Thanks to the Affordable Care Act, insurers can no longer rescind coverage when a policyholder gets sick, except in cases of intentional misrepresentation. Is this a big deal? How common were recissions anyway?
TIE research assistant extraordinaire Daniel Liebman looked into the literature on this subject and it’s about as thin as can be. There are just two studies, which Daniel summarized as follows.
“Termination of Individual Health Policies by Insurance Companies”, 2009 (House Subcommittee on Oversight and Investigations)
- Widely-reported house investigation and hearing into rescissions at three large insurance companies (WellPoint, United Health Group, and Assurant)
- Found that these three companies retroactively rescinded 20,000 policies over the previous five years
- Savings from these rescissions totaled more than $300 million
- Highlighted specific cases where employees were allegedly commended for saving money through retroactive rescissions, asserted that companies use a list of “expensive” conditions as flags to give policies additional scrutiny following diagnosis
- Insurance executives defended rescission as a necessary tool in cases where risk was not properly disclosed when the policy was offered
- Assurant CEO stated that rescission affects less than 0.5% of enrollees
- Drew criticism from lawmakers for declining to rule out rescission in non-fraudulent cases
“Rescission Data Call”, 2009 (National Association of Insurance Commissioners)
- Data call issued to 52 insurance companies by NAIC
- Sample represented 70% of covered individual lives in US
- NAIC a standard-setting/regulatory support organization governed by chief insurance regulators (commissioners) from each state
- Assessed number of and reason for rescinded policies from 2004-2008
- 27,246 rescinded policies against sample of 6.7 million policies
- Translates to incidence of 3.7 rescissions/1000 policies
- Heterogeneity state-to-state, ranging from ~19/1000 in New Mexico to none in certain states
- Psychiatric conditions most frequently cited as basis for rescission
- 18% psychiatric, 10% hypertension, 9% height and weight (obesity), 9% substance abuse
Given this thin base of evidence, I would not draw strong conclusions about the precise pre-ACA rescission rate. I also would not expect many strong studies in this area, as insurers are, no doubt, not eager to share such data and unbiased self-reports could be difficult to obtain.
Having said all that, the conclusion here is easy. If rescissions for accidental application errors occurred at a “substantial” rate pre-ACA, it was a reasonable thing to clamp down on. If they occurred “rarely,” then it shouldn’t matter a great deal to insurers and the market that they are a thing of the past. Of course, in all cases, rescissions are (and were) meaningful for consumers, and bad behavior by insurers to the extent they were not always reasonably based on deliberate misrepresentations or fraud.
Given the nature of some insurance markets pre-ACA and the immense value of insurance to people with pre-existing conditions, we should be careful about using the pejorative terms like “fraud” anyway. No doubt there were cases of deliberate “fraudulent” consumer behavior that you or I would exhibit ourselves, were we in the same, desperate circumstances. (Imagine your financial and medical future relied a great deal on whether you mentioned that congenital condition. Perhaps you must choose to be uninsured with money to pay the rent, non-”fraudulently” insured at a high premium which leaves no money for rent, or “fraudulently” insured at a lower premium leaving enough left to pay rent.)
Fortunately, the temptation to misrepresent one’s medical history when applying for coverage should be much lower under the ACA, since insurers may no longer underwrite. Along with it, rescissions should be less common even without explicit prohibitions against them. That is, the new, basic structure of the insurance market resolves many of the ethically challenging situations that might have arisen in the past for both consumers and insurers. It is not hard to understand why this feels to many to be a more just and equitable market reform independent of the precise pre-ACA rescission rate.