Rescission

by on August 6, 2009 at 9:28 am in Medicine | Permalink

I'm not going to recap the whole debate but here are a few comments:

1. This is one of the better arguments for health care reform.  I don't know how widespread or significant the practice is, but something should be done to stop it.  Even if it covers only a small fraction of total medical expenditures, it is a significant moral wrong.

2. I am not convinced by the arguments that reputation provides an effective check on the practice.  Reputation affects market practices, but possibly reputation is part of the problem.  It's relative reputation which matters.  The operative reputational incentive is not always: provide a better product to get more customers.  Sometimes the reputational incentive is: customers tolerate bad treatment, because established reputations suggest they will receive equally bad treatment elsewhere.

Some of the used car market works that way too.  Why we sometimes get these bad reputational equilibria is a good question and I'd like to see it studied more. 

3. That all said, the central question concerns remedies.  Presumably the critics believe that egregious violations of law and contract are occurring.  If that is the case, why not just enforce the law more strongly and raise the penalties — significantly — for unjust treatment of sick individuals?  You can call this market failure, which it is, but it's also legal and regulatory failure as well.

If those legal parties cannot implement and enforce basic laws, can other legal parties successfully take on larger responsibilities for managing the U.S. health care sector?  Somehow it is assumed that the answer here is "yes."  I'm less certain.

You could try arguing that cases of unjust rescission are not easily observed or verified and thus tougher legal penalties will not work.  Maybe so, but then I fear the whole story becomes very muddied: "Rescission — I can't observe it, I can't verify it, yet I know it is true."

David Whitaker August 6, 2009 at 9:35 am

Tyler, you don’t have to “recap the whole debate”, but sometimes a sentence or two so that readers know what you’re talking about would be helpful.

C August 6, 2009 at 9:43 am

Where are the ambulance chasers on this? You know… the injury lawyers who DON’T CHARGE YOU ONE SINGLE PENNY UNLESS YOU GET A SETTLEMENT!!! …? Or aren’t the breaches of contract so severe and strategic that they represent easy wins and big payouts?

Luis Enrique August 6, 2009 at 9:50 am

Isn’t it relatively straightforward to get (by law) the insurer to take more of the risk of insuring people on the basis of false information, by offering rescission-proof contracts? You could include a few exceptions (if it turns out you lied about this, this or that, the contract is invalidated) but otherwise once it is signed, it must be honored regardless of any errors/falsehoods discovered ex post.

Jake Walker August 6, 2009 at 9:57 am

The other day, I listened to a radio story about rescission, which included some congressional testimony from healthcare providers, who said that “only 0.5% of policies are canceled in this way,” or something along those lines. This struck me as an odd thing to brag about — rescission occurs only after a major claim, and it’s likely that a very low percentage of policyholders have a major claim in any given year. If only 2% of policyholders experience a major claim in a given year, and 0.5% of policyholders have their contracts cancelled that year because of rescission, it has an impact on 25% of the relevant population.

thetaxman August 6, 2009 at 10:03 am

it’s not clear that it’s a violation of law/contract. my reading of the news coverage is that the policyholder frequently has incorrectly filled out some form. thus a legal justification for rejection may exist. if you make the forms long enough/complicated enough you can ensure a high proportion of documents with at least one error.

ZBicyclist August 6, 2009 at 10:05 am

@Jack Walker provides a valuable perspective.

It is very difficult to get another provider to accept you after you are dumped. This is straight rational capitalism: who wants to insure people likely to make big claims? But it’s a bad way to run a society.

The fundamental problem in health care is to get all the incentives reasonably aligned, rather than seriously perverse as they are now.

RobertB August 6, 2009 at 10:11 am

This isn’t really an argument for health care reform, it’s an argument for passing a law saying that immaterial lies on applications do not justify recission of health insurance policies, and that any clause purporting to allow that is against public policy. This isn’t even an economic issue, it’s just a flaw in the law of contracts (frequently explicitly created by state law).

