Rescissions: Much Ado About Nothing

How many times have you heard President Obama say, “Health insurers won’t be able to drop your coverage just because you get sick?” Or Kathleen Sebelius? Or the Democratic leadership in Congress? Or the mainstream news media?

As I wrote at Kaiser Health News the other day, you would think that the private health insurance industry was being revolutionized.

In fact, it has been illegal since 1997, under the Health Insurance Portability and Accountability Act, for insurers to drop coverage because someone gets sick. And even before then, the practice almost never happened.

Think of it this way: Do you think there would be a vibrant, active, ongoing life insurance industry if insurers could renege on their part of the contract after someone dies? How many of us would buy fire insurance if the insurers could change their minds and refuse to pay after our house burns down? Would you buy auto insurance from Allstate if the “good hands” could disappear after a collision occurs?

These things do not happen because

  1. Insurers are contractually obligated to keep their side of the bargain and courts enforce these obligations just like any other contract;
  2. Regulatory agencies enforce good behavior, quite apart from any lawsuit, and;
  3. An insurer that routinely refused to pay claims would lose customers and go out of business.

So what’s the fuss all about?

Ties that Bind

 

It’s about rescissions. This occurs when an insurer cancels a policy and returns the premiums to the policyholder, thus voiding the original contract. It almost always happens because the insurance application form is discovered to have fraudulent, misleading or simply wrong information on it.

Rescissions are very rare. They apply only to the individual market (less than 10% of private health insurance) and even then they occur less than 4/10ths of 1% of the time. Even when it does happen, there is almost always an appeals process where the decision is reviewed by an internal committee and often submitted to outside reviewers. Further, when insurers are wrong – as they may sometimes be – it is the job of state regulators to correct this injustice.

This has not stopped the Obama administration from demagoguing the issue, however. Based on a Reuters story, Secretary Sebelius accused WellPoint of targeting thousands of female policyholders for rescission after they were diagnosed with breast cancer, and President Obama repeated the charge in his weekend radio address. WellPoint’s response: The insurer paid for 200,000 cases of breast cancer last year and rescinded exactly four policies for fraudulent or misleading statements.

Even though such instances are rare, they can provoke differences of opinion on the proper response. Some cases are fairly straightforward. Suppose on my insurance application I say I am in good health when in fact I have chronic renal failure. Should the insurance company have to pay for my kidney dialysis? Obviously not.

Other cases get murky. Most life insurers will not sell to someone who is obese (girth measurement is often the test). Suppose I lie about this information, then get hit by a truck and killed. Should the insurance have to pay off?

On the one hand, you could argue that the lie I told about my obesity was irrelevant. Yes, I lied. But the lie had no material impact on the cause of my death. On the other hand, my lie was not innocuous. It allowed my family to reap a cash benefit it otherwise would not have been entitled to. It caused the insurer, and therefore the policyholders, to incur a cost they otherwise could have avoided.

Regardless of how you come down on this case, if you find the discussion to be one worth having it is probably because you believe there is economic value in a market for risk in which competition tends to price risk accurately.

Yet this White House does not believe in a market for health care risks. It certainly does not believe in pricing risk accurately. Indeed, they tend to think that the only legitimate function of health insurance companies is to pay medical bills. The reason they think ideal health insurance is a single-payer public plan is because they think government can write checks with less administrative hassle than private companies.

In general, whenever government gets involved in a market for risk, the first thing it does is eliminate the ability of the market to price risk accurately. Witness the market for student loans (now monopolized by government), the market for moderate-income housing and the market for reverse mortgages (both completely dominated by government).

I’ll bet you didn’t know about the reverse mortgages market, did you?

Comments (21)

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  1. Nancy says:

    Great post. Clever song pairing.

  2. Stephen C. says:

    The White house apparently went through the books and found a 13 year old law that they liked so much, they decided to pass it again.

  3. Ken says:

    The insurance companies have done a very bad job of letting the Administration portray them as the evil villains.

