Jim de Bree: Preexisting conditions confusion

Jim de Bree
Jim de Bree
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Since the House of Representatives passed the American Health Care Act (“AHCA”) on May 4, it has been the subject of significant commentary. One of the most controversial aspects of the AHCA is the preexisting condition issue.

While I oppose the bill, which exacerbates many of Obamacare’s problems, opponents of the AHCA have misrepresented the preexisting condition provisions – which are unlikely to affect Californians.

A preexisting condition occurs when someone has a medical problem at the time he or she applies for new medical insurance coverage.

Prior to Obamacare, having a preexisting condition was a serious problem for many because an insurance company could deny coverage for medical treatment of that condition or could charge a higher premium for coverage.

Furthermore, insurance companies could place a limit on what they would pay during the patient’s lifetime. This limit is sometimes called a “lifetime cap.”

Obamacare prevents denial or limitation of coverage because of preexisting conditions, and it eliminated the lifetime cap. Consequently, under Obamacare, many previously uninsurable patients were able to obtain insurance. The increased costs of treating those patients is one of the drivers of health-care costs.

Obamacare also requires people to carry health insurance. Those who fail to do so are subject to a punitive tax.

If approved by the Senate and signed by the president, the AHCA would eliminate both mandated health-care insurance coverage and the punitive tax under existing law. Theoretically, this provides consumers with a choice of whether to obtain health-care coverage or not.

This also provides incentives for healthy people to be uninsured. For insurance to be successful, the premiums collected must exceed the claims paid. Therefore, healthy people need to participate to fund the claims of the seriously ill.

Under Obamacare, the population purchasing insurance was divided by state into groups of people who participated in separate insurance plans. Each group is called a “risk pool” because the risk of paying claims has to come from the pooled premiums paid by the group’s participants.

Unfortunately, in many states the claims paid exceeded the premiums collected because the amount of claims was underestimated when the amount charged for premiums was determined.

The ACHA provides multiple ways for states to deal with this problem. One way is to put certain people with preexisting conditions into a “high-risk pool.” A high-risk pool is where the participants in a health-care plan are sicker than the general population.

If a state chooses the high-risk pool option, it must ensure that the plan is economically viable. Usually to accomplish the requisite viability, the state has to fund a significant portion of the plan from its general fund.

Without an insurance mandate or a pre-existing condition provision, uninsured people can postpone getting insurance until they get sick. Because they were not in the insurance pool while they were healthy, these folks game the system.

Consequently, the ACHA allows insurance companies in states choosing the high-risk pool option to consider preexisting conditions in pricing insurance policies for new participants who do not have coverage for a period of more than 63 days prior to the effective date of a new policy. Furthermore, they can impose a lifetime cap.

To be subject to the preexisting condition rules you have to meet two tests. First, you have to reside in a state that uses high-risk pools. Second, you must have had a gap in your insurance coverage exceeding 63 days.

Many articles written by AHCA opponents discuss the cost of insurance for someone who is subject to the preexisting condition underwriting criteria. While those articles accurately assess the costs to affected persons, they fail to mention that the preexisting condition restrictions apply only to those meeting the two tests. California is very unlikely to adopt high-risk pools.

The Commonwealth Fund estimates that 30 million Americans experienced a gap in coverage of 90 days or more in 2016.

Some AHCA opponents have presumed that all 30 million will be subject to higher premiums and extrapolated the cost of placing them into a high-risk pool. Since most states are not expected to utilize high-risk pools, those extrapolated costs are exaggerated; but we don’t know by how much.

Furthermore, not all people with gaps in insurance coverage will enter the high-risk pool immediately. Some may never enter the pool.

As you can see, confusion over preexisting conditions has led to considerable misinformation. Unless you have a 64-day gap in your insurance coverage and you leave California for a state that’s chosen to use high-risk pools, you are not likely to be affected by these provisions.

Jim de Bree is a retired CPA residing in Valencia.

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