Unleash a competitive health insurance market

Katherine Restrepo Contributing columnist

June 12, 2014

Those keeping up with Obamacare are well aware that one of its most popular provisions prohibits insurers from denying health coverage to those with pre-existing conditions. People no longer can be priced out of the insurance market based on health status. In fact, insurers no longer can inquire about a policyholder’s medical history on health insurance applications.

Prior to Obamacare’s passage, the pre-existing condition problem generally occurred when an individual with a medical condition that was costly to treat lost coverage under an employer-sponsored plan and was unable to purchase insurance in the individual market. Either the insurer could not take on that individual’s medical expenses, or conversion policies — policies offered to individuals who lose employer coverage for whatever reason — were unaffordable since the premium cost was based on health status.

Before Obamacare, North Carolina did enforce a few mandates and laws that protected high-risk individuals from being excluded by small-group plans. In 1992, the legislature passed the Small Employer Group Health Coverage Reform Act.

This law required all insurance companies offering small-group health insurance to extend policies to all businesses hiring up to 50 employees in their network area, so long as the employees resided within the insurer’s defined territory.

The act evolved to prohibit those insurers from denying coverage to self-employed people who had pre-existing conditions. The act also limited how much premiums could vary between each small employer.

And then came the Health Insurance Portability and Accountability Act. In 1997, North Carolina adopted federal HIPAA standards. Under this law, any employee could switch from his previous employer plan to a new employer health plan or an individual plan without facing penalties, regardless of health status.

While these and similar laws have helped some individuals, they also have raised prices for all consumers.

Conservative “repeal and replace” proposals address the issue as well. Sen. Richard Burr’s Patient CARE (Choice, Affordability, Responsibility, and Empowerment) Act essentially keeps intact Obamacare’s protection clause for those wanting to purchase coverage on the individual market.

The CARE Act proposes that within a one-year enrollment period, after a policyholder maintains continuous coverage for 18 months, he or she can move to any type of plan (individual or group) and not be denied for a pre-existing condition.

But there’s an even better remedy for this chronic problem. And it does not incorporate regulations. It is known as health-status insurance, and University of Chicago economist John Cochrane has written extensively about it.

Basically, combining health-status insurance with medical insurance creates a secure and portable health insurance policy. Medical insurance covers your medical expenses, while health-status insurance insures you from being denied coverage in the event your health status deteriorates drastically.

As Cochrane explains in an example, a healthy 25-year-old who incurs about $2,000 in medical expenses a year could purchase an insurance policy for $2,000 (plus administrative costs and profit); and if that same young person has a 1 percent likelihood at some point of developing a condition that will cost $10,000 a year to cover, he could purchase a separate “health status” policy that would amortize those potential costs over decades. That 25-year-old would pay less than $300 a month for both policies, and be protected from backbreaking medical costs.

For those who already suffer chronic health conditions, the government initially could contribute a defined amount of money into all high-risk individuals’ health-status insurance accounts and then step aside to allow for private insurers to compete for those consumers.

Health-status insurance represents a legitimate market-oriented solution that caters to those with pre-existing conditions and helps them afford coverage for any unfortunate health conditions that may occur in the future.

Katherine Restrepo is health and human services policy analyst for the John Locke Foundation.