    In fact it is scary the way this White House creates its own enemies (always people and entities that are unpopular with the public).

  4. Vicki says:

    I agree with Ken. Meanwhile, the Obama folks have been very skillful at their demagoguery.

  5. Devon Herrick says:

    I wish my various health insurers would rescind my respective policies dating back to 1986 and refund my premiums! Obviously this is unlikely to happen considering my premiums probably exceeded $70,000 yet my medical claims during the past 24 years would not reach $2,400 – or about $100 per year.

    It’s too bad I didn’t had a Health Savings Account, where about half of my funds would have been deposited into an account I controlled. Then I’d be partly protected from rescissions (or higher health costs later in life) by controlling more cash.

  6. Jim Morrison says:

    Don’t ignore the high-profile fines and sanctions that have been levied against insurers for rescissions, John.

  7. Shirley Svorny says:

    Most people think that no one should have to pay more for health care because they are sick. They don’t think it is fair. The only market solution I can see being attractive to them is one that includes risk adjustment payments to insurance companies to offset the costs of high risk patients. I’ve read that Medicare Advantage includes these types of transfers.

  8. HD Carroll says:

    The total misuse and abuse of statistics and the media generated hyperbole relating to “denied health coverage” stories from the past three years has been a complete injustice to the role health insurers have played in the financing of medical services. You never read stories about the 99+% of all claims that get handled contractually and without issue, but only the very rare exceptions, as discussed by John. I just wish there was someway to hold the president and his minions accountable for the distortion of the truth that they utilized for pure political pandering. And they STILL think that regulating what insurers charge for premiums is the equivalent to controlling health care COSTS, where the main problems have been created by the irrational, distorting and illegitimate price fixing and resulting cost shifting of Medicare and Medicaid. But then, they think controlling the Medicare BUDGET is controlling health care COSTS, don’t they?

  9. LAURENCE BRODY says:

    Thanks again John, Government will control service by waiting lists, and review agencies which will limit care. You can be on it. This will be in thge name of fraud reform.

    I can see people being referred for heart valve surgery and going on a 2-3 year waiting list, during which time their surgical risk rises dramatically.

    Just watch. How can Americans turn over so much to the government. Redistribution is SO attractive. Now everyone can get theirs.

  10. Bart Ingles says:

    “Rescissions are very rare. They apply only to the individual market (less than 10% of private health insurance) and even then they occur less than 4/10ths of 1% of the time.”

    Not to invalidate the rest of the argument, but this particular statistic seems meaningless. If policies are subject to rescission only after a large claim, then the more useful figure would be what percentage of policies with large claims in the first couple of years of coverage result in rescission.

    The WellPoint figure of four rescissions for 200,000 cases of breast cancer could be more to the point, but 0.002% doesn’t jibe with the earlier number. It should be higher, not lower. Perhaps it only includes policies canceled for “for fraudulent or misleading statements” and not those that were canceled because the applications contained unintentional inaccuracies?

  11. John R. Graham says:

    Not only is the government taking advantage of people’s ignorance of the status quo’s benefits and flaws, the politicians themselves don’t know the basic details of the status quo. I remember speaking face-to-face with a former governor who had never heard of HIPAA. Another health economist told me that he had spoken to a Congressman who did not know the difference between Medicaid and Medicare.

    Politicians are poorly informed about the issues because they are not rewarded for being well informed. Indeed, being well informed would just confuse them and reduce their likelihood of success via demagoguery.

    In one of President Obama’s speeches, he asserted that health insurers misbehave all the time – by wrongfully denying claims and rescinding policies – and that “nobody does anything about it.” He had already made Kathleen Sebelius, former Kansas Insurance Commissioner, the U.S. Secretary of Health and Human Services.

    I was itching for a reporter to ask Mr. Obama why he had appointed someone who, by his own accusation, was one of the 50 Insurance Commissioners who was utterly negligent in enforcing insurance laws. I had no such luck, of course.

