Insurers threaten to pull out of childrens’ market

The controversy this week over several health insurance companies pulling out of the children’s market because of new provisions in the federal health bill shows how tricky it can be for legislators and regulators to try to find the sweet spot between market-driven conditions and total government control.

The federal health reform bill, by 2014, will end the practice of insurance companies denying coverage to people because of pre-existing medical conditions. The bill couples that provision with a requirement that nearly everyone buy insurance, with subsidies going to those who cannot afford it. The two ideas go together because otherwise, rational people would delay buying insurance until they needed it, when they were sick, sort of like being able to buy home insurance after your house is already on fire.

But the bill also prohibited insurance companies from denying coverage to children under age 19 starting today, on new policies they offer.

According to the insurers, this stand-alone provision causes big problems in the market for individual policies covering children, kids who are not covered by their parents’ employers but whose families buy coverage for them in what is known as the individual market.

In that market, all the kids under 19 who buy insurance from a particular company are considered part of the same risk pool. And since, until now, the insurers could deny coverage to those children who were already sick, that pool had a somewhat random distribution of young people in it. Some would get sick, some very sick, and many would not get sick at all. Their premiums would spread the risk and the burden across the group.

Now, suddenly, all those sick kids who have been denied coverage are going to be applying for it, and since they are already sick, we know that most of them will need care, and that care will cost money. It’s almost certain that their care will cost more than the premiums that their families pay.

So who is going to pay for their care? The families of the kids who already had coverage. Under the idea of shared risk, their premiums will have to go up in order to pay the added costs of those more expensive cases who are now joining the pool.

To avoid that scenario, Anthem-Blue Cross, Aetna and several other insurers announced this week that they simply won’t do any new business in that field. They will stop offering insurance for children in the individual market. They will still sell it to families, and to children who are covered by their parent’s employers, but not to individual children.

“It’s outrageous that insurers are threatening to not sell coverage to children,” said Anthony Wright, executive director of Health Access California, a consumer advocacy coalition. “Anthem Blue Cross, Aetna and other insurers are holding children hostage in their attempts to weaken new federal patient protections. Some insurers would rather deny coverage to all children than have to cover some that happen to have pre-existing conditions.”

Wright and other consumer activists are urging Gov. Arnold Schwarzenegger to sign AB 2244, a bill that conforms California law to the new federal requirement and also limits the premiums paid by children with pre-existing conditions to no more than twice what other children pay for the same health policy, if they sign up within an annual open enrollment period.

Under that legislation, insurance companies refusing to sell policies in the child-only market would be barred for five years from selling other new plans in the broader individual market.

That kind of leveraging might work, especially since the children’s market is fairly small and only a small portion of those children have pre-existing conditions. But the proposal, if it becomes law, could also prompt some insurance companies to leave the individual market altogether in California. It’s not a matter of them being evil or greedy, but simply doing what rational people do when you change the rules affecting their business. They look for ways to work within the new rules to preserve their profits, or even their business.

Other states that have adopted guaranteed-issue — banning insurance companies from denying coverage based on pre-existing conditions — have seen their insurance rates skyrocket. Most experts think the concept can really only work if it is linked to the individual mandate, the requirement that everyone buy coverage, so that healthy people have to join the pool before they get sick, not after. We’re now going to see if that same logic applies when only a small segment of the market is tinkered with.

It may be that dealing with high-risk insurance cases is one of those things that the market cannot handle and that government must do instead. Trying to use the power of government to force the private sector to do something for which it is not equipped might make things worse, not better.

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