Kicking off the Death Spiral

Beware the individual health insurance market (yes, that’s the market McCain wants to push millions of people into). Consider this situation: let’s say you do the right thing and buy an individual health insurance policy when you’re healthy, pay premiums for years, then get sick.

The insurance company pays the initial claims, but they certainly don’t want you on their policy forever. You’re costing them a load of money and they are in business to make money. The logical thing to do would be to just cancel your policy at the annual renewal, but that’s illegal in all fifty states. They can only raise premiums to cover the costs of everyone on that individual plan. What to do?

Here’s an idea, as described in ConsumerReports Health.org:

Companies also control their risk by using a maneuver known as closing a block or book of business. They stop accepting new customers in a plan, which kicks off a process known as a “death spiral.”

Even if everyone in an insurance plan starts out relatively healthy, as time goes on, people get sick, and the cost to insure them rises. Once the pool is closed, costs for the remaining members rise inexorably. Healthier members find cheaper plans, but sicker ones are effectively forced out because they can’t afford coverage.

Once that process gets going, premiums on individual health insurance policies can rise at a breathtaking rate.

And they have an example:

Jesse Paul, 59, an Indianapolis lawyer, paid $25.50 a month for his individual, $100- deductible Prudential major medical policy when he took it out in 1980. Premiums rose steadily for years but at a pace that Paul deemed “rational in terms of medical costs.” In 2003 the premium shot up from about $1,200 to about $1,900 a month at renewal.

When Paul complained to the state insurance department, he learned that the policy had been closed to new entrants for years, that he was one of only 400 to 600 customers left in the state, and that the premium increase was permissible under Indiana law. Paul reached his breaking point when he got his latest renewal notice in August; the monthly premium was now $4,284. He quickly found out he was uninsurable on the private market because he took medications for high blood pressure, high cholesterol, and allergies. He is now insured by the Indiana high- risk pool for a premium of $650 a month.

If only Charles Dickens were alive and writing about the American healthcare industry.

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Filed under dignity, healthcare finance, slimy marketing, social insurance

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