A big tip'o the hat to okanogen at CorrenteWire for picking up this one:
Death by Math (that should get Oaks' attention!). Taunter analyzes the statement by Assurant CEO Don Hamm’s that "Rescission is rare." Rescission is when a health insurer cancels a policy, usually because the insured "lied" on the original application, usually by failing to disclose a previous condition. If you haven't heard the horror stories of people who required costly medical care only to be dropped by their health insurer, you haven't been paying attention to the world around you. Here is what Hamm told Congress in his prepared remarks:
Rescission is rare. It affects less than one-half of one percent of people we cover. Yet, it is one of many protections supporting the affordability and viability of individual health insurance in the United States under our current system.
Late last week, James Kwak of Baseline Scenario suggested that the numbers put forward by Hamm were misleading because rescissions are targeted only at those who fall ill. [NOTE - this corrects my previous, erroneous statement that Kwak had accepted Hamm's argument; I apologize for that major error.] Taunter, who has a mathematics background, came up with the hard numbers:
To understand why 0.5% of the people Assurant covers is a lot of people – a jarring, terrifying, probably criminal lot – you need to understand a little bit of math. You need to understand just enough math to understand what Don and his legal team are not telling you. You need to understand conditional probability. And the folks at Assurant are counting on the fact that you don’t. . . .
Half of the insured population uses virtually no health care at all. The 80th percentile uses only $3,000 (2002 dollars, adjust a bit up for today). You have to hit the 95th percentile to get anywhere interesting, and even there you have only $11,487 in costs. It’s the 99th percentile, the people with over $35,000 of medical costs, who represent fully 22% of the entire nation’s medical costs. These people have chronic, expensive conditions. They are, to use a technical term, sick.
An individual adult insurance plan is roughly $7,000 (varies dramatically by age and somewhat by sex and location).
It should be fairly clear that the people who do not file insurance claims do not face rescission. The insurance companies will happily deposit their checks. Indeed, even for someone in the 95th percentile, it doesn’t make a lot of sense for the insurance company to take the nuclear option of blowing up the policy. $11,487 in claims is less than two years’ premium; less than one if the individual has family coverage in the $12,000 price range. But that top one percent, the folks responsible for more than $35,000 of costs – sometimes far, far more – well there, ladies and gentlemen, is where the money comes in. Once an insurance company knows that Sally has breast cancer, it has already seen the goat; it knows it wants nothing to do with Sally.
If the top 5% is the absolute largest population for whom rescission would make sense, the probability of having your policy cancelled given that you have filed a claim is fully 10% (0.5% rescission/5.0% of the population). If you take the LA Times estimate that $300mm was saved by abrogating 20,000 policies in California ($15,000/policy), you are somewhere in the 15% zone, depending on the convexity of the top section of population. If, as I suspect, rescission is targeted toward the truly bankrupting cases – the top 1%, the folks with over $35,000 of annual claims who could never be profitable for the carrier – then the probability of having your policy torn up given a massively expensive condition is pushing 50%. One in two. You have three times better odds playing Russian Roulette.
And that's just the beginning of Taunter's article. There are some other great zingers in the rest, such as this:
It is in the health insurer’s interest to have application fraud, not only because it saves time and expense on the front end, but also because it lets them get out of any policy that isn’t going well for them. If the health insurer had to verify the information – if, in essence the insurance company had to behave as an accredited investor with adequate expertise to make a decision without reliance – it wouldn’t have the opportunity to bail out. It would catch more genuine liars, but many of these liars would have turned out to be healthy, profitable customers, and what the carrier really wants is a population devoid of expensive claims, not devoid of liars.
Just go read it: Unconscionable Math. And get it someone in your Congresscritter's office to read it.