 26, 2018 at 9:03 am

    @prufrock: Because it was where we were headed before the ACA, and if the Republican ?s get their way that future will be coming toward us again like the proverbial freight train.

  3. 3.

    Ohio Mom

    October 26, 2018 at 9:14 am

    I am reminded of the old doctor joke: What do you call a healthy person? Someone who hasn’t had a full work-up yet.

    Sign me,
    At least three serious pre-existing conditions and counting

  4. 4.

    lee

    October 26, 2018 at 9:23 am

    How accurate is that 2% reclassification as ‘sick’?

    That seems low to me.

  5. 5.

    gvg

    October 26, 2018 at 9:46 am

    job lock….that is where you don’t change jobs because you need the insurance. You can even be unemployable because your potential coworkers can’t afford the rate hike of having you added to their pool. Universal coverage/universal pool would solve that.
    I was healthy till 49 then suddenly cancer. Luckily I have good state insurance. I have been here 24 years because I like the job, but the stable insurance has always been a factor because I knew what most jobs had was way worse.
    My dad worked for a company with about 100 employees. Good insurance, decent rates until one employee got a rare high cost cancer. Then everyones rates went up. It was causing problems. Dad left so he didn’t see the results, but I have heard of companies that had layoffs just to get rid of someone that costly, not provably, but rumored.
    ACA was supposed to let people start their own businesses or change jobs, and it did at first, but with it always under attack, I suspect that got damped down. If the GOP weren’t deranged nutters, they would have embraced it as being probusiness. I think our national non healthcare has warped out economy in ways that undercut our potential prosperity and increased the growth of super big companies with too close to monopoly power because that was where the health insurance was.

  6. 6.

    lee

    October 26, 2018 at 9:57 am

    You can even be unemployable because your potential coworkers can’t afford the rate hike of having you added to their pool.

    I have first hand knowledge of this. The company I work for terminated a guy because his wife was having high cost chronic medical issues.

  7. 7.

    RepubAnon

    October 26, 2018 at 10:03 am

    Pre-existing condition coverage depends upon mandated coverage for the entire population. It’s the “cherry-picker” problem: consumers say “why buy health insurance if I’m healthy”, and insurers say “why sell insurance to someone if I know they’re sick?”

  8. 8.

    Mary G

    October 26, 2018 at 10:07 am

    I worked for a corporation where the average age of the people in my department was around 50 and 85% women. I was able to get disability, I had a mother to move in with, and no kids to worry about supporting, but the lengths they went to in order to get rid of everyone else were awful.

  9. 9.

    Luthe

    October 26, 2018 at 10:23 am

    I wonder how quickly support for government-run health-care would increase if “health status” were added to the list of things employers were not allowed to discriminate against. If you can’t fire Employee X because they had cancer last year* and the company’s premiums are going up, trying to push all employees onto the Exchanges or a government plan suddenly looks a lot better…

    (*if you do fire them, the new protections would let them sue you for discrimination)

  10. 10.

    catclub

    October 26, 2018 at 10:31 am

    any thoughts on Trump’s purported plan on Medicare drug prices? I would guess it will be pushed a lot right before elections but otherwise ignored.

  11. 11.

    PST

    October 26, 2018 at 10:32 am

    @gvg: In addition to job lock, I’ve experienced marriage lock. Tying health insurance to jobs introduces many distortions, all of which become more serious as medical care consumes an ever greater share of national income.

  12. 12.

    ElegantFowl

    October 26, 2018 at 10:38 am

    Your lead “in the first year, …” ignores the policy transition. Lots of people don’t know about medical underwriting, because they came of age under the ACA, or they can’t believe an insurer could act that way, or they’ve just forgotten how it was. They’ve sought diagnosis and treatment for a host of minor ailments, without fear of insurance consequences. Those conditions are now documented in their medical history, and will be used for coverage surcharges and/or denial.

  13. 13.

    catclub

    October 26, 2018 at 10:39 am

    @catclub: kevin drum has a pretty good summary. IT is VERY small, and timed to the election.

  14. 14.

    ArchTeryx

    October 26, 2018 at 10:41 am

    Yep. Or like me, where lack of insurance is a simple death sentence. The death panels have ALWAYS been in the insurance boardrooms, and even under the ACA still are. They just got nerfed.

    Then Trump was elected.

  15. 15.

    patrick II

    October 26, 2018 at 10:59 am

    ACA pre-exisiting condition protections are fundamentally an insurance policy against bad luck

    Young healthy people often don’t buy health insurance and don’t feel the individual mandate is justified. For those people the mandate is justified as a cost to have the right to buy an insurance policy in the future. I never hear it justified that way, but it should be.

  16. 16.

    David Anderson

    October 26, 2018 at 11:00 am

    @catclub: I’m not a drug pricing guy (way out of my area my knowledge) but a lot like the HRA proposal that I have been following, the people who I know are good drug pricing people, think this is a serious policy attempt that is grappling with trade-offs and uncertainty. This is an early notice of a potential rule, so it will be very slow process of any change.