Greg Taylor August 6, 2009 at 10:12 am

The big flaw rarely discussed in regulating these types of things, as C touched on above, is that justice is ultimately dependent upon having the time and money to work through the system. This is beyond the average person and companies routinely understand that having legal counsel funded for the purpose of delaying the process is very profitable. Even if cases are won, and a judgment delivered, collecting on the judgment is another matter entirely…and costly also. (I saw this frequently in financial services litigation. On a completely unrelated topic we can observe that it took more than 5 years AFTER the passage of the 1988 Civil Rights Act to mail checks to the formerly interned Japanese Americans who “won”. Many had died between victor ans reparation). Health-care is particularly sensitive to time needs. An effect reform must incorporate a speedy system for investigation and judgment or it will simply be window dressing.

Tartempion August 6, 2009 at 10:34 am

@mobile: not sure what you mean. (1) here in Belgium (but this is the same in France, or Germany), the quality of hospitals, doctors, etc. is, as far as I can tell, comparable to that of the US (admitedly this is very difficult to measure). (2) Cost is only marginally taken into account when deciding which procedure you should have — at least in most cases. This last point is a major issue we have with our health care system! We, too, have spending growing quite a bit.

sam August 6, 2009 at 10:54 am

man, rescission, seems as though there is a clear cut case for government intervention… run for the hills… shove your head in the sand… no need to pay attention!!!

tyler is right, this is a perfect example of why we need a public option. when the only source of health insurance are providers who contractually rape patients, something needs to be done for people to receive honest and appropriate healthcare, to which they are entitled.

C August 6, 2009 at 10:59 am

If we think of insurance companies as merely the administrators of a risk pool, is it possible that rescission is an action taken on behalf of the majority of the pool just because the rest of the pool wants it done? That would be weird, and it would mean that most people signing up for insurance are interested mostly in recouping lots of small claims and are willing to risk getting screwed by the pool when they want to claim something large. Possible?

Andrew August 6, 2009 at 11:19 am

Again, our master plan is that the folks responsible for the Federal Register are going to make sure we aren’t tossed out of our coverage on technical legalese? And how again are they going to cut costs? Oh yeah, comparative effectiveness…right.

Thomas,

My theory on this is that although the poor and uninsured usually get care, the cost of avoiding moral hazard is sheer terror, uncertainty and lack of transparency, but the liberal thinkers don’t understand insurance and aren’t comfy with the wink and a handshake method and want this codified and we might have to live with the results of the warm fuzzy feeling they get from reform. The evidence is that they talk about healthcare and insurance as interchangeable terms. They talk about the “uninsured” as 100% synonymous with “uncared for.” This may be rhetoric, but that’s not a defense and not apparent. I think for the most part they really are sincere and really don’t understand.

Chris D August 6, 2009 at 12:01 pm

Rescission is the natural consequence of having health insurance be primarily concerned with profit.

Another reason reputation doesn’t matter is that most of us have no choice in health insurers: we either take the insurer and plans made available to us by our employers, or we go without insurance.

mulp August 6, 2009 at 12:43 pm

I thought economists considered regulation and lawsuits to be contrary to the operation of the free market and that government is a deadweight cost to the economy.

Why not just mandate everyone have insurance and then allow people to switch from insurer to insurer at will, with the insurers negotiating the way they deal with the cost shifting?

If the law requires that all insurers insure everyone who applies, and that every qualifying insurer join in an association where every insurer will accept transfers from one to another without restriction on the customer, with the insurers dealing among themselves with any possible attempts of one insurer to shift its costs to another to gain higher profits.

mulp August 6, 2009 at 12:57 pm

Seward writes: Coverage does not mean actual access to medical care. We see this in every country that has so-called “universal coverage.”

Please list the nations which have universal insurance where access to health care is worse for the population as a whole than in the US?

The people in the US with great employer or government run health insurance get great care without access problems don’t eliminate the millions of people who have problems accessing care because they can’t prove the ability to pay before being served.

Your argument is like your kid responding as you tell him he needs to work harder in school because he can do much better than a C-, “but jimmy got an F and billy got two D-’s.”

Douglas Knight August 6, 2009 at 1:38 pm

why not just enforce the law more strongly

because it’s civil law, to be litigated by individuals, who, like a lot on this thread, don’t know that the contracts are illegal (or being interpreted illegally)

But it is mysterious why, as C says, the “ambulance chasers” aren’t promoting this knowledge or arranging class-action suits.

anon August 6, 2009 at 2:15 pm

This isn’t really an argument for health care reform

LOL! That’s why it’s gaining attention now, to inflame public opinion.

