The arithmetic of rescission
Yves links to Taunter on a July 28 post I should have linked to long ago. It's wonderful to have a lucid explanation of how the numbers work (which is one thing most econoblogs are very, very good at):
The House hearings on rescission – the retroactive cancellation of individual health insurance policies – were over a month ago, but after its initial run through Daily Kos it seems to have waited a bit before popping up on Baseline and Slate. James Kwak at Baseline [quoting the testimony of an Asssurant CEO] 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.
Cool! Here's how the odds work (and do read the entire post, which is connects the arithmetic of recission to -- I kid you not --
The Price is RightLet's Make A Deal [even more a propos!]:
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.
Splendid. Now, the advocates of the 1000 page public option bill, HR3200, will tell you that rescission won't happen under HR3200. But that's not the burden they have to meet. What they have to show is that there's no way the insurance companies can game their complex, unproven, and Rube Goldberg-esque system to make sure the practice doesn't continue under another guise -- because the health insurance companies are profit-driven (and it's the fiduciary responsibility of the CEOs to make that profit).
Medicare for All advocates, of course, don't have to show that. The "Everybody in, nobody out" policy prevents rescission by definition.