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An Analysis of Obamacare Part I: Guaranteed Issue

November 20, 2010 4 comments

Obamacare imposes an insurance policy feature known as guaranteed issue.  This is the requirement that an insurance company cannot turn down a buyer of health insurance due to pre-existing conditions.  After thinking about the impact this will have upon insurance companies, it will be obvious why it is crucial that the government force people to buy health insurance when they do not wish to do so.  Consider the following examples that I have used with students.

You own a home and do not have a homeowner’s insurance policy.  Your house catches fire and you call up an insurance company, buy a homeowner’s policy, and place a claim.  Once the claim is paid you drop the policy until the next time you want to place a claim.

Or you have no health insurance and are told that you need an expensive operation.  You buy a health insurance policy, have the operation, then cancel the policy when you are healthy again.

Obviously, in either example, the insurance company will lose money on your policy.  But the problem for the insurance company is much worse than this.  Soon the word will get around (you’ll tell friends and neighbors about your actions) and others will do just as you did.  The insurance company will have an applicant pool increasingly dominated by people doing what you did, a phenomenon known to economists as “adverse selection.”  The implication of this feature is that, absent a requirement to buy health insurance, an individual can simply wait until he or she is sick to buy a policy, dropping the policy when healthy.  Insurance companies clearly cannot survive financially in such an environment.  This makes it clear why Obamacare seeks to force people to buy health insurance.

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