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Does the Affordable Care Act Discriminate?

June 8, 2014
Chris Garlasco, Owner & Managing Partner - Founders Insurance Group

Chris Garlasco, Owner & Managing Partner – Founders Insurance Group

Many people have claimed that the Affordable Care Act (ACA) ends discrimination in the health insurance business. After nearly twenty eight years in the insurance business a statement like that catches my attention. The Merriam Webster Dictionary defines discrimination as “the practice of unfairly treating a person or group of people differently from other people or groups of people.”The key word in that definition is the word “unfairly.”

Before we dive into the definition of discrimination, let’s talk about what it means to insure someone or something. The function of insurance is to take a large risk and spread that risk among a large group of people in an effort to lower the exposure to that risk for everyone. A great example would be to take a snapshot of a 1,500 square foot home lost in a total fire. By the time the structure is replaced, the contents have been replaced; the additional cost of a rental home for the duration of the time to rebuild along with other costs, the claim will easily surpass $400,000. So the homeowner has a choice, (assuming that there is no mortgage); to take on the entire $400,000 risk or spend in the neighborhood of $750 per year and let the insurance company take on that risk instead for a set period of time. The homeowner knowing full well that the majority of folks that take out that policy will not have a $400,000 loss. The end result is that the policy mitigates the loss exposure to the homeowner.

When the insurance company assesses the amount each person must pay to cover their risk exposure, the company will take into consideration a number of factors in determining the cost of the policy. Is the home in an area prone to hurricanes, like a beachfront home? How old is the home? An older home will generally cost more to replace than a newer home. How well is that home protected from fire by the community? Is it located far away from a fire station or fire hydrant? Is there a paid fire department or a volunteer fire department? These are just a few of the many questions asked. After all of the questions have been answered, the company will assign a premium amount based on all of the factors involved. It is reasonable to expect a home sitting two hundred feet from the ocean  will see a higher premium than a home away from the ocean that sits a half mile from the fire department. The reason is simple, the greater the risk, the higher the premium.

Going back to our definition of discrimination, when speaking of insurance, it is reasonable to say that one person or group is being treated differently than another person or group, but, is it discriminatory? The answer is no and the state insurance department is there to assure that is the case. This is true when we speak of auto, business, life or health insurance as well. A low risk driver will pay less than a higher risk driver and so on.

Assigning a proper premium to the amount of risk exposure is often confused by the buying public as discriminatory when in fact 99.9% of the time it is not. Based on that confusion, the ACA marched along with a campaign to take advantage of that confusion. Aside from those that could not obtain health insurance at all, (I believe that there should be, but that is a subject for another blog), the ACA was set up to end discrimination where in fact was very little to begin with in the first place. So for example, women would no longer be charged more than men for their health insurance. Secondly, young people would no longer pay the actual price to cover their risk exposure, but a discriminatory price instead. Thirdly, some groups would have to pay fees while other groups had their fees waived by the government.

Let’s take the male/female argument first as it is a fairly simple one. Woman use the medical system more than men and therefore the amount Health care cost imagepaid out in claims is more. The ACA has now said that this is illegal. But remember, insurance premiums are based on the actual risk. So the end result is that the risk for woman has not changed. So the cost must be recovered somehow and the result is that men are nowpaying more than their actual risk demands! Now before I get a bunch of letters from angry women, it should be noted that in life insurance as well as in auto insurance, the claim payout for women is generally less than it is for men and as a result, women most often pay less for life insurance and for auto insurance than men do. It would be like charging a good driver with a great driving record a price that is the same for a poor driver. In the case of young people, their rates are as much as 40% or much more than their true cost should be. This has been highly publicized and the reason is that young people must now cover their own cost and the cost of others too.

Lastly, some organizations have had fees waived by the government as the result of political favors. Those fees are there with good reason based on the structure of the ACA. The end result is that those that did not receive a waiver will now be paying their own fees plus an additional amount to cover the fees waived for others. This will be reflected in future insurance premium increases.

So let’s return to our definition of discrimination and the all-important word, “unfairly” contained in the definition. Is it unfair to charge the appropriate rate for a risk or is it unfair to charge more than the appropriate rate for a risk in the name of “fairness?”

The ACA has largely replaced a perception of discrimination with real discrimination and barring any change in the legislation, it looks like it’s here to stay.

Have a great day!

Chris Garlasco

 

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