Romney’s Pre-Ex Plan

Imagine you are a homeowner and — tragedy for you — one night your house burns down. Fortunately, you have homeowners insurance. But when you report the incident to Prudential, your insurer, you get a strange response.

“We’re actually not very good at paying claims like this,” the agent says. “You would be a lot better off if you switched to State Farm.”

Of course in the real world State Farm wouldn’t agree to sell you insurance to rebuild and repair your home after it has already burned down. But suppose we had some crazy law that says it has to.

Imagine you are a homeowner and — tragedy for you — one night your house burns down. Fortunately, you have homeowners insurance. But when you report the incident to Prudential, your insurer, you get a strange response.

“We’re actually not very good at paying claims like this,” the agent says. “You would be a lot better off if you switched to State Farm.”

Of course in the real world State Farm wouldn’t agree to sell you insurance to rebuild and repair your home after it has already burned down. But suppose we had some crazy law that says it has to.

In that case we would have a casualty insurance market in which (1) a new insurer would have to pay the cost of rebuilding your home, even though you have been paying premiums to some other insurer for many years, (2) every insurer would have an incentive to dump it’s expensive claims on its rivals, and (3) every insurer would have an incentive to avoid anyone with a problem — by not enrolling them in the first place and by providing poor service if they do enroll.

Welcome to the world of health insurance. I only gave the example above because I find that most people can think more clearly about houses than they can think about health care. They can also think more clearly about automobiles. In fact, people can think about almost any subject more clearly than they can think about health care.

In the world of health insurance, we already have this sort of craziness in the group market. ObamaCare will extend it to the individual market.

But what about Mitt Romney?

It burned while I cried.

Mitt Romney says that under his plan you won’t be burdened by pre-existing conditions so long as you have been continuously insured. Granted, that’s not as bad as ObamaCare. But it’s certainly not good.

By way of introduction to the Romney plan, Jim Capretta at NRO explains the problems with the current system this way:

Under current law, the Health Insurance Portability and Accountability Act of 1996 (HIPAA) ensures that workers can easily move from one employer plan to another without fear that their new coverage will exclude a pre-existing condition or that their new plan will increase premiums based on their elevated health risks. However, HIPAA does not provide solid protection for people who move from employer coverage to an individually owned insurance plan. In theory, HIPAA required states to set up options for those people with continuous insurance coverage and a pre-existing condition who want to move into the individual market from group insurance. In practice, those options do not prohibit insurers from charging much higher premiums based on the elevated risks of the enrollees…The upshot is that HIPAA’s protections simply do not work in the individual-insurance market, and that is a big, not a small, problem.

So how would Romney fix the problem? Capretta continues:

Romney’s plan would fix this and extend to the entire health system, including the individual market, the HIPAA protections that work well today in the group market. This would allow millions of people to move seamlessly from group to individual coverage, and back again, so long as they stay continuously insured. That alone will dramatically reduce gaps in coverage that are so frequent today.

OK. Problem solved? What do you think?

Here’s what Avik Roy thinks.