  12. Philip Weintraub says:

    John,

    Your article expresses an interesting point of view. Are your views based on an independent study I can read?

    Also, could you explain how your references to government involvment in the market for student loans, moderate-income housing and reverse mortgages support your viewpoint? Having spent many years in the financial services sector, I believe all the programs you mention have substantial private sector participation without which these programs could not function.

  13. John Goodman says:

    Response to Philip Weintraub and a few others: On the number of recissions, I provided a link to a NAIC study.

    On the financial markets, whenever the government gets involved, you get some variant of community rating. That means, apart from the subsidies, that the bad risks are being undercharged and the good risks are being overcharged.

    In response to these perverse incentives, the bad risks overinsure or borrow too much. The good risks underinsure or borrow too little or stay out of the market altogether.

  14. Beverly Gossage says:

    I have been shouting, “They can’t do that anyway” when the media and politicians have touted no rescinsion (unless for fraud) as a cornerstone of the bill. But my question has always been, why didn’t the insurance companies and the state commissioners speak out? The answer that I was given was they didn’t want to argue about a mandate in the bill with which they were already complying.

  15. Paul Nachtwey says:

    Bravo, John. The misinformation surrounding this matter is mind boggling. For example, the Reuters story that made false accusations about Wellpoint cited a women who wasn’t even covered by Wellpoint. The problem of rescission doesn’t exist while submission of fraudulant and intentionally inaccurate insurance applications is a rampant problem that raises the costs for all. I wonder how politicians are allowed to spout falsehoods about legitimate businesses (insurance companies) that provide needed and valuable services to their customers and are staffed and run by hundreds of thousands of honest individuals who go to work every day with the simple goal of improving the products that they offer.

  16. Beverly Gossage says:

    rescission rather. This former school teacher can’t let a typo slide.

  17. John Baden says:

    John,

    Today’s Health Blog is an excellent piece indeed.

    I’m intrigued by several of your readers expressions of surprise summed by, “How can politicians lie and demagogue so boldly?” The answer is easy, they are scavengers in a competitive environment; rewards are rarely determined by violence but rather by connivance.

    Man has been plagued by scarcity ever since our exit from the Garden–and scarcity implies competition. Competition was violent for the vast scope of our existence. Primitive societies tend to be dangerous places in which to live as people beat, stoned, stabbed, and otherwise inflicted major tissue damage while teetering on the margins of subsistence. Buffers were tiny. It wasn’t until the mid 1800s that European cities could even replace their populations by natural increase. Further, fighting had, and still has, both an expressive and instrumental value.

    Western societies gradually built institutions to constrain violence. The most prominent are called governments. Governments protect subjects from roving bandits. That’s how they justify taxes. Then the problem is how to control stationary bandits, AKA politicians. This was the primary task of America’s Founding Fathers as they drafted the Constitution. The Federalist Papers laid out their arguments.

    The Founders created a system that rewarded productivity, the creation of value, more highly than transfers of wealth via politics. Alas, their system could be and indeed was subverted by crafty, unprincipled individuals always acting in “the public interest”. Then, when an ever higher proportion of allocative decisions are made via politics, the potential rewards for being a politician grow ever higher. And it’s not just money; boys, girls, deference, the list has no limits. The constraint is what ever they think they can get away with.

    While the market process selects for efficiency and constructive innovation, the political process selects for those who can best organize constituencies. And here’s a key point; while there are fundamentally corrupt systems such as Chicago, and Illinois more generally. There the tenure track of governors leads to prison. Putting them aside, America retains a cultural bias against political predation.

    Couple this reservation about political predation with the rational ignorance of voters, public decisions as public goods, and the remaining suite of public choice economics. The result is an explanation of why lies dominate political posturing.

  18. hippieprof says:

    “They can’t do that anyway….”

    But the point is – they try. Insurance companies spend part of my premium to hire people whose sole job is to try to deny me benefits. It is an absolutely immoral practice. You say it happens rarely? It should NEVER happen.

