On future insurability

One of the common misconceptions about health insurance is that health insurers, like auto insurers, can drop their clients at any point if they become too risky. In fact, health insurers must honor their plans with their policy-holders as long as the customers are up-to-date with all payments and contractual obligations.

Nonetheless, when it comes time to renew, some people find that they no longer qualify for their previous plan.

Government, reformers say, is the only solution to this problem. If insurers are not forced to keep insuring their patients, they will simply not do it — a case of market failure.

It’s obvious, though, that people would like to be able to renew their plans. This creates demand for a service that would allow them to do so.

Enter health-status insurance. Health-status insurance is insurance against the possibility that a policy-holder could become far more expensive to insure in the future. An analysis by University of Chicago economist John Cochrane explains how it would work.

Under Cochrane’s proposal, if an insured person develops an expensive chronic condition, a lump-sum payment would be deposited into a health-status insurance account that would be available only to pay medical insurance premiums. This restriction would limit the temptations to commit fraud (faking an illness to get the money and then run) or to spend it and then show up at an emergency room unable to pay. In addition, if the insured becomes unexpectedly healthier and his premiums decline, the money could then be returned to the insurer.

Creating and selling separate health-status insurance policies would mean that medical insurance companies would no longer have an incentive to offload sick people. Instead, because those with pre-existing conditions would have the funds to pay higher premiums, insurers would compete for their business. “Constant competition for every consumer will have the same dramatic effects on cost, quality, and innovation in health care as it does in every other industry,” argues Cochrane.

Health status insurance is more than just theory — in fact, it’s been available in Michigan since December 2008. This innovation has come about without government pressure that would not increase the premiums of all policy-holders in the way that community rating systems, a tool the government created to accomplish a similar goal, do.

Sadly, it also seems to be an innovation that’s being ignored by politicians in the health care debate.

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