Wall Street Journal Profiles Practice of Insurance Reunderwriting
The Wall Street Journal today profiles Wisconsin-based insurer American Medical Security Group Inc. and its practice of annually reunderwriting individual health insurance policies. Although reunderwriting for individuals "faded away" in the 1950s, the practice has made a "quiet comeback" in the past few years, and is now a "sign of how soaring health care costs are driving some insurers to aggressive practices that can have severe consequences for consumers," the Journal reports. Most companies that sell health insurance to individuals only evaluate patients' medical histories when they sell the initial policies. However, American Medical reviews the health of policyholders at each annual renewal. At that point, American Medical reviews claims that a policyholder has filed in the past year, as well as their disease diagnoses, and assigns points to the claims and diagnoses "based on their likelihood of generating future claims." The insurer places policyholders into one of three tiers -- preferred, manual or substandard. Preferred policyholders receive no increase in their monthly premium rate other than increases based on medical inflation; manual policyholders receive a 5% increase as a result of their health and claims filed; and substandard policyholders receive a 37% increase for the year and for each additional year spent in the tier. The Journal reports that the practice has helped to boost American Medical's financial performance during a "tough time" for the health insurance industry. Increased prescription drug costs, advances in medical technology, an aging population and the "retreat from tightly managed care" have hampered profits for most insurers, but American Medical posted a 56% increase in earnings last year, which the company attributed in part to reunderwriting.
American Medical's practice of reunderwriting could "herald a new strategy for [the] beleaguered" health insurance industry, the Journal reports. American Republic Insurance Co., an insurer based in Des Moines, Iowa, also has adopted the practice. "People in good health are demanding some kind of discount for not using their coverage," Rod Turner, a vice president at American Republic, said, adding that "if someone gets a discount for no claims, then someone has to get higher premiums for having claims. The industry is moving in that direction." This fall, an American Academy of Actuaries task force plans to ask state policy makers to allow more reunderwriting of individual health insurance policies. "If regulators can overcome their emotional reaction and allow it to happen, I think it could be a useful tool in managing health care costs," Bill Bluhm, chair of the task force, said. However, opponents of reunderwriting have raised concerns that the practice could "price people out of the market, leaving them uninsured and unable to afford medical care when they need it most." Some insurers also oppose the practice of reunderwriting, and others "are watching to see how much resistance American Medical faces." Three states have ordered American Medical to end the practice of reunderwriting, and the Florida Department of Insurance has filed an administrative complaint that accuses the company of "illegally discriminating against customers based on their health" and violating unfair-trade-practices law for "not warning policyholders that getting sick may drive up their rates." American Medical denies the charges and argues that reunderwriting helps to reduce health insurance costs. "Our tier-rating approach encourages more healthy people to remain in the system and keep rates lower for everybody," James Modaff, chief actuary at American Medical, said (Terhune, Wall Street Journal, 4/9).This is part of the California Healthline Daily Edition, a summary of health policy coverage from major news organizations. Sign up for an email subscription.