And based on the comments here, it’s working.

Andrew August 6, 2009 at 2:33 pm

Mulp,

Surely you understand that there is more access to more advanced care in the US for those able to pay or sometimes even if they can’t.

Sure, in other countries you can probably see some kind of medical person and not pay out of pocket, but the list of countries where you could not get an MRI appointment for Monday would likely be every country except one.

I’m pretty cool with people getting the care they arrange for themselves, either by paying cash, by having insurance, or begging a nice doctor if that system allows high tech medicine to be available when I need it. Weird, I know.

Seward August 6, 2009 at 2:51 pm

Andrew,

Well, more to the point, other countries tend to have universal caps on health care expenditures as a means to tamp down the escalating cost of “free” health care. That means of course limits on care, refusing costly procedures which do not meet some sort of cost/benefit analysis (never mind that these are wholely subjective to start with), etc.

BTW, there have been a string of foreign politicians coming to the U.S. in recent years for medical care; while anecdotal that ought to tell us something about what could happen in such a system – it is two-tiered, one for the politicians and bureaucrats and the other for everyone else (except those with the means to travel outside the country).

Vehical Driver August 6, 2009 at 3:13 pm

One comment from Europe: the sheer idea that I might not be able to get decent care in case I have some treatable illness and my insurance compagny refuses to cover me is utterly frightening. This is a long time wonder for me that a nation as rich as the US would accept living with this risk.

You have no guarantee of coverage under your “Universal” European system. Government systems deny people coverage all the time. They just do it in a centralized way, less transparent way. For example, a government bureaucrat may decide that an expensive cancer treatment is not cost effective for the medical system, and therefore denies people who need that treatment life saving medical care. Or, people are put on a waiting list for life saving treatments, and a certain number of people will die before they receive treatment, for all practical purposes denying those people life-saving medical coverage.

You have simply bought into the belief in Government Magic. You believe that the government saying that “everyone receives medical treatment” makes it so. The only systems with truly universal coverage are systems that have eliminated any scarcity in medical treatment (and that is no-one). As long as medical treatment is based on scarce resources, people will be denied health care. I understand why you believe in Government Magic, as you are likely educated in government schools, government universities, and get your information from news sources run/subsidized/regulated by the government.

Please list the nations which have universal insurance where access to health care is worse for the population as a whole than in the US?

You are discussing entirely subjective evaluations (what is “better”) of entirely hypothetical concepts (“Population as a whole”). There is no such list, because it would be utterly meaningless. I can say though, that from my first hand experience with both 100% socialized medicine and U.S. style quasi-socialist quasi-private model, the U.S. system clearly works better for the average person. I know several people who died from lack of medical treatment under “Universal” socialized medicine, and no one who died from lack of treatment (despite their complete lack of insurance or financial resources) under the U.S..

Seward August 6, 2009 at 3:26 pm

Vehicle Driver,

Shorter answer: government cannot make health care a non-commodity. ;)

nmg August 6, 2009 at 3:47 pm

In California, as far as I know, the law disallows rescission after a two year period, for *any* reason.

But in general I don’t understand why this is such a big deal. If you lie to the other party when executing a contract of COURSE they have the right to cancel the contract when your lie is exposed. Why is this a controversy?

sam August 6, 2009 at 4:39 pm

@ doc merlin:

have you seen the fee matrix yet? obviously, you haven’t because there isn’t even a final bill yet. i find it hilarious how you can blindly apply fundamentalist-like dogma to something which hasn’t even taken form yet.

to answer your question, i absolutely expect the public option to be better than the current trend toward rescission. a public option will not refuse coverage because of a pre-existing condition and will not refuse coverage based on the estimated cost of a course of treatment.

sam August 6, 2009 at 4:51 pm

anon says: “As a business owner, I’m guessing the insurance companies were starting to get hit with many more late payments and the reasoning by many late payors that “It’s not my fault!” Even if a late payment isn’t the payor’s fault, why is the burden on the company to make sure the payment is on time?”

one very specific reason for an insurer, in this case Blue Cross Blue Shield, to be nice to customers is found in my state. in michigan BCBS is given freedom to engage in noncompetitive, monopolistic practices by law. given these freedoms, they should be a little nicer to 85 year old ladies.

