Unconscionable Math
Posted by
Loyola
Aug 3 '09, 12:51
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"The House hearings on rescission � the retroactive cancellation of individual health insurance policies, James Kwak at Baseline described the practice as rare, affecting only 0.5% of the population. The faint light bulb above my head began to flicker: could that be true�that�s not rare � that is amazingly common.
To understand why 0.5% of the people Assurant covers is a lot of people � a jarring, terrifying, probably criminal lot � you need to understand a little bit of math. You need to understand just enough math to understand what Don and his legal team are not telling you.
Half of the insured population uses virtually no health care at all. The 80th percentile uses only $3,000 (2002 dollars, adjust a bit up for today). You have to hit the 95th percentile to get anywhere interesting, and even there you have only $11,487 in costs. It�s the 99th percentile, the people with over $35,000 of medical costs, who represent fully 22% of the entire nation�s medical costs. These people have chronic, expensive conditions. They are, to use a technical term, sick.
An individual adult insurance plan is roughly $7,000 (varies dramatically by age and somewhat by sex and location).
It should be fairly clear that the people who do not file insurance claims do not face rescission. The insurance companies will happily deposit their checks. Indeed, even for someone in the 95th percentile, it doesn�t make a lot of sense for the insurance company to take the nuclear option of blowing up the policy. $11,487 in claims is less than two years� premium; less than one if the individual has family coverage in the $12,000 price range. But that top one percent, the folks responsible for more than $35,000 of costs � sometimes far, far more � well there, ladies and gentlemen, is where the money comes in. Once an insurance company knows that Sally has breast cancer, it has already seen the goat; it knows it wants nothing to do with Sally.
If the top 5% is the absolute largest population for whom rescission would make sense, the probability of having your policy cancelled given that you have filed a claim is fully 10% (0.5% rescission/5.0% of the population). If you take the LA Times estimate that $300mm was saved by abrogating 20,000 policies in California ($15,000/policy), you are somewhere in the 15% zone, depending on the convexity of the top section of population. If, as I suspect, rescission is targeted toward the truly bankrupting cases � the top 1%, the folks with over $35,000 of annual claims who could never be profitable for the carrier � then the probability of having your policy torn up given a massively expensive condition is pushing 50%. One in two. You have three times better odds playing Russian Roulette.
People lie on their insurance forms, of course, and that is a serious problem. But let�s not forget that the very nature of the forms is designed to create inaccuracies, and it doesn�t matter in the slightest how minor the error may be once the company comes looking to get out of its policy.
It is in the health insurer�s interest to have application fraud, not only because it saves time and expense on the front end, but also because it lets them get out of any policy that isn�t going well for them.
the health insurance companies sneak around. They have nice facades, they speak in the bureaucratic language of statistics few understand, and they make the eminently reasonable argument that they just need to protect themselves. They promise great coverage, and when many years later it comes time to pay out and the petitioner is sick and unable to function, sorry, wish we could do better, but there was an error and rules are rules. We�re keeping the premiums."
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