Before the Law

Some pretty standard economic reasoning suggests it'd be efficient to allow health insurance companies to charge, say, a morbidly obese smoker a higher premium than a fit non-smoker. But that's against the law, right? Insurance companies seem to think so, yet Health and Human Services honcho Tommy Thompson and the agency's general counsel both say it's totally Hoyle. Are the insurers just massively, expensively confused? Is HHS unclear on the law? Either way, Radley Balko has the story.

Update: Reader Terry Dugan suggests that the problem is state-level regulations.

Comments

[EcoDude]

Maybe the obesity activists will unwittingly provide the rationale for insurers to actually engage in this type of pricing.

[EcoDude]

Maybe the obesity activists will provide the insurance companies the rationale to engage in such pricing practices, which could possibly increase profits.

[thoreau]

But if obesity isn't their fault then why should they be charged more for health insurance, which is after all a right?

The obvious solution is that we should tax McDonald's to provide national health insurance. Make the corporations pay for making us fat! I don't see what could possibly go wrong with letting the gov't pick up the tab for all health care and thereby giving it the power to regulate all health decisions.

Oh, wait, somebody might take this idea seriously. Never mind.

[mrbill]

Perhaps the approach I recently read about would result in a different take and approach. A local doctors office instituted a new policy that they would no longer treat smokers or obese folks. They stated they were no longer going to use resources to try and fix something that can be taken care of by the individual.

heh

[fyodor]

"Our lawyers have told us it's not legal."

Listening to the goddamn lawyers again!!

All seriousness aside, seems like Balko should have asked those lawyers, if he had been able to. Maybe they're afraid of lawsuits? Especially where group plans involve employment and therefore employment discrimination issues? Of course "our lawyers" always seem to be afraid of something!

[Gary Gunnels]

"Are the insurers just massively, expensively confused? Is HHS unclear on the law?"

A link to the organic act upon which the HHS gets authority to regulate in this area would be helpful in answering this query. I see litigation either way, and an application of the Chevron two-step.

Also, Radley Balko is hot. *growl*

[Radley Balko]

Reader Terry Dugan is right.

There are many restrictions at the state level.

The answer is a federal law enabling consumers to purchase health insurance from any provider in the country -- and that the state regulations apply to the residence of the insurer, not the insured.

That way, we get competition among the states in addition to competition among health insurers.

Given that many state laws preventing this protect the insurers within that state, it would also be an acceptable invocation of the Commerce Clause.

Also, Gary's right. I am hot. But I don't swing that way.

Not that there's anything wrong with that.

[Lisa Simpson]

Awww, he IS cute! Babyface Balko.

[Gadfly]

For the price of a cup of coffee I will pay any one of you non-smoking, non-drinking, genetically perfect, white male, risk averse assholes a million dollars if you don't die in the next year.

But that ain't insurance; that's cherry picking. We are fast developing a cherry picking industry that makes its money off of people that don't need their service.

[Warren]

so make yourself pickable Gadfly

[thoreau]

Gadfly-

I'm actually still kind of flabby, but I swim a mile every day. I'm not perfect, but I'm determined to stay healthy.

[Ruthless]

I was an insurance agent years ago so I've forgotten more about the principles of insurance than I ever knew, but most of the huge future deficits facing taxpayers are the result of politicians being anti-King Canute when it comes to insurance priciples--giving actuaries hives.

Sooner than most of us would guess, almost every "insurable risk" will be set in stone by DNA analysis from shortly after birth.

In spite of politicians, actuaries and gene scientists will be working in concert to sort all this out.

Nothing about it will be fair, but the hoi polloi will grasp the brutality of reality and get jiggy with it long before politicians do.

[Gary Gunnels]

Radley Balko, Terry Dugan, etc.