Lindsay August 6, 2009 at 5:37 pm

Even more criminal is the fact that individuals who were dropped/had their policies rescinded apparently are not eligible for insurance through other companies — so if they made a mistake filling out a form once, they can never have insurance again? It is unconscionable.

FE August 6, 2009 at 8:55 pm

Arguing against rescission in the abstract, as Prof. Cowen seems to be doing here, is like arguing against insurance itself. Insurers have to be able protect themselves against fraudulent applications or the insurance market couldn’t function. The rescission debate, if there is to be one, has to be much more specific.

rhhardin August 6, 2009 at 9:49 pm

Besides recission, they can decline to renew a policy when it’s time for renewal.

And of course there are the lifetime limits.

In short, catastrophic health coverage has two deductibles, a small one that you pay, and then all the rest over some large amount that you also pay.

The solution is do away with third party payments entirely. No doctor can stay in business charging more than his patients are willing to pay, and in any case fees were historically simply tailored to the patient when insurance wasn’t in the picture.

That would bring economics back in to play.

Ricardo August 6, 2009 at 10:35 pm

Besides recission, they can decline to renew a policy when it’s time for renewal.

I don’t think this is correct. The client can decline to renew but the insurance company has to offer the same coverage in force over the last coverage period [this reflects the practice in most states as I understand it -- there may be some states where this isn't true]. Also, premium increases are regulated by the state’s regulatory body and have to be uniform — the insurance company cannot increase premiums only for people who filed claims. In short, individual health insurance doesn’t work the same way auto insurance does, although it has plenty of problems of its own.

The solution is do away with third party payments entirely. No doctor can stay in business charging more than his patients are willing to pay, and in any case fees were historically simply tailored to the patient when insurance wasn’t in the picture.

I’ve had a few medical emergencies in my life and it occurred to me at the time that I wasn’t in much of a bargaining position with the doctor or hospital concerning fees. I had one emergency procedure that cost $500 — in retrospect, I was in so much pain and the doctor told me I might need to be hospitalized with a breathing tube that I probably would have just as easily agreed to $2000 or more. Now, there are many good, ethical doctors (including this one and probably all the others I have dealt with) but there are inevitably a few bad ones as well as for-profit hospitals who would not be able to resist the temptation to exploit or overcharge their patients. And no hospital is going to be able to tell you exactly how much a procedure will cost in many cases since they cannot forsee all the different complications and contingencies that may arise.

In short, markets as well as governments work best when there are checks and balances. Ordinarily, smart consumers and consumer watchdog groups serve as a valuable check against abuse and exploitation by business. When you have a medical emergency, though, are you going to shop around as if you are looking for a 2000 Honda Civic? Even if you really wanted to, in many cases you cannot for reasons mentioned above.

C August 6, 2009 at 11:48 pm

@ mulp

Your quotes indicate that insurance companies do indeed claim that some contracts are void and that some insurance CEOs believe the government would do less of that if it were in charge. Since I have seen no evidence that the typical case of rescission happens for any reason other than attempted fraud by claimants (please show it to me if I’m wrong), you’ve just done a fine job of demonstrating that government managed health care will be less efficient and less equitable, at least for those who are honest. Let me know if I’ve got something wrong.

mulp August 7, 2009 at 12:18 am

Andrew wrote:Mulp, and your mandate isn’t a regulation? The right to not contract (not to mention association) is kind of a big deal.

Anyway, with your proposal do you include community rating, the idea that everyone pays the same premium?

I’m suggesting the simplest regulation/mandate possible and requiring the insurers themselves to regulate themselves while giving their customers free market choice.

Bsically, buying insurance should be like buying a car or a melon or hamburger.

Yancey Ward August 7, 2009 at 12:42 am

An earlier commenter wrote:

Rescission is the natural consequence of having health insurance be primarily concerned with profit

Not precisely. It is a natural consequence of several things, but even a non-profit has just as strong an interest in not going into the red as a for-profit does to not be as far into the black. Eliminating profit only moves the point of concern, and not all that much. Even government “insurance” has to not break it’s budget.

