Pre-Existing Condition Mandate is Unhealthy Policy

One of the most vexing issues in health care policy concerns "pre-existing conditions." Unfortunately, the Michigan House of Representatives has chosen to deal with the problem in a way that could reduce the availability of insurance, dramatically boost premiums, and hinder competition in the health insurance marketplace.

Historically, people who developed severe health problems before they bought insurance (or before an employer purchased it for them) discovered one or more of the following realities: They could get insurance only at a price so high they couldn't afford it; or they could buy only insurance that excluded treatment for their pre-existing condition; or they were "uninsurable" at any price.

To a person unfamiliar with how insurance works, it might seem unfair for a company to take into account a person's health record before selling him insurance. But imagine the automobile insurance equivalent of requiring companies to behave as though pre-existing conditions don't matter. A person could wait and buy collision insurance after he has damaged his car. Or, insurers would have to sell policies to accident-prone people with drunken-driving records at the same prices they charge safe and sober drivers with perfect records. The resulting higher premiums would penalize the good behavior of the responsible drivers in order to subsidize the bad behavior of the irresponsible ones.

Things are a little different in health care. Although they might partake of unhealthy foods or lifestyles, people don't choose to get sick like they might choose to be irresponsible drivers. But while there are public policies that can increase access to coverage for people with pre-existing conditions, forcing insurers to ignore or minimize those conditions is not one of them.

Unlike its approach to auto insurance, Michigan doesn't require people to buy health insurance. If the legislature made it difficult or illegal for health insurers to consider pre-existing conditions, people would have a powerful incentive to remain uninsured until they need coverage, and then cancel their policy after their insurer paid the bills.

In Washington state, where three years ago the legislature enacted laws that have had this very effect, one woman's letter to her insurer tells it all. After becoming pregnant, she purchased a policy that included maternity benefits. When all the bills were paid by the insurer, she wrote a letter to thank the company for its generosity and cancel the policy. According to the Wall Street Journal, "she said she would be sure to come back and get another one if she got pregnant again." It's one of the reasons that Washington's health insurance market is in shambles today-dozens of insurers plan to close up operations in the state and rates for individual policyholders are soaring.

The whole purpose of insurance is undermined by such practices. Insurance is the pooling of risks to cover the unexpected, not partial pre-payment for the expenses of a certain event.

Even Congress recognizes this point. The Kennedy-Kassebaum bill passed earlier this year was intended to make it easier for people to change jobs without losing health insurance. But it permits companies to consider pre-existing conditions for those individuals who choose to go without insurance for a significant amount of time.

How has the Michigan House of Representatives addressed this issue? In September, it unanimously passed a bill that exceeds the generous terms of Kennedy-Kassebaum by a country mile and goes far beyond what other states have done. The bill would make it almost impossible for insurers to effectively consider pre-existing conditions: They could do so for a very limited six-month period on individual policies and not at all on group plans.

Supporters of the House measure (HB 5572) believe the bill will guarantee that more of Michigan's citizens are covered by affordable insurance, but that defies both experience and economics. Without exception, every state that has moved in the direction of minimizing consideration of pre-existing conditions has seen premiums soar and coverages lapse. Michigan would not be immune to these consequences. We could expect those hardest hit to be the buyers of individual and small-group health insurance-mostly younger people, those in lower income brackets, and small businesses.

Economists and health care analysts propose a number of alternatives for dealing with the problem of pre-existing conditions. One would allow generous tax credits for people who wish to contribute toward the health care expenses of those who cannot get or afford insurance. Another would repeal some of the costly state-mandated benefits that foist unneeded coverages on people and price many out of the insurance market in state after state.

A more comprehensive approach underway in at least 28 states but not yet in Michigan, would establish a high-risk pool of those whose pre-existing conditions make them uninsurable or insurable only at a cost they cannot afford. States that have high-risk pools fund them by premiums from the people participating in the pool, direct subsidies from the public treasury, or assessments on insurers in proportion to their share of the market.

Each of these alternatives has problems of its own. All are better than what the Michigan House proposes because they meet the needs of the tiny minority of citizens who have insurance problems due to severe illness without devastating the market for everyone else. Ultimately, the most fruitful approach will be to find ways to encourage private, voluntary solutions instead of schemes that force taxes or government mandates on some segment of the population.

Social policy is one thing. Insurance economics is quite another. Foisting the former onto the latter is not a harmless fling but a deadly serious business.