Thursday, October 31, 2013

Black-market insurance

[To reiterate what I said in my previous post: This post is based on what I think I know about ObamaCare. It doesn’t have links to back up my understanding because I’ve picked up and integrated this understanding from lots and lots of reading over the past month (and previously) and I can’t easily find where I read what. I may be wrong about some or all of my understanding and if so, I hope someone lets me know. I can say I’ve read everything I claim to know somewhere; however, part of the problem with ObamaCare is that even people who should know how it works and/or who claim to know how it works often seem not to. So take everything in here with a large grain of salt.]

Back in February, I posted a comment over at Grim’s about what I called “Disaster Insurance” or, alternatively, "Failure To Sign Clients Up For Health Insurance In A Timely Fashion" policies. I described such insurance thusly:

Under Obamacare, I can elect not to get coverage and pay a fairly small fine/tax - certainly less than coverage would cost me. Then if I get a condition like Alzheimer's or cancer or congestive heart failure, I just buy health insurance.

The risk is that I'll suffer some sudden condition: heart attack, stroke, hit by a bus. If I'm unconscious as a result, I'll incur huge medical expenses before I'm well enough to buy health insurance.

So I wondered if it would be possible to sell something called perhaps "Disaster Insurance". I sign up, pay a small annual fee, and - if I get hit with one of those sudden conditions - the Disaster Insurer signs me up for health insurance and pays whatever charges I incur before I'm signed up.

This would require that I keep insurance applications on file with the Disaster Insurer and that the DI have some type of arrangement with hospitals to be notified if I show up in their Emergency Rooms - or perhaps I wear something like a MedicAlert bracelet that says I'm a DI customer. [snip]

Technically, they wouldn't be health insurance policies at all. They would be "Failure To Sign Clients Up For Health Insurance In A Timely Fashion" policies. That is, the policy doesn't say it will pay my health care costs; it says it will sign me up for health insurance as soon as I need it. Should it fail to do so - for any reason, including my being hit by a bus - it will make good what it has cost me.

Tricky but I suspect it could be made to work.

When I wrote that, I thought ObamaCare would have a 24/7/365 open enrollment period. That is, I believed that if I was diagnosed with leukemia or hit by a bus on June 23, I could sign up for health insurance on June 24. Once I realized that wasn’t the case, that ObamaCare open enrollment periods would be the usual brief window late in the year, I stopped thinking my DI idea would work. Now we weren’t talking about paying my health care costs for a few days or a couple of weeks. Rather the DI would be at risk of having to pay them them for up to almost 13 months.*

Interestingly, however, someone else is now thinking along those lines and seems to think such an idea will work. Martin Feldstein (via Greg Mankiw) is writing about what he calls “Obamacare’s Fatal Flaw”. He considers “the biggest danger to Obamacare’s survival” is the possibility (perhaps probability) that many healthy people who could buy in the individual market will pay the fine rather than pay for health insurance. If and when they become seriously ill, they will simply purchase health insurance then since they can’t be turned down for pre-existing conditions. This “wait-to-insure” strategy, he says, will work out well for the individual if the illness is something that doesn’t require immediate expensive treatment. On the other hand, conditions that do require immediate expensive treatment - like being hit by a bus or having a heart attack - would expose these individuals to huge bills and fear of this exposure may well drive people to sign up for health insurance as a precaution.


...private insurance companies could solve that problem by creating a new type of “emergency insurance” that would make enrolling now unnecessary and allow individuals to take advantage of the wait-to-insure option. Such insurance would cover the costs that a patient would incur after a medical event that left no time to purchase the policies offered in the Obamacare insurance exchanges. Emergency insurance might also cover the cost of care until the “open enrollment” period for purchasing insurance at the end of each year (if political pressure does not lead to the repeal of that temporary barrier to insurance).

This type of insurance is very different from existing high-deductible policies. Given the very limited scope and unpredictable nature of the conditions that it would cover, the premium for such a policy would be very low. It would not satisfy the broad coverage requirements that Obamacare mandates, forcing individuals to pay the relatively small penalty for being uninsured and to incur the subsequent cost of buying a full policy if one is needed later. But the combination of emergency insurance and the wait-to-insure strategy would still be financially preferable for many individuals, and the number would grow as premiums are driven higher.

An interesting proposal (she said modestly). However, I think it’s illegal. As I understand it, health insurance companies are forbidden to sell any health insurance policies except the ObamaCare metallics: Platinum, Gold, Silver, Bronze, and Restricted To The Young And The Somewhat But Not Totally Poor Fake Catastrophic policies. The type of insurance policy Feldstein is describing is none of those and thus it would be illegal to sell such a policy in the United States. In other words, the problem isn’t just that an individual buying such insurance would still have to pay the fine/tax for being “uninsured”; it’s that selling such a policy is against the law.