    The big thought is that the Obama administration tried to do something very similar to the proposal on referencing pricing and the docs and drug industry were able to kill the proposal before it ever was finalized. I am expecting a lot of oncologists pushing back with adorable patients on TV soon.

  17. 17.

    patrick II

    October 26, 2018 at 11:06 am

    If everyone had health insurance, as they do in most civilized countries, the only preexisting condition would be birth defects and we wouldn’t be having this discussion. It is change to an existing paradigm (people exist without insurance) that makes the problem exist at all.

  18. 18.

    Brachiator

    October 26, 2018 at 12:13 pm

    ACA pre-exisiting condition protections are fundamentally an insurance policy against bad luck.

    “Bad luck” is an interesting, but perhaps imprecise term. Some proportion of all human beings will get sick over time, just because we are human. So pre-existing conditions will inevitably accrue in the population over time.

    @patrick II:

    Young healthy people often don’t buy health insurance and don’t feel the individual mandate is justified. For those people the mandate is justified as a cost to have the right to buy an insurance policy in the future. I never hear it justified that way, but it should be.

    Weren’t there some Republican health insurance proposals that would let insurance companies impose a surcharge under some circumstances when a person who had skipped out on insurance before later decided to buy a policy? Here, I guess part of the assumption would be that if you went without insurance for years, but now want to buy it, you must have some illness that you want coverage for.

    I am sympathetic to the argument of younger (or just plain healthier) people that they should not have to buy health insurance. I can recognize the larger social value, but still it is not entirely outrageous that someone who is healthy would not want to have to get health insurance, or at least have an option of a cheaper policy.

  19. 19.

    J R in WV

    October 26, 2018 at 12:21 pm

    I’m thinking that eventually everyone gets a pre-existing health condition. Most of us will get sick first, if not all, then 90% or so.

    We all die, eventually. Something causes that death, usually. Very few are 90 and drop dead suddenly and painlessly.

  20. 20.

    Repatriated

    October 26, 2018 at 12:38 pm

    @gvg:

    ACA was supposed to let people start their own businesses or change jobs, and it did at first, but with it always under attack, I suspect that got damped down. If the GOP weren’t deranged nutters, they would have embraced it as being probusiness.

    It’s pro-small-business.

    Upstart small businesses could siphon off good employees — or worse, profits — from their big-business donors.

  21. 21.

    jl

    October 26, 2018 at 12:52 pm

    Thanks for an informative post. Another way to look at the issue is that there is a market failure, and an accompanying lack of proper regulation, that prevents people from buying multi-year health insurance policies, and therefore they face lifetime financial risks that they would be willing to pay to avoid, but the market failure + current inadequate regulation will not provide. Mostly, for health care it is the market failure. The problem comes from the high dependence of risks across years, which annual policies have a hard time fixing.

    With other lines of insurance, auto, property, business insurance, the market, or stricter regulation, or government programs, solve this problem. But for health care, the lesser people are on their own. I heard a news report that 40 percent of cancer patients get their wealth wiped out eventually after diagnosis, assuming they can afford treatment and don’t just die off quickly. The US healthcare system has become a national disgrace.

    If you are an affluent or rich person, or a lesser person lucky enough to live nearby, government programs will help insure your property in many areas that have above average frequency of floods, storms and hurricanes (though some of the subsidy has been reduced recently). But if you get hit by a bus or car, or get cancer, tough luck to you, you are done.

  22. 22.

    StringOnAStick

    October 26, 2018 at 3:44 pm

    Husband and I were on an international trip recently with 2 friends, and 2 friends of theirs that we had not met yet. The guy is a 32 year old investment banker, every 4th work was “fuck” or “fucking”, and he got into my face when the local guide was asking me questions about (1) health insurance in the US, and (2) the Electoral College. Thanks to reading every post by David, I was able to push back HARD on his argument that “Obamacare fucked it up for everybody” plus the usual “I hate SS and Medicare and don’t want to pay for it anymore since I’ll never see it”. Georgia-dwelling wingnuts are rather predictable, no? Mr. bigshot investment banker had no response when I said that “all insurance is about spreading risk”; his MBA couldn’t argue with that. He later told me he was planning on getting into more medical investments since their buying up physicians accounts that had been sent to collections was returning about 5%. His goal was to buy generic drug patents and then raise the price, “just not be a jerk about it like that one guy”. Yeah, sure. Funny, I used to think the point of being an investment banker was to identify small companies or ideas that had growth potential; apparently it is really about finding holes in the system to exploit.

    His argument to keep the Electoral College is if we didn’t, then the larger population states like CA and MA “would dominate the rest of us”. He said that the same day he pulled out that “war of Northern Aggressive” bullshit. I threw down with “equal protection under the law” and that if the majority of the population voted one way, then the Electoral College is violating equal protection by denying the will of the majority.

    We won’t be traveling with these folks again. Between the constant swearing in really inappropriate places, the winger attitudes, and the way I’d cringe every time his wife would say “gracias” with the heaviest, almost cartoon-like southern accent, I was hoping we weren’t getting the Ugly American label slapped on all of us instead of just the people who deserved it.

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