Archive for June 2008
Steve Verdon at Outside the Beltway argues that pre-existing condition exclusions are necessary if health insurance is to be actual insurance. He concludes:
But when you pool people with pre-existing conditions with those who are healthy, you are basically providing a transfer of income form those who are healthy to those who have pre-existing conditions. So please, call it what it is. You want to give people with pre-existing conditions other people’s money so they can get treatment. Calling [it] insurance is simply a lie.
Although this may be true, this doesn’t mean our current system is working. There’s a common sense reform that should change this: apply HIPAA’s creditable coverage definition to the individual insurance market.
In the group insurance market, pre-existing condition exclusions are limited to rare circumstances. The 1996 HIPAA reform stated that they cannot be applied to anyone who has “creditable coverage” — which is essentially everyone who has group insurance coverage sometime in the last 63 days. Essentially, this is an alternative solution to the same underlying problem: people who purposefully forego coverage until they are sick.
To extend this definition to the individual market, you’ll have to include an actuarial determination that the original health benefits were sufficiently “rich” (i.e., a limited-benefit plans that only gives you $1,000 of coverage really isn’t insurance). And there would be a small adminstrative burden on health plans when they enroll new members. That’s it. To counter these costs, you also get administrative savings because you no longer waste manpower with as many denied applications which saves money in underwriting, as well. You also reduce the cost of rescission control.
In the long-run, everyone either buys in or they don’t. If they don’t, then pre-ex applies, as it should to keep individuals from free-riding. If they do buy in, however, they’re protected from pre-ex, also as it should be.
Just by extending creditable coverage definitions to the individual market, you defang much of the problem. It is such a simple and straight-forward solution to the problem that I’m surely way off base.
James Hamilton’s thoughts on the link between housing and gas prices reminded me of a rough back-of-the-envelop calculation I did when buying my own home four years ago.
My wife and I bought a home in central Little Rock, with a 10 mile daily (roundtrip) commute. We paid a premium for the proximity to downtown. We both place a high value on family time, and likely would have paid this premium regardless. However, a motivating factor was the possible increase in gas prices.
Little Rock is surrounded by commute communities: Conway, Sherwood, Cabot, Benton, Maumelle, etc. I assumed that an alternative housing arrangement would result in an additional 60 miles of driving, for roughly 200 days of work. Under those assumptions, commuting would add 10,000 miles per year. Assuming an average of 30 miles per gallon, that’s $333 per year for gasoline alone.
If you further assume an average expected residency of 20 years and a 3% discount rate, then a $1 increase in gas prices translates into more than $5,000 of added cost to the commuters. That’s $5000 of potential appreciation for homes like mine.
That’s one reason I’m not disappointed by the rise in the price of gas.
Notes on assumptions:
* The 20 year residency may be too high. If you assume a 10 year residency, the gain drops to $3,000 in present value.
* The days per year assumption is rather low for a full-time employee; I’m implicitly hedging the assumptions against work-at-home opportunities that may become more of a norm in the future.
* A 3% discount rate is a bit low, but it’s roughly the after-tax interest rate for our fixed-rate mortgage. A 1% increase in that discount rate reduces the potential price appreciation by about $400 (out of the initial $5000 estimate).