Well, most regulation of the insurance industry as a whole is at the state level; indeed, Federal regulation in the area tends to be "residual" in nature. This was how the Congress designed the system to work when it enacted the McCarran-Ferguson Act in 1948 (the historical background of the Act was US v. Southeastern Underwriters (1944), which overturned an earlier decision that stated that insurance was not commerce, interstate or otherwise - thus the regulation of the industry went from something that was strictly a state preserve, to an area that the Federal government could interfere in). In its basic outlines McCarran-Ferguson states the following: (a) ? 2(b) (15 USC ? 1012(b)) states that federal legislation which which does not specifically relate to the "business of insurance" (what the fuck that term means has been the center of certain epic fights in the case law) does not impliedly pre-empt state regulation; and (b) where the states have exercised there regulatory authority which the removal of this implied pre-emption allows, teh federal anti-trust laws (with some exceptions - specifically found in ? 3 (15 USC ? 1013) - these being "any agreement to boycott, coerce, or intimidate" or any "act" of that amounts to such) will not apply to the business of insurance.

That's about 1/10th of my course in Insurance Law in law school. 🙂

[Gadfly]

The concept of insurance is "risk spreading". When you carve out holes in the concept, after a while it isn't insurance anymore. Further, those companies that carve out those holes, just as moi in the illustration above, can ponzi scheme their way to a fortune or, in the alternative on a bad bet, bankruptcy, leaving policy holders holding hands with no recourse.

You're nuts if you don't think those guys need watching.

[Mo]

mrbill,
So will they stop treating skiers, snowboarders, moutain bikers, etc with broken limbs? How about car crash victims that were speeding (or on a cell phone)? Flattened jaywalkers? Drug overdoses (legal ones too)? Hunters that get shot accidentally while out hunting?

I think the air is kinda thin up on your high horse.

[Gary Gunnels]

Gadfly,

The general trend in American and European law is to make areas of risk publicly insured via one scheme or another; in correlation with this are efforts to limit liability. Indeed, a perfect example of this are worker's compensation schemes; or the 9/11 victims' fund.

[J]

"Sooner than most of us would guess, almost every "insurable risk" will be set in stone by DNA analysis from shortly after birth."

It will be a _long_ time before "insurable risks" will be understood with a high degree of confidence for most people for any diseases with complex genetic and environmental causes (which means a lot of the diseases wealthy countries are dealing with - cancers, heart disease, etc.). We will for all practical purposes never be able to make "set in stone" predictions of these diseases.
But that doesn't mean actuaries and geneticists won't act like they can much sooner than that.

[Gary Gunnels]

Gadfly,

Another example of such is the "accident compensation system" found in New Zealand, which enacted an Accident Compensation Act 1972 which created a wide-reaching no-fault compensation system which provided benefits to those suffering "injury by accident." This is of course not directly analagous to the sorts of insurance claims at hand, but it does illustrate the trend I worte of above.

[Gadfly]

I guess my point is that most people laugh and point to arcane and stupid rules imposed by the gummint (i.e. the obesity issue before us) as another reason for abolition of rules and less government. In fact, the weasel insurance companies among us, attempting to squeeze a higher margin out of a smaller pie, demand it by skirting every decent, basic rule as best they can.

[Ken Shultz]

Morbid Obesity isn't the only code that could be targeted for such a policy. Females, for instance, tend to seek medical attention more often than men. Men don't carry babies and don't need pre-natal care. Men don't get yeast infections, and they don't need mammograms. But offering a discounted policy excluding females, even if it is legal, is probably too controversial for a typical insurance company. Did you see the heat the Golf World took over the last couple of years?

Which insurance company wants to be the first to offer a discounted policy, exclusively for males, that exempts the insurer from claims associated with an HIV infection?

The instance of both Diabetes and Heart Disease is greater in the African American community than it is in the general population. Theoretically, an insurance company could charge African American parents a higher premium to cover their children for Sickle Cell Anemia, but which insurance company wants to be the first to offer a policy like that?

