The End Of Rescission: The Perils Of Regulation By Anecdote

Last week the national media triumphantly announced that, well in advance of the legislatively-imposed deadline of September 1st, the insurance industry had agreed to end the process of rescission: that is, canceling coverage for insured customers who developed medical conditions after having purchased individual health coverage.

Accounts suggested that big insurers such as Wellpoint had run individuals' claims through a computer model to determine whether customers who had developed, for example, breast cancer after having purchased their health plan might have known about their health conditions prior to buying coverage, and therefore may have misrepresented their health conditions on their applications.

(Interestingly, I haven't seen any accounts indicating what percentage of applicants screened in this way might actually have lied on their applications).

The year-long debate over health insurance reform was predicated largely on the need to curb such behavior on the part of the insurance industry; one was left with the impression that rescission was rampant across the country.

But, setting aside the notion that such behavior can easily be seen as reprehensible, the numbers tell a slightly different story.

In its editorial on the subject, the New York Times reported that three big insurers had rescinded coverage for 20,000 individuals nationwide since 2005. The National Association Of Insurance Commissioners issued a report concluding that some 27,000 policies had been rescinded over an overlapping period.

For those who faced rescission, the effect is undoubtedly catastrophic; having had their coverage abruptly canceled, and having been accused of misrepresentation by their insurers, those individuals (who all had health conditions) would have been unable to find coverage anywhere at all in the private market.

But...

Even if those two studies measured parallel universes, over a five-year period, rescission occurred among fewer than two-tenths of one percent (.0019) of the 24.7 million individuals who are privately insured (the 176.3 million people covered by group plans aren't subject to rescission, unless it can be proved that an insured lied on his/her application).

So of all the 200-+ million people with private insurance in America, this new regulation has benefited about two-thousandth of one percent of the insured population.

The health reform debate has almost always relied on individual stories to make it real for voters and legislators. And this is an excellent example of how such stories can be a tad...distorted...in the political context.

There's little doubt that, for those who are or might have been affected by rescission, the new health reform law will be a real benefit. But it does beg a few other questions, such as:

1) Given how extremely rare such cases have actually been, why did it take a new federal law to prohibit it? Are insurers simply that arrogant, or that ignorant, that they couldn't have stopped the practice voluntarily themselves?

2) Relative to the cost of building those computer models, what was the actual cost savings to insurers (and, by their own implication, their customers) from rescinding this microscopic percentage of individual policies, and what will be the actual cost of discontinuing the practice (this will be important when insurers begin crying the blues over the premium increases they'll attribute to covering people with existing health conditions)?

3) How might that cost compare with the everyday outrage that, for small businesses and individuals...every single small group and every single individual in America with private coverage...between 25 and 40 percent of their health insurance premiums cover not medical expenses, but administrative costs? Compared to the inefficiency and bureaucracy which result in those costs, the actual cost of rescission is absurdly inconsequential (though it did have clear political benefits).

Just brings to mind what a former Congressman friend used to say about campaign financing: Everybody knows what should be against the law; it's what's legal that'd make you cry...