Risk rating health insurance

After my previous post, and a few comments there, here’s some more detail on why I don’t think proper risk rated health insurance works particularly effectively for most people.

(by the way, the US market, from what I understand, doesn’t have individual health insurance rating to any large extent; you get your insurance coverage through your employer, and they average out the claims cost).

If we had individual risk rating for health insurance, there would be two key checkpoints. First, can you get insurance at all. Now a similar, but less risky product, is disability income insurance. For that product, most insurance companies will reject between 10 and 20% of applicants outright. Their risk of claim is so high, that it is not worth taking the risk of insuring them. I have no equivalent statistics, but I’d guess that at least twice as many people would fit into that category for health insurance.  Annika is an example of someone no insurance company would take on as an individual – if you know that next year the claims cost is going to be somewhere upwards of $500,000, as an insurance company, that’s the premium you’re going to charge, so as a parent, you’re going to start fundraising.

So (say) 40% of the population wouldn’t be able to get health insurance, probably at all. But that’s not the end of the story. You’ll probably get far more substantial exclusions than you do now. Pregnancy, for example, is unlikely to be covered. Far too predictable and expensive. From an insurance company perspective, if your alternatives are to charge an extra $1,000 (at least) for every woman of childbearing age, or to exclude it from coverage, you’re probably going to choose exclusion to avoid the adverse publicity.

Health insurance, if it was risk rated, would also be far more expensive for some people than others. My family (touch wood) is pretty healthy. But my parents, although “self-funded retirees” (code for lucky enough to have been in a public sector super scheme for a significant part of my dad’s working life) would have trouble affording health insurance that genuinely covered their risk of claim, particularly after my dad’s brush with cancer last year, and my mother’s two hip replacements.

So just by the nature of the predictability of health care costs, if you let insurance companies charge for risk, many people (even morally upright people who have managed to earn lots of money over their lifetime, and contribute to society) will be unable to afford or obtain insurance.

So society as a whole has to decide what is an acceptable level of healthcare for those unfortunate people who can’t get health insurance, and then (definitely a question to be answered second), how should that healthcare be funded?

In Australia, we’ve answered that question with medicare – generally acute care is funded well, chronic, non life threatening issues are not dealt with as effectively, but eventually, after quality of life issues.

But when we get to the funding question, we’ve had another stab. We’ve effectively decided that richer people can queue jump and slightly improve their quality of care (e.g. by choosing their specialist, and getting private rooms when they have surgery), but we’ve still spread the cost of that over the whole population who is willing to do pay for it. So there are two categories of health care, but you’re either in one or the other, with no gradations.

When the second, higher standard of health care started to become expensive, because the young healthy people couldn’t see the point, we used a carrot (tax incentive) and stick (punitive tax rates) approach to getting more healthy people into the system to fund the sicker, but “deserving” (read middle class) people. Up to 50% of people had health insurance after the carrot and stick were introduced. I think it’s declining again, because of the tensions inherent in a system where healthy people are somewhat voluntarily subsidising unhealthy people.

This has been a very rambling post. But my main point is that genuine risk rated insurance will leave a lot of people either uninsurable, or unable to afford insurance. Those people will very likely include a lot of people who have private health insurance now because they use the health system a fair bit. Your health status correlates fairly poorly with your economic ability to pay (particularly when you allow age rating).  That means your safety net is going to need to be pretty good.