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Understanding health insurance underwriting

Health Care and Health Insurance
by Heather Robinson
Health insurance underwriting takes some special considerations.
Health insurance underwriting takes some special considerations.

Change is an expected component in the insurance industry, and the professionals who work in the marketplace are constantly required to keep their ears on the ground to remain competitive. This is especially true for those whose expertise is focused on the health insurance underwriting subsection of the industry.

The onset of the ACA shifted the way that policyholders and insurers function in America, and the underwriting process had to meet these challenges. Here, we will offer an insight into what health insurance underwriting looks like in a post-ACA world.

What is health insurance underwriting?

Medical underwriting is what insurance professionals call the process of evaluating an application for health insurance coverage. This is done by looking at the person's medical history to determine the specific risk that the applicant would pose to the insurance company. The underwriting process is important for most kinds of insurance, but it becomes more tricky for health care coverage.

Medical underwriting is a complex process because there are many different policies, as well as federal and state regulations to adhere to. In other kinds of insurance, the coverage may be denied if the applicant poses too high of a risk. Because of federal regulations, private insurers might not be able to deny health insurance coverage to any applicants for any reason.

When is underwriting prohibited?

When the Affordable Care Act (ACA) was first introduced on March 23, 2010, by President Obama, private insurers' underwriting process changed in a significant way. Before the act came into effect, health insurance companies were able to deny more people medical coverage on the basis of their risk potential. Private companies were also able to use this information to determine the premium rate for the individual. This includes people who had pre-existing conditions and serious, pervasive, health issues.

Now, in a world that operates with the ACA regulations, this kind of underwriting process and evaluation for risk is prohibited in some circumstances.

According to the Kaiser Family Foundation, there are about 52 million adult Americans who are currently younger than 65 who would be disqualified from obtaining individual coverage due to their pre-existing conditions. This boils down to about 27% of the population who would be eligible to receive individual health insurance coverage because of the existence of the ACA. Without the regulations in the act, a more comprehensive medical underwriting process would be utilized.

Private insurance companies are prohibited to deny an applicant coverage on the basis of their pre-existing condition for those who are trying to obtain individual coverage. Here are some examples of conditions that would qualify:

  • Arthritis.
  • Stroke.
  • Pregnancy.
  • Asthma.
  • Heart disease.
  • Cancer.

The majority of people who have employer-based health insurance coverage or have coverage through public programs are exempt from the underwriting process. This is true outside of the regulations provided by the ACA, which means that even if something were to change to the act, these populations would still be protected.

There are some additional circumstances that have some underwriting restrictions. For example, when an individual is seeking Medicare supplement coverage during the open enrollment, the company can't look at the applicant's health history when deciding rates and acceptability.   However, coverage through private association plans may, in some states, have underwriting criteria applied.

What underwriters look for

The job of an underwriter is to look for specific medical conditions in an insurance coverage applicant that would add additional risk for the insurance company. This is why it is so important for companies to understand the regulations and restrictions surrounding specific underwriting capabilities in accordance with the ACA.

With that said, underwriters are a valuable resource for every private health insurance company to remain at an acceptable risk level.

When allowed to do so, the underwriting process can be a complex procedure that involves analysis of data and applicant-provided information. The process is only as accurate as the amount of patient research that the underwriter has access to. With the full breadth of an individual's medical history in hand, an insurance company can make a more informed decision about the amount of risk that the applicant poses. This is often referred to as the amount of due diligence that an underwriter completes.

The underwriting process

Medical underwriting requires the professional to obtain the applicant's medical information via a health questionnaire. From here, the questionnaire is analyzed to determine the amount of risk that taking the individual on as a policyholder would pose for the insurance company. To do this, the applicant may have to provide medical records to the insurer. 

The goal of the underwriting process is to avoid the highest risk posed by a certain medical condition on the insurance company's part.  When a company becomes too overwhelmed with high-cost risk, the insurer may need to raise premium rates in excess of usual costs for those who do have coverage to compensate for the possibility of higher claim payouts.

Remember that there are some circumstances that prohibit an in-depth underwriting process. Here is a short synopsis of how the medical underwriting process works:

  • Personal Health Questionnaire: Provides the insurance company with basic health information on the applicant.
  • Attending Physician Statement (APS): This is only necessary if there are any major concerns from the initial questionnaire.
  • Prescription evaluations: The underwriter should analyze the applicant's prescriptions from the past few years.

These are the basic requirements that the underwriting process needs to be successful. Sometimes the process needs more medical history research to determine an accurate risk assessment. Because of this, the amount of time it takes for the underwriting process to complete can be extremely variable.

Risk classification and underwriting

When it comes to risk classification in the voluntary individual health insurance market, insurance tech comes in handy to complete the evaluation.

Underwriters use the information to ensure that the company does not become insolvent and that it has the ability to pay policyholder claims. To do this, underwriters must classify people into certain risk groups. These groups form because the individuals have a similar medical history and levels of risk.

The marketplace may also impact the underwriting process based on the idea of self-selection. Self-selection is when people act in a way that will benefit their own personal financial interests. This means that those who are entering the individual health insurance market may make choices that benefit themselves over the insurance company by overcommitting them to risk. For example, a high-cost applicant may desire a low deductible with minimal out-of-pocket costs. When this happens, it could be considered an adverse selection.

Because the underwriting process only occurs at the time of the insurance product sale, it is extremely important that it is done accurately with as much information as possible to attain. This includes risk selection, risk classification and setting the initial premium rate.

Important considerations for the insurance industry

The insurance industry is always shifting in response to external factors including regulations and policy implementation. Having access to the most accurate and reliable information to use in the underwriting process is valuable, especially when underwriting can be utilized.

If you are looking for a partner in success, this is where an actuary or underwriter can be extremely beneficial.

For example, Lewis & Ellis has professionals who have extensive experience in helping insurance companies create reliable insurance products, including major medical health insurance and other supplemental products.

This kind of support can go a long way when it comes to staying competitive in the ever-changing marketplace. If you're ready to get started, reach out to the experts at Lewis & Ellis today.




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