Monday, May 05, 2008

Why Medical Underwriting Is, Regrettably, Necessary

While arguing in favor of legislation that just passed the U.S. Senate that would prohibit insurance companies from using genetic information in underwriting insurance, UCLA law professor Russell Korobkin goes a step further and argues that insurers should also not be allowed to do any medical underwriting on health insurance, as "the purpose of insurance is to share the risk." His argument is a bit confusing here, as he fails to account for the fact that there are already limitations regarding medical underwriting with regard to group insurance under ERISA.

For personal reasons, I am somewhat sympathetic to his argument (I have not tried, but suspect that I would not be able to buy individual health insurance due to a slightly heightened risk of developing cancer than the general population.). However, there are problems with his suggestion. First, it fails to account for the problem known in the insurance industry as "anti-selection," which is the tendency of healthy people to put off buying insurance until they are sick. His plan would actually encourage anti-selection, which would actually have the effect of driving up costs, as seemingly healthy people would have an even greater incentive to take the risk of refraining from buying insurance until such time as they needed it if they knew for certain that they could not be denied at a later time.

There is a second problem with the concept of pooling risk as it relates to health insurance. With regard to most kinds of insurances, we can speak of pooling risk because we are insuring against unpredictable losses. No one knows when or if they will have a car accident. However, we require health insurers to cover predictable events -- things such as preventive medicine, annual check ups, and so forth. It would be like using car insurance to cover oil changes, which might sound like a good idea until someone figured out what it would do to costs. This difference means that health insurance in many ways is not a means of pooling risk as much as it is just a complicated financing mechanism.


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