What are really needed are clearer, less ambiguous contracts, but a host of government regulations at the state and federal levels essentially make such contracts illegal and/or prohibitively expensive.

mulp August 7, 2009 at 12:53 am

Yancey Ward: I cited the statements of the executives of three for profit insurers to back up my view that profit drives rescission. I don’t know of mutual insurers or the old cooperatives aka not-for-profit community insurers/prepaid/HMOs using rescission.

Are you speaking theoretically or do you have evidence of not-for-profits engaging in rescission other than when competing with for-profit insurers?

Ricardo August 7, 2009 at 1:24 am

What are really needed are clearer, less ambiguous contracts, but a host of government regulations at the state and federal levels essentially make such contracts illegal and/or prohibitively expensive.

Insurance companies already offer group health insurance that is not subject to rescission. Now, individual and group health plans are subject to different laws so maybe the laws you mention exist: can you cite some of them?

The more likely reason rescission exists in individual health insurance is the same reason medical underwriting exists in the individual insurance market: without it, you would get massive adverse selection problems. Since group health insurance pools risk among all the employees of the insurer’s corporate client and insurers assume the employer isn’t going to hire a workforce full of seriously ill people, the adverse selection problems in the group market are much less severe.

Seward August 7, 2009 at 2:09 am

mulp,

Unless you have a proposal for preventing the uninsured from draining resources from those with insurance, they will end up getting a free ride.

The uninsured make up roughly 2% of the health care costs in the U.S. There is very little in the way of actual “drainage,” and if that were really the issue at hand there are lots of ways to deal with that issue short of forcing someone to pay for health insurance they neither want nor need (as is the case with a large percentage who would rather use their dollars in other ways). Indeed, that’s part of the problem; the notion that state has a better idea of what someone’s utility is as opposed to the individual.

Anyway, the whole uninsured deal is complete hogwash.

C August 7, 2009 at 2:22 am

mulp, take it easy with the “you don’t care about facts” comments. I asked you for some evidence because I’ve yet to see any. I’ll assume you’ve delivered the strongest stuff you know of in your latest comment.

If the insurance companies find discrepancies, omissions, or misrepresentations, they can retroactively cancel policies, return premiums, and refuse payment for medical services.

Yes, if there is fraud, insurance companies won’t want to honour their end of the deal. Fair, no?

a WellPoint subsidiary rescinded coverage for a patient in Virginia whose insurance agent entered his weight incorrectly on his application and failed to return it to him for review.

This looks like fraud from the insurance company’s point of view (and from the point of view of all who are paying into that insurance pool). They thought they were agreeing to insure a person of type X, but they unwittingly agreed to insure a person of type Y. And it was the agent’s fault, not the insurance company’s fault (assuming the agent wasn’t employed by the insurance company). Is it really obvious that the insurance company and their policy holders should bear all responsibility for someone else’s mistake?

The company located a CT scan taken five years earlier that identified silent gall stones and an asymptomatic abdominal aortic aneurysm, but the policyholder’s doctor never informed him of these conditions.

Again, the insurance company thought it was insuring a person of type X, and it was tricked into insuring a person of type Y. Rescission is only fair to the insurance company and the other policy holders, no? Perhaps the doctor is the more responsible party here.

The company initiated an investigation into the patient’s medical history and concluded that she failed to disclose that she had been diagnosed previously with osteoporosis and bone density loss. The company rescinded her policy and refused to pay for medical care for the lump in her breast.

Again, fraud on the part of the person buying insurance. True, the fraud wasn’t related to the claim, but the claimant had been paying premiums as if she was a person of type X when she was really a person of type Y. Is it obviously unfair for the company to balk at living up to their end of the contract with someone who lied to lower her premiums?

If there is more hard-hitting stuff at http://energycommerce.house.gov/Press_111/20090616/rescission_supplemental.pdf, let me know and I’ll have a look at it. So far, all I’ve seen is examples of attempted fraud or extreme negligence by a third party leading to an insurance company rescinding contracts. I don’t understand why those are obvious examples of bad behaviour by insurance companies, unless you think they are supposed to act like charities.

Insurance companies have evaluated employee performance based on the amount of money their employees saved the company through rescissions.

Yes, employees owe it to the company and the other policy holders to find examples of fraud!

The three insurance companies testifying at today’s hearing reported to the Committee that they rescinded at least 19,776 policies from 2003 to 2007.

