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What is medical underwriting in insurance?

Keep in mind...
  • Medical underwriting is the practice of investigating the medical and personal history of applicants for health insurance
  • Medical underwriting supports the insurers initial selection decision
  • Medical underwriting supports classification of applicants by the degree of risk
  • Medical underwriting had a larger role in individual and family insurance than in group insurance

Medical underwriting is an investigation of an applicant’s medical and personal history. The information provides a basis for acceptance or rejection and the amount of money the consumers must pay for coverage. A key element of medical underwriting was risk associated with pre-existing conditions.

The conditions included actual disease and illness, but also health matters that might lead to future risks. Obamacare banned the use of pre-existing conditions and nearly every other individual trait.

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Medical Underwriting in Group Insurance

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Group insurance has an important distinction from the individual market; members of group classes do not select the insurance provider, rather they get the opportunity as part of a job or group benefit. When assessing risks for the insured population, insurers do not need to consider adverse selection. Insurers can treat the group as a normal population with standard risks.

Medical Underwriting in Individual and Family Market

The Affordable Care Act added importance to the individual and family market. The Individual mandate created a huge business opportunity in the individual and family market. The standard practices for insuring individuals used medical underwriting extensively where permitted by state or federal law.

The Impact of Medical Underwriting

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Studies showed that a minimum of 27 percent and up to 53 percent of US adults would not qualify for coverage under pre-ACA medical underwriting practices. Most of the covered population before the ACA got insurance through sponsored plans that were not subject to medical underwriting.

Medical underwriting in the individual and family market would likely cause more than half the applicants to be rejected for coverage. Obamacare has increased coverage since its enactment in 2010.

Medical Underwriting before the Affordable Care Act

Medical underwriting was the primary method for assessing risk and pre-existing conditions before the Affordable Care Act. Insurers in the individual market guarded against adverse selection in which consumers might wait until they were sick to buy insurance.

Adverse selections changed the dynamic of the insured population and increased the insurer’s risks of unprofitable levels of costs.

Medical Underwriting and Obamacare

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Obamacare used community rating to classify applicants with guaranteed acceptance. Community rating is the opposite of medical underwriting. Community rating excludes individual traits; limited community rating includes the below-described practices.

  • Community rating is the designated method for setting price, terms, and coverage in the Affordable Care Act. The law does not permit other uses of individual characteristics such as medical history, finances, and pre-existing conditions.
  • Limited exceptions to community rating in the Affordable Care Act permit insurers to make limited use of age, tobacco usage, location, family size, and type of plan.

Underwriting Selection and Classifications

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Insurance companies used medical underwriting in two important ways. First, they used it to decide whether to select the applicant or deny coverage. Second, they used it to classify the risk involved and to set the price for coverage. The numbered items below describe key factors in using medical underwriting.

– Risk selection

The risk selection issue involves the basic question of acceptance or denial. Denial ends the inquiry, and the applicant must go elsewhere to find coverage.

– Classification

The second part of the underwriting process is setting a standard group for risk. Insurers can add additional facts to rate applicants with higher risks than the standard group.

– Guaranteed Issue States

Before the Affordable Care Act, about 13 states had laws that required insurers to issue coverage in some form to all applicants. These laws caused various classifications of insurance risk, and insurance providers assigned higher than standard risks and premiums.

Some states had high-risk pools to subsidize coverage of applicants with pre-existing high-risk conditions.

The high-risk pools provided coverage but often at high rates that burdened consumers. The Affordable Care Act guarantees issue in all 50 states to those that can pay.

Medical Underwriting at Renewal

Insurers can use medical underwriting to set the initial policy terms and conditions. After the policy takes effect, state regulations limit insurer’s ability to raise individual policy prices. They can raise prices for a class or group of similar policyholders. HIPAA bans cancellations by non-renewal as long as the individual remains in the individual market for health insurance. The lone basis for cancellation available to insurers is for non-payment of premiums.

The Individual Mandate

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The Affordable Care Act requires every eligible resident to get and keep qualified health insurance Those that fail or refuse to get coverage may have to pay a tax penalty. The Act excuses certain people from the requirement by exemptions most significantly, those that do not meet the minimum amount of income to file federal tax returns.

Universal Acceptance

Obamacare requires insurers to accept every qualified applicant. Qualified applicants are those that demonstrate the ability to pay. Obamacare bans the use of pre-existing conditions in the selection decision.

The law permits limited use of individual traits when setting prices for premiums and costs. The below-listed items describe the exceptions.

  • Age is a permissible basis to charge higher rates. The law limits the increase to three times the amount charged to the youngest member of the class.
  • Location is a factor that causes higher prices for medical services; some areas are chronically underserved. Insurers can charge higher rates upon a showing that location causes an increase in costs.
  • Insurers can charge higher rates for families and use family size as a factor.
  • Insurers can charge different rates based on the type of Obamacare plan. Using actuarial value, the higher rated plans will have higher premiums than the lower-rated plans.
  • Tobacco usage can cause up to one-and-one-half the standard rate for an insured class. Successful tobacco cessation can reduce the rate for smokers.

Medical Underwriting in Health Insurance

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Before the Affordable Care Act, medical underwriting was the chief method for determining acceptance and terms of health insurance for individuals and families. Obamacare banned the use of pre-existing conditions and also required every eligible person to get insurance. Obamacare reduced the role of medical underwriting in health insurance in favor of limited community rating.

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