Rescission of coverage is happening "more and more"?

Scott Harrington digs into the rescission issue, a prominent feature of the Obama healthcare stump speech. We've discussed his use of an inaccurate anecdote to lend credence to his claim that insurers routinely drop coverage on the sick. But accuracy aside, let us stipulate that sick people do sometimes lose their health coverage.

President Obama implies that rescissions normally arise from chicanery on the part of the profit-crazed insurer and are increasing in frequency:

"More and more Americans pay their premiums, only to discover that their insurance company has dropped their coverage when they get sick, or won't pay the full cost of care. It happens every day."

One might think that insurers are yanking the rug out from under the sick left and right. They aren't, and they can't, because it's illegal. This is not to say that there are never abuses.

Harrington notes:

Clearly, this should never happen to anyone who is in good standing with his insurance company and has abided by the terms of the policy.

Therein lies the key: your coverage is a contract between you and your insurer. (For you young'uns, a contract is a quaint concept dating from the pre-Obama era.)

Harrington provides background on how, and how often, rescissions occur:

Traditional practice, governed by decades of common law, statute and regulation is for insurers to rely in underwriting and pricing on the truthfulness of the information provided by applicants about their health, without conducting a costly investigation of each applicant's health history. Instead, companies engage in a certain degree of ex post auditing—conducting more detailed and costly reviews of a subset of applications following policy issue—including when expensive treatment is sought soon after a policy is issued.

This practice offers substantial cost savings and lower premiums compared to trying to verify every application before issuing a policy, or simply paying all claims, regardless of the accuracy and completeness of the applicant's disclosure. Some states restrict insurer rescission rights to instances where the misrepresented or concealed information is directly related to the illness that produced the claim. Most states do not. [. . .]

These two cases [cited by Obama] are presumably among the most egregious identified by Congressional staffers' analysis of 116,000 pages of documents from three large health insurers, which identified a total of about 20,000 rescissions from millions of policies issued by the insurers over a five-year period. Company representatives testified that less than one half of one percent of policies were rescinded (less than 0.1% for one of the companies).

If existing laws and litigation governing rescission are inadequate, there clearly are a variety of ways that the states or federal government could target abuses without adopting the president's agenda for federal control of health insurance, or the creation of a government health insurer. [emphasis added]

Rescissions appear to be proportionally rare and not always an injustice perpetrated by a mustache-twirling villain upon widows and orphans. Insurance is a business.

Private health insurance cannot function if people buy insurance only after they become seriously ill, or if they knowingly conceal health conditions that might affect their policy.

Some rescissions are legal and justifiable. Some arise from errors, and some arise from malfeasance on the part of the insurer. If anyone has data showing that the rate of unwarranted rescissions is on the rise please pass it on.

Comments welcome.

Cross-posted in the Green Room.

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