So there’s a ton of fraud out there, and you’re eager to pay for it through your taxes? That’s weird.

BruceM August 7, 2009 at 3:04 am

But they will always have some facially plausible excuse for rescission, i.e. “lied about preexisting conditions” or some other such nonsense. They’re not merely deciding to flagrantly breach the contract. Their excuse might be woefully unjustified, but they have SOME legally recognized excuse.

So what you’re really saying is health insurance companies should pay out benefits to people who lied on their application or otherwise breached the terms of their agreement with the insurance company. That’s the way the insurance companies will frame it, and as long as they have a plausible excuse for rescission, they’ll be right. And if you make a law that says rescission is not permitted for any health insurance contract, then why would people NOT lie about preexisting conditions to get lower premiums (or to get insurance they’d otherwise not receive)?

The problem is “health insurance” is against public policy and should not be legal. It’s fine to insure a house, a boat, a car, a painting, jewelry, or even your life (though we have a lot of limits on life insurance based on public policy concerns). But “insurance” for healthcare is simply perverse and creates all sorts of perverse incentives that are so clearly against public policy that one really has to wonder how this system ever came about to begin with. Only in America, with Nixon as president, I suppose. I don’t know what the answer is re healthcare reform, but we need to shut down the health insurance companies YESTERDAY. Every one of them needs to be closed down for good. It’s a system that cannot be allowed to continue. It gives society incentives to have as many sick people as possible but to treat as few of them as possible. It’s okay to haggle with an insurance company over whether a chipped windshield is covered by a policy, but when our health, wellbeing, and our lives are at stake, we CANNOT have a for-profit insurance company standing between us and medical treatment, where any treatment – so much as a pill – presents a conflict of interest to the health insurance company, which has a fiduciary duty to its shareholders to deny and refuse all claims (a/k/a “medical losses”). I don’t say that as a cynical dig at the h.i. companies, it’s merely the way they legally have to operate. That’s fine for claims about stolen goods, arson, etc – an incentive to deny claims keeps policy owners honest and cuts down on insurance fraud. But there IS no such thing as health insurance fraud (not by policyholders). Nobody is seeking money, they’re seeking payment for medical treatment… so there’s no way anyone can pocket cash from a health insurance claim. Second of all, nobody goes and gets expensive medical treatments just for fun. There are no means or incentives for policy holders to rip off their health insurance companies.

We need to end this system now.

Ricardo August 7, 2009 at 3:12 am

This looks like fraud from the insurance company’s point of view (and from the point of view of all who are paying into that insurance pool). They thought they were agreeing to insure a person of type X, but they unwittingly agreed to insure a person of type Y. And it was the agent’s fault, not the insurance company’s fault (assuming the agent wasn’t employed by the insurance company). Is it really obvious that the insurance company and their policy holders should bear all responsibility for someone else’s mistake?

Then the insurance company can sue the insurance agent for the difference in premiums between what it charged the client and what it should have according to its actuaries. The legal system provides a variety of remedies for those who’ve been wronged. Being able to back out of a contractual obligation is a very strong remedy that is highly inappropriate here.

[mulp]: The company located a CT scan taken five years earlier that identified silent gall stones and an asymptomatic abdominal aortic aneurysm, but the policyholder’s doctor never informed him of these conditions.

[C]: Again, the insurance company thought it was insuring a person of type X, and it was tricked into insuring a person of type Y. Rescission is only fair to the insurance company and the other policy holders, no? Perhaps the doctor is the more responsible party here.

Then the insurance company could sue the doctor. From an economic view though, there is absolutely no justification for backing out of the contract since there was no asymmetry of information. The client had the same amount of information that the insurance company had: both thought the client did not have these conditions. You say the insurance company was being “tricked”: who was doing the tricking and what was the motive?

Maybe everything the insurance companies are doing is completely legal. But there is absolutely no economic justification in these two cases. Insurance is a very serious obligation and it should be extremely difficult to back out of that obligation — otherwise it creates a heads-i-win tails-you-lose situation.

C August 7, 2009 at 3:33 am

[Ricardo]Then the insurance company can sue the insurance agent

Why is it the insurance company’s obligation? Isn’t the individual at least equally responsible for going after the agent? I think an experienced judge is needed to unravel all the blame here, but it’s not obvious to me that burden should be assumed to be on the insurance company.

