Guaranteed renewable insurance

December 11th, 2008 | by Brian Schwartz |

A common and legitimate concern about health insurance is not being able to buy insurance because of a preexisting condition.   In this post I make the case that if government stopped subsidizing employer-sponsored insurance, more people would buy individual insurance policies when they are young and healthy.  Such policies are guaranteed renewable, so pre-existing conditions would be less of an issue.

My understanding is that employer-sponsored insurance can either benefit or hurt those with preexisting conditions.  On one hand, if an insurer wants to sell a policy to a group through their employer, they cannot exlude those with pre-existing conditions.   There might be laws against such individual underwriting, but I imagine insurance companies who did this wouldn’t sell many policies to employers.

On the other hand, people can lose health insurance because of changes in their employment status, and hence any condition they have hence becomes “preexisting.”   This could make it impossible to buy an individual plan, so they either must find a job that offers insurance, remain locked to a job that offers it, or marry someone to get insurance.

Current tax law and other controls favor employer-sponsored insurance over non-group plans and group plans through membership organizations.   A common criticism of removing this tax bias is that people with preexisting conditions would have trouble getting coverage.

However, a recent study suggests otherwise.  Authors Mark Pauly and Liebrethal write that:

for people in poor or fair health, the chances of losing coverage are much greater for people who had small-group insurance than for those who had individual insurance. We attribute these results to the offsetting effects of high loadings and guaranteed renewability in the individual market.

An earlier paper co-authored by Pauly describes guaranteed renewability:

Guaranteed renewability is a contractual feature in which the insurer agrees both to sell another policy to the insured person (if that person wishes to buy) at the end of the term of the current policy period and to charge a premium for that policy that is not affected by any individual loss experience or change in the insured person’s circumstances during the term of the current policy. …

So, in theory, guaranteed renewability is a way of diminishing risk selection for persons who can buy insurance before they become high risks. There is a real-world counterpart to this theory: Even before widespread regulation of guaranteed renewability, approximately 80 percent of insurance buyers were willing to pay the premium for contracts with this feature.*

So here’s a back-of-the-envelope sketch of how we’d buy insurance if government policy didn’t favor employer sponsored insurance:

First, employers could still offer insurance, but so could membership organizations like AAA, or one connected to your profession.  (Buying through membership organization sounds much more preferable than through your job.  Which would you prefer, to pay $50 a year to remain a AAA member just so you can buy the insurance, or stay at a job you don’t like just for the insurance?)

As for the non-group market, I could imagine policies, if they do not exist already, that can remove the pre-existing condition problem by being both guaranteed renewable and covering people from birth.  Such a policy would cover pregnancy and delivery-related risks to both the mother and baby.  This latter coverage for the baby can then extend to a separate policy for the child (as a dependent).  When the child is old enough to be self-supporting (no longer legally dependent on the parents), the policy could have a feature such that it would automatically roll-over to be an individual policy, regardless of the child’s health history.

And why imagine such a feature?  Bevery Gossage told me about the “generation to generation benefit” from Freedom Health Plans: from Companion LIfe Insurance:

Your covered dependents have the option when they reach age 19, or up to 25 while a full-time student, to purchase their own plan without evidence of insurability.

If anyone can cite other plans that have this, please tell me.

* The authors also found that

all states but Hawaii, Idaho, and Kentucky forbid insurers from imposing follow-on rate increases that are based on health status at the time of renewal. In short, virtually all states say that they require insurers to abide by the textbook definition of guaranteed renewability.

Keep in mind that the authors also found most policies to have this feature even without the government’s making it a crime to purchase a policy without it.

For this data, the authors site an earlier Health Affairs article (Pauly is also a co-author), and the relevant data is in Exhibit 3.  From my reading, I’d put the figure to be 60% rather than 80% as the 80% figure appears to includes non-cancelable disability coverage.  This is different from mecical insurance, and I don’t think you can add percentages like that if the denominators differ.

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  • Brian,
    The guaranteed renewability you've proposed in this post already exists and has existed for a long time. And the guaranteed issue of group policies is what makes them 2-3x the price of individual plans.

    Insurance companies don't want insureds for more than a few years, atleast in the same pools they are actively marketing and want the price to be competitive on. To get around guaranteed renewability, they practice sunsetting.

    You don't ever cancel any of the insured's policies on them, but you quit marketing it and start marketing a new policy. If you've obtained a health condition while on the plan that now makes you uninsurable, you're stuck and the prices are going to now start increasing very quickly. Everybody else healthy enough to have other options will leave the pool - or as libertarians put it, "take their business elsewhere." Eventually, the only people left in the block are those unable to "take their business elsewhere". The cost of their premiums is roughly equal to the cost of their claims.

    Luckily for Coloradoans, once their premiums exceed the premiums of CoverColorado (the taxpayer subsidized option), they are able to switch over to that. You can see a good discussion on this topic in the comments section of one of the posts on our website HERE.

    That is the difference between the health care market and other markets. Even if there were a truly "free" market as you say, the invisible hand requires each consumer to be allowed to choose freely what to buy and each producer to be allowed to choose freely what to sell and how to produce it. In a truly "free" market lacking consumer protections from the government, the producers would make sure the consumers with health conditions lose their ability to choose freely.

    Also, I'd like to request that you install the subscribe to comments plugin. That would be helpful for me to know when people reply.


    Good point, Jay. Vip Patel and Mark Pauly address this issue in a 2002 Health Affairs article, "Guaranteed Renewability And The Problem Of Risk Variation In Individual Health Insurance Markets" on-line here. They write:
    Another possible harmful insurer strategy is subtler still. An insurer may raise premiums for all insured persons more than experience would dictate.7 This will cause below-average risks to drop out. The insurer may then offer to cover only those low risks in a new underwriting class at a premium appropriate to them, while refusing the insurance coverage to higher risks. In effect, the insurer can cause the underwriting group to self-destruct.

    However, such behavior should be limited because no one would knowingly buy coverage from an insurer with a reputation for engaging in such behavior, and even the lower risks might be nervous about repurchasing from an insurer that they have observed to engage in such practices. After all, even though they have remained lower risks so far, they would fear themselves becoming higher future risks with coverage from a company that schemes to avoid its obligation to provide them with protection. Reputation surely does not provide complete protection, but its effect is enhanced if insurance brokers and state insurance departments, at a minimum, identify the insurers engaged in such practices. With a reasonable amount of consumer attention to premiums and probabilities—and remember, adverse selection can only occur if consumers do pay attention to such matters—a consistent policy of offering vacuous guaranteed renewability should be self-defeating for any company that wants to remain in a market for the long run. We know (based on anecdotes) that these practices do occur, but we also know (based on data) that many people with prior and costly chronic conditions obtain nongroup insurance at premiums close to the average.8 The answers to the key empirical questions—how frequently such behavior occurs and how well reputation-based incentives police the market—are not known.
    Brad Herring and Mark Pauly also address this issue in a 2006 paper, Incentive-Compatible Guaranteed Renewable Health Insurance.


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