More on Rescissions

For those interested in the issue of health insurance policy rescissions, Slate also had a story yesterday, only with a lot more detail and links than mine (but without the clever comparison to financial services “innovation”).

Also, Taunter wrote an insightful post about rescission, expanding on a comment he left on this blog. He drives home a point I thought I made in my original post, but maybe wasn’t very clear: if 0.5% of policies get rescinded, that means that far more than 0.5% of insureds who really need insurance get their policies rescinded, because the insurers are targeting those policyholders who develop expensive illnesses. I said, “insurers only try to rescind policies if you turn out to need them; so the percentage of people who lose their policies when they need them is even higher.” Taunter puts numbers behind that, and they turn out to be potentially scary.

He also has a great analogy to underage gambling which I will reproduce here:

Years ago I was walking a casino floor with a casino executive. . . . [T]here we were in the middle of acres of blinking lights, with absolutely no one making sure that underage kids weren’t walking up to a slot machine.  Indeed, they don’t card for the table games.

The executive told me you are free to play if you are underage, you just aren’t free to win.  You can sit down and pump your money into the slots, and if you look presentable you can drop some chips on blackjack or craps.  However, if you should happen to start winning, the pit boss or security team will come over and check your ID.  The house edge is 100%.

By James Kwak

28 thoughts on “More on Rescissions

  1. Taunter’s numbers are not just “potentially scary” – they’re scary.

    As Taunter points out, healthy people are not at risk of getting dumped by the health insurance company. But if you fall seriously ill, you run a fairly high risk of getting dumped. (Check out his site – he explains it well.)

    However, I will point out that it seems like we need a provision for mandated coverage. If insurance companies will no longer be able to deny coverage to people with pre-existing conditions, there would be nothing to prevent the healthy people from opting out of purchasing health insurance until they need it – which defeats the “large pool of people” theory behind insurance. You need those healthy people buying up policies they won’t need for a good long while to support the people who are seriously ill (and a huge financial drain on the system.)

  2. Come on people, the CEOs of those insurance companies need their bonuses too. Give them a break.

  3. The whole concept of insurance seems outdated and bizarre. The only thing that is going to work is a system to pay for services that you need with abundant options and choices for the cheapest budget choice to the Obama Plan. There is just no sustainable way that LA General can continue to have 6,000 births a year, 70% of which are uninsured – which is what I saw reported on NBC Nightly last night. In my world, they can have one of thse “birthers” come over to the bedroom with clean towels and demerol. Like The Little House on the Prarie, if the preemie don’t make it, well, better luck next time.

  4. Has nobody here ever heard of the rule against forfeitures in common law?

    I grant that recourse to a court is not often practical, but it wouldn’t take many precedents to change the habits of the insurance industry, and such precedents do get established. (The response of the industry could potentially be to include in their contracts a choice of forum clause [= state where rule against forfeitures doesn’t exist] or an arbitration clause. However, since, as far as I know, insurance is a business that is state regulated, the former won’t work out that well, at least. And mandated arbitration may also be on the demise, as we’ve been seeing recently.)

    The rule basically says that courts can use a presumption that an amount due a person not be forfeited, unless the violation of the contract terms is “of the essence.” The latter is, of course, a fishy principle, but here are some examples:
    – you put up a down payment on a house but eventually leave the deal; some courts will mandate the seller to return the payment (however, putting the burden of proof on the buyer to show that there would be unjust enrichment absent repayment);
    – you miss the date on which you have to file an insurance claim by one day, and the co. uses that as a ground for denying coverage; some courts will come back and order the insurance company to pay you.

    I’m not an expert on this point of law, but it is out there and courts do use it. I wonder whether it has ever been applied in the context of a rescission decision based on a minor flaw in an insured’s application form.

    I guess one of the problems with this “rule” is that it’s not intuitive, at least to me, that such a monster would exist in U.S. law. So, most people (like me before law school) wouldn’t know of this type of recourse, I think.

    Any thoughts?

  5. The idea that it’s fraud to keep accepting payments while all along you’re intending to play gotcha the moment anyone tries to collect is a clear moral truth which always occurs to me, but since I never heard of there being any real pushback in the courts, I assumed that the law here as everywhere else is monstrously pro-corporate and anti-public.

    I’m glad to hear there might be some possiblities here. (I’m also glad to hear, if it’s true, that the systematic privatization of law through forced arbitration may be on the decline. I hadn’t heard anything to that effect.)