Then the insurance company could sue the doctor.

Same thing. Maybe the individual should sue the doctor. If you bought a car from someone who said she had it checked by a mechanic and the mechanic said it was in perfect condition when it wasn’t, would you feel it was your responsibility to go after the mechanic? Maybe that’s what is necessary, but it’s not obvious that that’s the right answer.

You say the insurance company was being “tricked”: who was doing the tricking and what was the motive?

The doctor did the tricking, whether it was intentional or not. If it was intentional, the motive would be to satisfy the patient and get repeat business from someone who could now afford it because they acquired insurance. Is that so unlikely?

Insurance is a very serious obligation and it should be extremely difficult to back out of that obligation — otherwise it creates a heads-i-win tails-you-lose situation.

I agree. Do you think it’s unimportant for individuals to be truthful when entering into their obligation? Do you want to create a heads claimants win, tails the insurance company loses situation?

PQuincy August 7, 2009 at 8:45 am

You mean insurance companies haven’t already inserted ‘obligatory binding arbitration’ clauses into the very fine print on p. 313 of the typical customer-paid health insurance policy? What are they waiting for…

C August 7, 2009 at 9:04 am

[closing italics]

Gary August 7, 2009 at 9:11 am

For those who worry about contract rescission because of some minor, accidental omission from a long and difficult application form, I have invented the perfect health insurance company. They don’t require applicants to do any research into their own medical history. This would be the intro to the application forms:

“Just fill out the forms based on your best recollection. If you forget some doctor visit or malady and end up paying lower premiums as a result, no worries. I’m sure the others in the pool won’t mind making up for what you don’t pay as a result of your omissions. Plus, it’s not a problem for us that we might not get a complete picture of your health risks, because we never even think about trying to balance our portfolio of insureds to prevent too many of one kind of payout falling due at the same time. Finally, we wouldn’t dream of optimizing the investments from our policy holders’ premiums according to the schedule of expected payoffs we’ll have to make based on who we’ve insured, even though that might help us offer competitive prices for our policies. We’re cool like that.”

Gosh, I would like to join such an insurance pool. Even more, I would love to see who would join me!

C August 7, 2009 at 9:49 am

Good morning Jeffrey! That’s a nice way to start a comment :)

It seems you’ve gone from “insurance companies can do x” to “insurance companies should do x”. That’s a tough principle to uphold, IMO, especially with regard to how it might apply elsewhere in the world. Insurance companies can also fund anti-malaria research to benefit children in Zambia. Should they?

In any case, perhaps your conclusion is the same conclusion that an experienced judge would deliver. I only wish to point out that it isn’t a completely obvious case of what is right and wrong. If paying out immediately and then entering into a potentially expensive lawsuit raises the premiums of the other insureds, is it still the right way to handle the situation?

Yancey Ward August 7, 2009 at 12:11 pm

Mulp,

If profit motive drives the denial of treatment by a for-profit insurer, then it must follow that non-profit will deny coverage when it appears their collected premiums are going to be consumed otherwise. The only difference between the two is the level of premiums they wish to retain- a for-profit firm will want to retain some for profit, a non-profit will want to retain enough not to go into the hole.

Ricardo,

Contracts that explicitly prevent recission are fine with me, but they will cost more, however, that was not what I was addressing. Recission for explicit and material violation of contract terms is not a moral wrong. The problems that arise are recissions where it is not clear to both parties what the terms of the contract were, and health insurance contracts are just about the most ambiguous and undefined contracts I have ever seen. Such contracts are a bilateral creation- insurance companies like the latitude it gives them to control their costs through denial of coverage, and the customers like them because they don’t want to feel limited in their options for treatment to what is explicitly written on a piece of paper. Unfortunately, this leads to legal conflict that is not easily resolved.

BruceM August 7, 2009 at 6:24 pm

C: medicare fraud is always about the PROVIDERS overbilling or submitting false/fraudulent claims. It’s not the actual beneficiaries who are lying about medical treatment to get medicare to send them cash.

C August 7, 2009 at 8:29 pm

Yancey, very interesting point about ambiguous contracts.