    I am curious how you answer the charges in this story:

    http://www.nytimes.com/2009/08/27/opinion/27kristof.html?_r=1

    Quite a while I asked a question on my own blog – where are the pro-insurance testimonials? The ones in which people cheer loudly for how well their insurance company treated them.

    Those pro-insurance testimonials surely must be out there. Point me to them!

    — hippieprof

  19. [...] Coming True… May 19, 2010 Leave a comment Go to comments PRIMER – Please read THIS BEFORE GOING [...]

  20. Bob B says:

    It has been stated previouly but Obama and his cronies know exactly what words to use whether true or false. They want sensationalism. The general uneducated public has no clue what the truth really is. If you are really interested in the healthcare system read HELP! Your healthcare Hanging in the Balance. It’s an eye opener.

  21. HD Carroll says:

    hippieprof – “They can’t do that anyway…But the point is, they try” – In any human business activity, there will always be abuse, and there will always be those who violate the contract or the law relating to that contract. The key is that it be kept to an allowable minimum without strangling the legitimate business enterprise. There are few business activities in this country more regulated and with more litigation and media power put on the side of consumers than the insurance industry, especially health insurance in the past decade. Have some people at some insurance companies at some times stepped across the line in terms of interpretation or enforcement of perceived contractual rights? Of course, but it has been (and documented) as statistically minor.

    “It should NEVER happen.” Are you nuts? I can see from your website that you are probably high, at least. It has been (changed with the reform act, of course) a contractual obligation of insurers to properly underwrite and cost/risk classify potential customers in order to benefit their policyholders as a whole. In the process of doing so, the company also may benefit – that is why they are in business – but persons such as yourselves, along with politicians and journalists, refuse to credit them with looking out for the bulk of their policyholders by doing exactly, and no more most of the time, what they are contractually obligated and legally allowed to do in managing underwriting risk, which includes “post claim” underwriting (because it is cost effective).

    In that op-ed piece you link to, it is stated that Blue Cross of California rescinded 20,000 policies over 5 years saving $300,000,000 – that’s $15,000 a policy that the other policy holders didn’t have to subsidize because those people tried to cheat the system – “cheat” based on the regulatory definitions of how the company was allowed to determine if a claim was legitimate according to the contract or not. By the way, you quote that op-ed piece as if it was somehow an overwhelming condemnation of insurance practice because some idiot PR executive decided to be persuaded by someone else’s PR hype. The guy undoubtedly had NO technical expertise in how and why insurance has to work the way it does – he was merely a propaganda monger, and wouldn’t understand whether or not the practices that he came to despise were legitimate or not. Does the insurance industry deserve condemnation for employing people to do what he supposedly was supposed to do? Yes, probably – but that certainly doesn’t legitimize something he might be saying now about things he knows nothing about. People are so suckered into believing that the expression “insurance executive” means they have any intelligence or special knowledge – it doesn’t mean it any more in insurance than any other industry, which is extremely rare.

    You ask where all the “pro insurance” testimonials are. What kind of idiotic question is that? Humans don’t do that. They complain bitterly and vociferously (aided by an ever ready tabloid media), but rarely volunteer satisfaction UNLESS ASKED, especially about something they think they deserve in the first place. The “pro” testimony is found in the continuously overwhelming vote of satisfaction that people have shown in poll after poll when asked how they feel about their OWN health care plan/insurance, whether generally, or when asked specifically about their particular insurance coverage.

    ACA has changed everything anyway, though if the “mandate” falls away from legal wrangling, the quid pro quo of doing away with underwriting and health status rating in exchange for the mandate will rightfully create new problems. Anyway, that is essentially water under the bridge at this point. The issue of the original post was that the president and his henchmen (and henchwomen) have consistently LIED to the American people about the practices of the industry in order to justify their illegitimate use of power by pandering to what people “want to hear.” Everybody loves to hate insurance companies, so why not feed the beast. Who will hold the president accountable? Apparently no one. But it doesn’t change the facts.