    But, yes, I’ve never understood how, as a legal (by which I mean political) matter, they wouldn’t have to at the very least refund everything you paid in if they refused to follow through on their obligations, since almost none of the rescission examples involve intentional fraud on the part of the consumer.

  6. “The whole concept of insurance seems outdated and bizarre.”

    That’s probably the single most sensible statement I’ve seen anywhere on this subject. In order to prepay our medical expenses we let third parties ride on our wealth for free… encamping themselves in beautiful buildings with expansive grounds and living like lords. It is simply stupid, as in s-t-u-p-i-d. Redistribution is not a service that is worth that much.

  7. Sorry, but I haven’t seen anything as stupid as this statement. Wait until you get that rare cancer. There is no way you’ll be able to pay for all the treatments you’d like. It’s going to bankrupt you and your kids, even if you’re moderately well off now. That’s what risk spreading and risk averseness means, but you don’t seem to have heard those terms.

  8. When I first joined Baseline I privately disagreed with SJ that health reform should come second to applying antitrust laws to the Zombie banks. But now I understand why. It seems that any meaningful health reform, in the United States, is blocked by the same oligarchy that runs your country’s financial system.

  9. Let’s not dispair. Consider the — Butterfly Effect. — “The phrase refers to the idea that a butterfly‘s wings might create tiny changes in the atmosphere that may ultimately alter the path of a tornado or delay, accelerate or even prevent the occurrence of a tornado in a certain location. The flapping wing represents a small change in the initial condition of the system, which causes a chain of events leading to large-scale alterations of events. Had the butterfly not flapped its wings, the trajectory of the system might have been vastly different. While the butterfly does not cause the tornado, the flap of its wings is an essential part of the initial conditions resulting in a tornado.

  10. As the casino example makes clear, the important rescission rate is not per insured, but per initial major medical expense, since that is what triggers rescission.

  11. Before you say that, I’d suggest that, as an exercise, you add up all the $$$ you have paid out for insurance over the years. I did that and the number floored me. What you must include in your statement is the recognition that you’d have far more money invested over the years if you hadn’t put it into insurance company showpiece headquarters. A lot more than you might casually think.

  12. Given that all the posters seem to agree in principle that their needs to fundamental reform of the health care system for either moral or economic reasons (or both), perhaps you might be able to shed some light on a subject that still baffles me to this day. I have heard consistently that their has been a ground swell of opposition to reform, not just from those who stand to lose economically (insurance companies) but those whom would benefit most (poor unisured people, or underinsured). This phenomenon: poor people voicing ardent opposition to government intervention that would benefit them has always baffled me. This issue goes beyond healthcare, whether to tax/economic policy. I understand why wealthy individuals like the status quo, its working for them, but the economy has not been working for the poor/middle class for a very long time. And yet the answer of many of these individuals seems to be cut taxes for the wealthy. In Canada, where I live, people vote much more along class lines (Wealthy for Conservatives, Urban poor for NDP, Middle Class/Urban proffesionals for Liberals), in that there is a much more logical link between vote and policy. But in the US, it seems the poor have been voting against their own interests while wealthy individuals on the coast vote for their interests. What is up with this? Thomas Frank commented on this, but I was hoping that American posters might better explain this phenomena to an outsider.

  13. It seems there’s a certain portion of the economically beleaguered who, out of political and/or religious conditioning, have an aversion to consciously seeing themselves in a “class” way.

    What this means in practice is that they really, in contradiction of reality, cling to their sense of themselves as “middle class”, but see this as a cultural rather than an economic status. If they can define themselves that way, they can still cling to all their delusions about the “American dream”, the benevolence of capitalism and organized religion, patriotism and the rest of it.

    Meanwhile they furiously resist any realization that they are factually “sinking into” (as they would see it) the “poor”, or that they are part of the “proletariat”. They reject this way of seeing themselves, and by way of compensation join in with right-wing bashing of workers and the poor. It’s the standard phenomenon of bullying to cover up for one’s own inadequacies.

    So in these ways they deal with their increasingly hopeless economic plight by escaping into an alternate culture war reality. The pathetic and ironic thing is that things are only hopeless to the extent that people refuse to recognize the class war being waged upon them. If they did confront this reality and fight back against it, it could be changed.

    But lumpenproletariat reactionaries, historically fascism’s base, are worthless for this.