Jeff, many legal systems do consider ability to pay with respect to insurance claims, but that consideration usually comes into play once it is established that more than one party bears responsibility. If an insurance company bears no responsibility in the first place, its ability to pay wouldn’t change that.

BruceM, your certainty that ordinary citizens never commit medical insurance fraud is strange. I think it’s fair to say that the burden of proof is on you to show some evidence for this view.

Kyle, you give a lot of plausible reasons that individuals can’t hope to beat an insurance company in a lawsuit if their contract is unfairly rescinded. But couldn’t you say the same thing about contracts in any area of life where different parties have different time horizons, pocket depths, etc.? Why do people keep entering into these contracts if the odds are so stacked against them?

mulp August 8, 2009 at 12:22 am

C wrote: If there is more hard-hitting stuff at http://energycommerce.house.gov/Press_111/20090616/rescission_supplemental.pdf, let me know and I’ll have a look at it. So far, all I’ve seen is examples of attempted fraud or extreme negligence by a third party leading to an insurance company rescinding contracts. I don’t understand why those are obvious examples of bad behaviour by insurance companies, unless you think they are supposed to act like charities.

You took the executive summary that I posted when you didn’t read the document the first time and claimed there was no evidence of rescission, and now you write the above. I felt bad posting that much of the document, and now I see that I wasted my time and everyone else’s because you won’t bother to read the sources listed before declaring it to be evidence of willful fraud.

Clearly you are not interested in the facts because if you had read the document, it would have been clear that these are not cases of fraud. But this is typical: simply deny the facts to justify your position.

Jeffrey Deutsch August 8, 2009 at 3:09 pm

Good afternoon C,

This is indeed a matter of dual possible ex ante responsibility: should the insurance company pay the claim and then sue the third party, or should the patient stay on the hook for very high medical bills until and unless s/he can squeeze compensation out of the third party?

On the one hand, it’s not fair that the insurance company should be asked to pay a claim when it didn’t do anything wrong and it would not have agreed to insure the patient (at least on the same terms) if it had been appropriately informed – especially when someone else’s negligence or worse is responsible.

On the other hand, it’s also not fair that the patient should be asked to pay medical bills which were covered under insurance that s/he bought and paid for and s/he didn’t do anything wrong – especially when someone else’s negligence or worse is responsible.

Who gets left holding the bag?

The superior risk-bearer doctrine is designed precisely to deal with such contractual questions.

If the insurance company doesn’t like having to pay first and then try to collect from the insurance agent or the doctor, imagine how the patient would experience that same thing. At least the insurance company’s only going to get hurt in the pocketbook, and even there it can hold out years if necessary for a lawsuit to play out, since it will still be around and likely still solvent.

Whereas, to paraphrase Adam Smith, in the long run the money may be as necessary to the insurance company as the treatment is to the patient, but the (former) necessity is not so immediate. As Adam Smith trenchantly pointed out, the mere ability to hold out adds greatly to your bargaining power.

Cheers,

Jeff Deutsch

Graham Shevlin August 9, 2009 at 11:13 am

Based on what I have been reading in the last couple of months, it is clear to me that a number of instances of recission are nothing more than fraud by insurers seeking to welch on their committments by pointing to non-material inaccuracies in applications and using them as an excuse to cancel coverage.
Insurance is a statistical and actuarially based process where insurers calculate risks on populations and then structure insurance policies and conditions to provide coverage to a large population while still making a profit. Some insured individuals will be profitable over their lifetimes, some will be neutral, others will lose money for the insurer. The final objective is that the profits cancel out the losses. There is nothing intrinsically different about the health insurance model in that respect.
There needs to be a modification to contract law to prevent this sort of behaviour. At a minimum, I would require any health insurer who engages in a recission to refund all premiums paid to the insured person. If I cannot claim on a policy that I paid premiums for in good faith, I should at least get my money back. The legislative change needs to be supported by a third party to examine disputes and rapidly rule on them, otherwise (as has been pointed out already) insurers will have a powerful incentive toâ™  try to “run out the clock” on disputes until the individuals in question die.
Right now, the medical insurance landscape for private individuals is like a casino model, where the casino (read medical insurer) gets to toss you out if you keep winning (claiming for medical expenses). Do we really want a medical insurance marketplace run along casino lines?

five fingers September 22, 2010 at 1:18 pm

I gree with it!

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