Suppose your company is considering three health insurance policies. The first p

Question

Suppose your company is considering three health insurance policies. The first policy requires no tests and covers all preexisting illnesses. The second policy requires that all covered employees test negative for the HIV virus. The third policy does not cover HIV or AIDS related illnesses. All insurance policies are priced at their actually “fair” value. All individuals are slightly risk-averse. An individual with the HIV virus requires, on average, $100,000 worth of medical care each year. An individual without the virus requires, on average, $500 worth of medical care each year.
a. Suppose that the incidence of HIV in the population is .005. Calclulate the annual premium of the first policy. (hint: adverse selection.)
b. If you don’t have insurance that covers HIV-related illness, the probability of getting HIV is 1%. If you have insurance that covers HIV-related illness, suppose tha the probability of getting HIV is 2%. Calculate the premium of the second policy. Show your calculations. (Hint: Moral Hazard.)
c. In part b, suppose that insurance company wants to encourage low-risk behavior by individuals who have insurance. On average, it “costs” individuals $100 to engage in low-risk behavior. Assume that if people get HIV, they pay the deductible; and if they do not get HIV, they do not pay the deductible. How high must the deductible be to encourage low-risk behavior?
d. Calculate the premium of the third policy. Show your calculations.

Explanation / Answer

I appreciate that this problem is designed to get you to do analysis, but the whole premise is revolting. Not to mention illegal.

If we're going to discriminate against people who engage in risky behavior, let's try this:

Higher premiums for people who eat fast food (their health care costs us all billions of dollars a year)
No life insurance for people who drive (40,000 deaths in car accidents in the U.S. each year)
Higher premiums for parents whose children play contact sports (head injuries in student athletes are a huge problem).

"These issues you are bringing up, they deserve to be brought up," said Pisano. "People who have experienced rape and sexual assault are victims and we want them to be in a system where everyone is covered."

Turner's story about HIV drugs is not unusual, said Cindy Holtzman, an insurance agent and expert in medical billing at Medical Refund Service, Inc. of Marietta, Ga. Insurers generally categorize HIV-positive people as having a pre-existing condition and deny them coverage. Holtzman said that health insurance companies also consistently decline coverage for anyone who has taken anti-HIV drugs, even if they test negative for the virus. "It's basically an automatic no," she said.

Pisano, of the insurance trade group, said: "If you put down on a form that you are or were taking anti-HIV drugs at any time, they [the insurance companies] are going to understand that you are or were in treatment for HIV, period," she said. "That could be a factor in determining whether you get coverage."

Some doctors and nurses said that the industry's policy is not medically sound. "The chance of a rape victim actually contracting AIDS is very low. It doesn't make any sense to use that as a calculus for determining who get health insurance," said Dr. Alex Schafir, faculty instructor at Providence St. Vincent Hospital in Portland, Ore.

Nurses who deal with sexual assault cases say the industry's policy creates a significant problem for those treating women who have been assaulted. "It's difficult enough to make sure that rape victims take the drugs," said Diana Faugno, a forensic nurse in California and board director of End Violence Against Women International. "What are we supposed to tell women now? Well, I guess you have a choice - you can risk your health insurance or you can risk AIDS. Go ahead and choose."

Turner, now a life and casualty insurance agent, said she went without health coverage for three years after the attack. She second-guesses her decision to take the HIV drugs. "I'm going to be penalized my whole life because of this," she said.

Several women told the Investigative Fund that after being sexually assaulted they had been denied care or ruled ineligible for health insurance because of what were deemed pre-existing conditions stemming from their assaults -- particularly post traumatic stress disorder, or PTSD.

A 38-year-old woman in Ithaca, N.Y., said she was raped last year and then penalized by insurers because in giving her medical history she mentioned an assault she suffered in college 17 years earlier. The woman, Kimberly Fallon, told a nurse about the previous attack and months later, her doctor's office sent her a bill for treatment. She said she was informed by a nurse and, later, the hospital's billing department that her health insurance company, Blue Cross Blue Shield, not only had declined payment for the rape exam, but also would not pay for therapy or medication for trauma because she "had been raped before."

Fallon says she now has trouble getting coverage for gynecological exams. To avoid the hassle of fighting with her insurance company, she goes to Planned Parenthood instead and pays out of pocket.

A New Mexico woman told the Investigative Fund she was denied coverage at several health insurance companies because she had suffered from PTSD after being attacked and raped in 2003. She did not want to disclose her name because she feared that she would lose her group health insurance if she went on the record as a rape victim. "I remember just feeling infuriated," she said.

"I think it's important to point out that health plans are not denying coverage based on the fact that someone was raped," said Pisano of the insurance trade group. "But PTSD could be a factor in denied coverage."

"That might not be a discriminatory action, but it certainly would seem to have a discriminatory impact," said Sandra Park, staff attorney at the Women's Rights Project at the American Civil Liberties Union. "Insurance discrimination against rape victims will only further discourage them from coming forward to law enforcement and seeking medical help."

Even when patients have coverage, there are fundamental disagreements between insurance companies and doctors about what mental health treatment is medically necessary. The Investigative Fund spoke with doctors, psychologists, and licensed clinical social workers around the country who work regularly with victims of sexual assault. They said that their patients have been experiencing an increase in delays and denials, particularly for talk therapy.

"There's a lot of anger about this in the medical community," said Dr. George Shapiro-Weiss, a psychiatrist in Middletown, Conn. "You don't realize what an Alice in Wonderland web this has become."

"A lot of my patients are being told that their treatment isn't medically necessary," said Keri Nola, an Orlando, Fla., psychologist, who said about 75 percent of her patients are victims of sexual violence.

Several therapists cited problems with managed care companies that specialize in mental health. Such firms generally work under contract with health insurers to hold down costs while still authorizing appropriate care.

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