Why should insurance cover pre-existing conditions?

Obama:

A recent report actually shows that, in the past three years, over 12 million Americans were discriminated against by health insurance companies because of a pre-existing condition.

Mark Perry asks:

Doesn't this demonstrate a basic misunderstanding on the part of President Obama about how private insurance markets work? Consider these examples:

1. You call the State Farm Insurance Company to purchase homeowners insurance the day after your home has been damaged by hail, a flood, a fire, an earthquake, a tornado; or has just been burglarized. Would you expect State Farm to cover those "pre-existing conditions?"

2. You call State Farm the day after your car has been in a major accident, and inquire about getting a quote for car insurance, hoping that your extensive "pre-existing body work" will be covered?

3. You call AAA on your cell phone from the side of the road with a flat tire, and ask about signing up for towing insurance, hoping that your "pre-existing" condition will be covered, and could they please send out a tow truck right away to fix your flat tire?

4. You are offered an extended warranty for your new bigscreen TV at BestBuy, and you decline. A month later, you have major problems with your TV and go back to BestBuy and ask if you can now buy that extended warranty, hoping it will cover your "pre-existing" electronic problems?

If the pre-existing conditions wouldn't be covered in those four examples, why would we expect that health insurance companies should, or would cover pre-existing medical conditions? That's not discrimination, that's just the way insurance markets work.

Denying coverage for pre-existing conditions would be serviceable if previous insurers were obligated to continue paying for conditions that developed while a patient was insured by them.

But this isn't the case, and probably for good reason--it's hassle enough to deal with a single insurer. This would lead to insurers arguing over when a condition developed and who's responsible for paying for it. Additionally, under the present system insurers can drop expensive patients, e.g. by refusing to renew their policy, thus leaving them with a 'pre-existing condition' no new insurer will be willing to cover at an affordable price for the patient.

Requiring the coverage of pre-existing conditions and setting up exchanges for the individual market to risk-pool seems like a straightforward remedy to these problems.

But, keep in mind, this is not a cost-decreasing measure. It is a cost-increasing measure, for two reasons:

1) The premiums of relatively-healthy patients (those without pre-existing conditions) will be subsidizing the care of the sicker ones that are now guaranteed the ability to purchase coverage.

2) Anytime you force a system to cover more sick people, you're increasing demand for services.