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A different mandate: Insurance exams for those who want to buy mandate-free products

Posted Oct 14 2009 10:00pm

Many states mandate that health insurance companies include specific benefits in all insurance policies. Examples of common mandates include required coverage for  treatment for alcoholism, minimum hospital stay after childbirth, diabetes supplies, post-mastectomy breast reconstruction, fertility treatment, prostate screening and well child care.

In today’s Wall Street Journal ( Mammograms and the New Jersey Governor’s Race ), Merrill Matthews, executive director for the Council for Affordable Health Insurance argues against the mandates because they drive up costs and price some people out of the market entirely.

I have mixed views on mandates. The economist in me knows such mandates drive up costs and prevent some people from buying health insurance in the first place. On the other hand, a lot of the mandates have good logic behind them and some are arguably civil rights issues. Overall, I think states should be allowed to mandate specific benefits but should be careful in how many they put in place.

The article reminded me of another type of insurance regulation that in some ways is a lot worse than these health insurance mandates. I recently helped an older couple look into long term care insurance. This couple is moderately wealthy and can afford a few years of nursing home payments, but they were worried about what would happen if they were in a nursing home for 5 or 10 years. Long term care policies have what’s known as an “elimination period,” which is the length of time the policyholder needs to pay for care themselves before insurance kicks in. It’s essentially a deductible. Unfortunately in their state the maximum elimination period is 180 days, and as a result the insurance coverage doesn’t make sense for them. In the end they decided not to purchase insurance.

Now don’t get me wrong. I understand why this elimination period is in place. It’s to prevent people from buying policies that don’t pay out when they’re needed. Regulators were worried that people would be taken advantage of so they banned policies with long elimination periods. That has a real cost to this couple, and if in fact they do end up in nursing homes for a long time they will be on Medicaid, thereby increasing costs to the government.

I don’t favor getting rid of this or other regulations entirely, but I would like to see more flexible insurance policies made available to people who want them and understand what they are about. I wouldn’t go the usual route of piling on disclosure after disclosure. Whenever I’ve refinanced my mortgage I’ve gone through page after page of mind-numbing disclosures; their very length and specificity makes them almost impossible to read and seems to me to have the opposite of the intended effect.

My proposal instead is to offer less-mandated, more flexible insurance products to people who pass a test demonstrating that they understand what they are getting into. Of course the administration of the test would have to be supervised to prevent cheating, but I think the effect would be good. It would allow people to have informed access to products that are more suited to them, and provide an inducement for insurers to structure their products in a way that’s clear enough for people to understand.

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