There's one other factor that should be mentioned as well. Every day, without much of a case, somebody goes in front of a jury and cries about how a big bad insurance company run by a lot of rich people treated them badly and then gets a big award. Even if writing the kind of policy that?s being described is legal, what assurance can an insurance company have that a policy excluding certain demographic groups from coverage, even if it?s done willingly, will be upheld in court on a consistent basis?

Most old line insurance companies aren?t making money on premiums anyway; they?re making it on what they do with the premiums they collect. But they do want consistent income, and doing something controversial, like excluding groups that are typically portrayed as victims, just threatens the predictability of that stream.

P.S. Unless they?re getting coverage through their employer, most Morbidly Obese people are denied coverage by way of a pre-existing condition anyway. Morbid Obesity, by definition, is indicative of life threatening health problems. Show me someone with Morbid Obesity, and I?ll show you someone who?s had Diabetes for a long time.

[Ira Weatheral]

As a utilization analyst for an insurance company, I see all the time that the actual number of days in the hospital for Medicare patients is 8 to 10 times greater than for folks not on Medicare.

Therefore it makes more sense to charge non-smoking, non-obese, exercising health-conscious folks more money for their policies, since they will use more of their premium dollars in the long run.

[MWB]

Ira, did you mean Medicaid rather than Medicare? It wouldn't be very surprising if Medicare patients have longer hospitalizations, since they are, by definition, old.

[MWB]

Oops, misread. Sorry.

[Douglas Fletcher]

What about the morbidly stupid? Surely they're the biggest risks of all.

[Evan Williams]

In fact, the weasel insurance companies among us, attempting to squeeze a higher margin out of a smaller pie, demand it by skirting every decent, basic rule as best they can.

What "decent, basic rules" are they skirting? And who gets to determine what is a "decent" rule and what is not? The fact of the matter is, these insurance companies are offering you a service that, in their absence, you would not have had. Nobody is MAKING you go to Aetna or Trigon BC/BS. Nobody is forcing you to pay them anything. And they don't owe you anything, except for that which you contract and pay them for. If you don't like it, well, then, you're entirely free to go the route of Ned Flanders, and eschew insurance altogether. Hope it works out for ya.

The basic questions to ask are these: are they breaking the binding constructs of a contract that you signed with them? Are they impeding your rights? (contrary to popular belief, the Constitution does not spell out the right to health insurance or health care) Are they defrauding you in any way?

If you cannot answer yes to any of those questions, then give it up. These companies provide us with a service, just like the plumber down the street. Now, if the plumber just closed up shop, well, you'd be hard-pressed to fix your septic tank, wouldn't you? So who are you to demand that the plumber owes you someone outside of a contract that both parties willingly entered into? If the health insurance industry just closed up shop tomorrow, then we'd all have to pay for healthcare on our own, wouldn't we (well, save for government aggression, i.e. medicare)? Healthcare is not a right, it is a privelege, and health insurance companies don't have to do anything other than what you contract them for.

[dhex]

what's the difference between the obese and the morbidly obese?

i've always been confused by that.

[Shiloh Bucher]

Evan,
I agree with the tone of your post, if not all of its substance. The problem is that many people are in fact coerced by their employers and current tax law into contracting with a specific insurer, who may well be a rule-skirting douchebag. As long as the system continues to distort the market by favoring employer-based health care over individual ownership of insurance, consumers are not going to have the market power they should.

[fyodor]

Gadfly:

"The concept of insurance is "risk spreading". When you carve out holes in the concept, after a while it isn't insurance anymore."

You seem to be saying that the insurance companies will cease to perform a useful service. If that's the case, people will stop buying it.

[Jason Ligon]

There seems to be a lot of confusion about what an insurance policy is. Yes, when it works, it works by spreading wealth from the healthy to the sick, but that doesn't mean that the policy should be written so as to provide minimum to no value to healthy people.

Insurance is a private agreement that trades in risk tolerance. The insurer must offer sufficient incentive at sufficient price for healthy people to choose to pay for the service. Cherry picking indeed.

[Jason Ligon]

"what's the difference between the obese and the morbidly obese?"