  14. Russ,
    don’t fall for this explanation

    “But lumpenproletariat reactionaries, historically fascism’s base, are worthless for this.”

    without also carefully looking at the role of the intellectuals who always tend to get right from the start very enthusiastic if somebody comes up with a new idea to create better or even ideal human beings

  15. What poor people are voicing opposition to meaningful health carer reform?? I’m one of those “poor” people without any access to health care and I assure you that I have no problem with a public option or taxing rich people. Also the poor people I know aren’t so delusional to think that one day they’ll be rich. This thinking is a canard created by the for profit media and comfortable progressives acting as spokespeople for the working poor and so called underclass.

  16. Unfortunately, there will need to be some social coverage for catastrophies – quite unfortunately. If it was up to me I would let your arse pay or die. Just what is so prescious about you or your families wealth that you can’t lose it if you are a morbid 400 pound walking hippo and you get cancer? Screw’e you. Pay or die.

    As far as the rest of “insurance” it is ridiculous. Everybody is out to get their share of benefits. They paid for them, right? Like Rush, you will go to the top cancer specialist to have a look and a bi-op on that pimple on your arse, why, because you are “covered” ….

    It will obviously stay as it is, because you have the POWER but my remark that insurance is a Suckers Game and economically retarded will always be true. Mr. Alcoholics Anomoyous…. sort of like the Stock Market of Ownership Equities in Corporate America. Hold your nose while you repeat that one.

  17. What poor people are voicing opposition to meaningful health carer reform??

    Enough to keep electing republicans, and to scare many democrats into acting republican.

    You’re certainly right about the repulsive MSM, but that doesn’t change the fact of the existence of these elected politicians, or that George Bush has a hard core 20% support base. That would be 19% over the 1% who actually monopolize the wealth.

  18. I don’t “fall for” anything. My expanations are my explanations, based on what I observe, although it is nice when I find fellow thinkers who have come to the same conclusions.

    If by the “intellectuals” you mean intellectual mercenaries who latch onto rising political trends and dress them up with fancy academic finery, you’re right about them. They’re an ineradicable part of political change.

    But they’re really an epiphenomenon, and speak mostly to one another. They don’t represent the vital forces which really drive events.

    E.g. the Global War on Terror is a brute power and resource grab, driven by oil fundamentals, the disaster capitalism which is a basic part of any crisis, the elemental fears 9/11 stoked among the masses, and the basic power greed of American politicians.

    There’s nothing intellectual about those, the true fundamental factors.

    But it’s not a “naked” power grab because it was dressed up in neocon ideology.

  19. Is there a large difference on this issue between the urban poor vs the rural poor? I have found from my American friends that the cultural divide(and the corresponding political/economic ramifications)is not so much red state/blue state as it is urban/rural. For example, when I looked at a map of which counties voted for McCain vs Obama I noticed that even in the South, in urbanized districts (Birmingham, Charlotte)Obama handily won, but in rural districts, even in blue states he lost, look at the votes in California outside LA and SF. I just don’t think most American’s understand how good the rich have it in the US, and also, I find a general lack of compassion from the monied classes in the US. There seem to believe that it was only their brains and hardwork that allowed them to prosper economically, and they seem to also think that they did this inspite of government, without recognizing that government has provided the infastructure/institutions that make their accumulation of wealth possible. I dont decry the accumulation of wealth, but I think a lack of moderation and perspective is problematic. Where did ethical capitalism go, what happened to the business man/woman who thought that being part of a society which allows you to have so much demands a certain amount of responsibility to that very society? The fact that Hedge Fund managers pay less of their income in taxes then the janitors who clean their offices boggles my mind (thank god for low captital gains taxes). I dont feel taxing everyone into equality of poverty is the answers, but at a certain point so much wealth being held by so few is a recipe for disaster, both morally and economically. And I dont think the answer is more economic freedom for the poor, as they rarely have the tools to utilize this freedom in the same way the well of do.

  20. I think in a lot of states there is a statute that covers when you may rescind an insurance contract. Here in MA, I seem to recall that you may only rescind if the misstatement on the application was “material,” in other words you left out some info that materially affected the underwriting risk. Functionally, this is pretty similar to the incorrect fact being “of the essence.”

    I’m guessing the egregious examples of recisions for trivial omissions (e.g. not disclosing acne treatment) were made in states with more insurance company-friendly statutes on the books.

  21. Addressing cogently just one of the many blatant sham/scam features of the health insurance coverage game. Listen to guys like Wendell Potter. The health insurance industry is an absolutely immoral use of capitalism with abhorrent results. Why not give them the right to hire Kivorkians of “off” any patient who looks likely to get a rational claims rationale? Might as well, it’s tantamount to what their strategy currently contemplates!!

