Rescission is rare – except for when it’s not

Rescission is a practice used by health insurance companies that basically means your policy is rescinded (hence, the name.)  The reason usually given is that you lied or omitted information when you got your policy, and thus the contract is voided – the insurance company doesn’t have to pay your claim and can walk away from your policy.

In practice, what this means is that you can get an insurance policy and pay your premiums for years without any objection from the insurance company.  But the moment you look like you’re going to cost money, the insurance company can launch an investigation into your medical history with the express purpose of finding a reason to rescind your policy.  This is entirely legal.

The insurance companies, and many anti-reform pundits and bloggers, tell us that rescission is very rare, affecting only one half of one percent of policies.

Sounds rare, right?  Think again.

Health care spending in the US is highly concentrated. Half of all health care expenditures are spent on the top 5% of spenders. 50% of spenders spend under $700 per year on health care and account for only 3% of all health expenditures.

So, maybe if you select a random person with health coverage and try to estimate their chance of having a claim denied or a policy rescinded the chance will look low. But, because it is the most expensive claims that get investigated, the chances for it to happen to a very sick person are much higher.

It is probably true that most of the insurance company efforts at rescission take place among the top 1% of spenders, as these represent 22% of total expenditures and cost about $35k per year per person. This is where the big savings come in.

If we grant that rescission affects around one half of one percent of policies (which is what the insurance companies claim), and if it is true that rescission efforts are concentrated in that top 1% where the insurance company saves money, that means that if you get seriously ill your chances of experiencing it are 50/50.

If we decide to be more generous, and figure that these “half of one percent” rescission cases are spread out across the top 5% of spenders (which encompasses almost everyone who makes a serious claim) and not only the top 1%, then that means your chances of experiencing it as a member of that group are 1 in 10. I think this is generous.

It’s rare only in that people who require expensive medical care who are not covered by Medicare are rare. Sure, they’re a small percentage of the population. But I have a hard time watching the anti-reform lobby argue that it’s not significant when we can safely say that if you are under 65 and you get seriously sick or injured you’ve got somewhere between a 10% and 50% chance of having your coverage rescinded.

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