Is it like the difference between Poison and Machinehead?

[Rob Read]

In the UK we offer Impaired life annuities to the morbidly obese, heavy smokers etc. Also male annuity rates are much cheaper than female (Soon to be banned by the EUSSR).

These offer a much higher income at retirement as the chance of living 30+ years after retiremnet is very slim. Would this dicrimination be banned in the US?

If you don't allow insurers to disciminate on the basis of reality, then surely the law is insane?

[Ken Shultz]

Morbid Obesity is actually a code. There is an entire profession most people aren't aware of called a "coder" that has nothing to do with writing software, but everything to do with determining the appropriate code for a given patient. Between ICD-9, CPT, APC, ASC, Outpatient Rehab, and DRG, the system of diagnosing and coding patients for reporting and reimbursement is so complicated, you wouldn?t believe it. Up until a couple of years ago, I helped develop software for huge hospitals and chains to help coders sort it all out. (Let?s leave medical necessity and CCI out of it for now.)

And the government changes the rules every three months at least.

For those of you who aren't familiar with the way reimbursement works, Medicare and Medicaid (Medi-Cal) are all about being given a specific diagnosis, or code, to every patient, and I know this is oversimplified, but the code you're given determines not just what level of reimbursement those that the people who provide you with care are entitled to, it also determines what procedures and services will be covered as a result of your diagnosis. Insurance companies and I'm grouping a lot of different kinds of companies under that heading, use the same codes as Medicare and Medicaid (Medi-Cal). In this way, how the government sets reimbursement on any given procedure has a huge effect on insurance companies and care providers.

Vencor and Health South have both been victims of having specialized in a certain class of codes only to have the reimbursement rate on those codes cut for, what I would suggest, are political reasons. By setting reimbursement amounts and code criteria, etc., the Federal Government has more power in the private insurance and health industry than most people realize.

It used to be, and like I said, I've been out of the business for a few years now, that Morbid Obesity would entitle you to a Gastroplasty procedure amongst other things. It usually means that it will get you on disability also. (Remember when Homer was working from home?) In short, the Morbid Obesity code means that if they don't do something drastic, you're going to die.

If I'm not mistaken, if you want to keep your Medicare contract, at the very least, you can not discriminate against people with a certain code. And even if you could, which insurance company wants to go on the record for having denied care to a dying fat person? (Maybe they could put up a sign in the lobby that reads, "We reserve the right to refuse service to Fat Chicks!) Nobody wants to do that.

[Evan Williams]

Shiloh,

Your point is pretty much the same one people raise against big corporations. The debate goes like this:

1) Free-marketeer says that corporations are not inherently evil, they are just engaging in capitalism.

2) Protectionist says, why are you sticking up for corporations, they just exploit loopholes in the law and lobby for unfair tax breaks and go against free-market capitalism

3) Free-marketeer says, the corporations will only do as much as they can get away with. The problem is not with capitalism, not with the corporations, but with the lawmakers who allow them to exploit loopholes, who give them tax breaks in exchange for bribes.

Same goes here. I was talking about the concept of insurance in the capitalist market. When government aggression and irresponsibility brings disruptions into that system, that is not a black eye for capitalism, or even for insurance. And the answer is not more legislation, but less. I mean, what makes more sense: keeping the government aggression in place, and then enacting laws to counter its effects, or simply getting rid of the government aggression?

[Gadfly]

As I understand it, the Law of Large Numbers, as applied to the insurance industry by their actuaries is that the larger the number of exposures considered, the more closely will the reported losses equal the true probability of loss. i.e. the larger the pool the closer to reality we get.

The maddening crazy quilt of companies, coverages, payment schemes and risk populations drives up the overall cost and leaves certain populations undercovered and certain others overcovered. A single, centrally administered pool would be more efficient.

I know this drives the free marketers nuts and I certainly have doubts of how to ever get there. In the case of health service, as well as a few other vital services, I believe its justified. Placing the onus on the employer's back doesn't seem right, either.