  22. I’m totally with you on rescissions. In general, I’m in favor of a strong health care reform with a serious public option.

    But I thought I’d point out a consequence of making rescissions illegal. Either #1, it becomes the Insurer’s responsibility to identify preexisting conditions.(although denial of a new policy for pre-existing conditions might become illegal, as well). or #2 Health insurance coverage becomes mandatory.

    #2 is probably a necessary consequence of making rescission illegal. But enforcing mandatory health insurance is actually quite tricky. Assumedly, the government would track people’s insurance(or lack thereof) and a fine would be issued.

    Therein lies the rub. If the fine is lower than the insurance premium, it is in by interests to not get insurance, pay the fine, and then sign up for a policy when I get sick.

    But selecting the appropriate fine is tricky business, in some senses, it is equivalent to insurance underwriting. At the same time, legislators are under pressure to make the fine as small as possible, to prevent alienating their constituents. Moreover, the tendency of government, is to specify the fines in the legislation itself. This means that an appropriate fine at the time of passage, even if it is initially significantly larger than the cost of an insurance premium at the time, will eventually become less valuable than the premium due to dollar inflation and health cost inflation.

    I don’t mean to imply this is a bad idea. In fact, if we’re lucky, the legislation is written poorly, it kills health insurers, and we end up with the public option. But I just think it is important to understand how making practical legislation to make rescission illegal, is actually quite tricky.

  23. I wonder if the supposition of widespread recissions is in fact correct. It would be helpful to have some actual data on this. Perhaps state insurance regulators collect it.

    The reason I wonder is that I have an individual insurance policy which provides that “Two years after this Contract is issued, no false statements which might have been in your Application can be used to void the Contract. Also, after these same two years no claim can be denied because of any false statement on your Application.”

    My insurance is with a Blue Cross Blue Shield affiliate in Georgia. I do not know if the above provision is a matter of insurer contract policy or state regulation, or how widespread its use is. This provision would appear to take a balanced approach to the issue and greatly limit scope for abusive recission.

  24. For whatever reasons too many of us either are unaware of recision or do not understand it fully. Health insurance in this country is a myth. We’re paying for something solely for the purpose of saying that we have it. I know this is not what the millions who pay for it are thinking, but it is the result. This demonstrates why it is so difficult to really get the public involved in this debate because a good number are thinking, that their premiums are paid and they’re fine. As long as they continue to be well, they will continue to have health insurance. provided they can afford it anyway.

    For this reason, I believe a Consumer Protection agenda is imperative. The most basic and yet powerful action possible would be to force insurers to publish their recision statistics. Who’d want an insurer who is likely to cancel them just when they really need them. What is an even more powerful statistic is the recision numbers paired with the anticipated cost of continued coverage. The amount of information that doctors, insurers and the financial establishment require of the public says just how powerful information about people you do business with is. The buying public has so little information about doctors and insurers and reversing this is a good beginning.

  25. Russ, I agree, but I think this speaks to the divide Tyson mentions below between rural and urban America. It reminds me about the caricature of honest, hardy, hard working rural Americans as though those in the urban America don’t work are dishonest and more prone to disease. Rural Americans also don’t consider farm subsidies or the fact that farm workers on public assistance during the off season is the same as the assistance that many urban families receive. The caricatures that television and movies use for what various people from various parts of society look like and what their backgrounds must have been are the same ones used in politics.

    Many if not most of the poor in the republican party are focused more on the ethical, religious aspects of the party which quite capably demonizes urban America, which for its purposes are neither ethical nor religious. This also demonstrates how the message of hatred is so pervasive because being ethical and religious, hardworking, hardy, and honest makes you better right. If you believe that those traits are beholden to geography or one political party vs. another, sadly it might. Politics obviously is the only place this distinction matters, because business and wealth in this country have nothing to do with origination.

    Everyone might not get into heaven, but corporations will take money from anyone. A neighbor of mine, staunch republican that he is, is always complaining about his insurance and the cost of prescriptions as though he is unaware that his vaunted political party has no issues with this whatsoever. Keeping America for Americans is also a big priority for him, so perhaps the possibility of being recised is less important to him than say illegal immigration. That the republican party maintains its status as standard bearer for all things moral and good despite the clear, public and seemingly regular failings of some of its most heralded makes clear the ‘we’re not the same and so its not the same when we do it’ thing the have going on in that party.

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