I keep thinking I must be wrong about this because surely Greg Mankiw and Martin Feldstein must know what ObamaCare does and does not allow. But I read posts like this (Peter Suderman citing Kaiser Health News) and it seems pretty clear-cut to me:

In 2014, plans sold on the individual and small group markets will have to meet new standards for coverage and cost sharing, among other things. In addition to covering 10 so-called essential health benefits and covering many preventive care services at no cost, plans must pay at least 60 percent of allowed medical expenses, and cap annual out-of-pocket spending at $6,350 for individuals and $12,700 for families. (The only exception is for plans that have grandfathered status under the law.)

Maybe this is just Expertopia shorthand for “plans sold on the individual and small group markets will have to meet new standards for coverage and cost sharing, among other things in order to spare those purchasing them the fine/tax for being uninsured”. If so, I wish someone would say so. If that is the case, then there is no prohibition on kinds of health insurance policies insurance companies can offer so long as those who buy them are willing to be considered “uninsured” by the IRS. That would be nice to find out but I just can’t quite bring myself to believe it. (It’s very frustrating and seems a metaphor for the whole ObamaCare mess that there isn’t someone I can call or email and be assured of getting a definitive, unspun, guaranteed accurate answer to questions like these.)

On a happier note, Feldstein ends with what sounds like an endorsement of the McArdle plan. After warning that the ObamaCare unraveling that would result from the “wait-to-insure” strategy could lead to renewed calls for a single-payer system, he offers an alternative:

But it might also provide an opportunity for a better plan: eliminate the current enormously expensive tax subsidy for employer-financed insurance and use the revenue savings to subsidize everyone to buy comprehensive private insurance policies with income-related copayments. That restructuring of insurance would simultaneously protect individuals, increase labor mobility, and help to control health-care costs.

And on a lighter note, I feel moved to quote another one of my comments from that Grim’s Hall thread (emphasis added here):

Obama demonstrated conclusively during his run against Hillary Clinton that he was clueless about health care and insurance (and incapable of logic). Obamacare seems to suffer from the same flaws. It's fascinating to see how many utterly foreseeable problems are baked in the cake.

I didn’t know the half of it.

(My thanks to T99 for the title of this post.)


* After the extended enrollment period from October 1, 2013, to March 31, 2014, ObamaCare’s open enrollment period will be from late October of each year until early December of the same year for insurance beginning the following year. Thus if I were to be hit by a bus the day after the open enrollment period ended in early December, my DI wouldn’t be able to enroll me until late October of the following year and my insurance wouldn’t kick in until January of the year after that. Unless, of course, my DI could arrange for me to experience a “life event” that would trigger an enrollment window. Getting me married off, moving me to another State, something like that.


E Hines said...

...Given the very limited scope and unpredictable nature of the conditions that it would cover....

This type of stop gap insurance coverage is easy to structure (says the non-insurance expert) so that it's legal even under Obamacare. It's a paid-up life insurance of a few months' duration. When a specified event occurs, the policy pays out, or if the premiums aren't fully paid, yet, the premiums paid are returned. Not necessarily low premium, though.

But it might also provide an opportunity for a better plan: eliminate the current enormously expensive tax subsidy for employer-financed insurance and use the revenue savings to subsidize....

Better yet would be to do the first part and create a free market for health insurance and create a free market for the separate health care industry. Most (all) prices in both industries would fall to their natural levels. A market for pre-existing conditions would exist, albeit with high "premiums" since here there's no risk to transfer beyond the timing of the next event of the pre-existing condition.

Might even be able to set up a health welfare program for the truly indigent who cannot be helped by the proper sources.

Eric Hines

Elise said...

I don't see how you could call this life insurance when the policy holder doesn't have to die to get benefits.

It may be possible to get away with what Feldstein suggests by calling it "emergency insurance", just as I suggested calling my plan “Disaster Insurance” or "Failure To Sign Clients Up For Health Insurance In A Timely Fashion". I think that's a lot more difficult with a plan that could potentially pay medical costs for a year or more than it is with a plan that's going to pay medical costs for a couple of weeks.

Even if someone could come up with a presumably legal structure for this, I have to believe the Obama Administration (and any subsequent Democratic Administration) would be on the insurer like a duck on a June bug. The legal fees of defending against the government's cease and desist attempts would eat up a lot of money and unless the insurer was backed by someone who was willing to pay those fees out of his own pocket, premiums would go up to cover them.

E Hines said...

Paid up policies can be cashed out for any reason, or no reason at all--the policy holder just wants to.

Eric Hines