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How Do Health Insurance Companies Decide Who to Insure or How Much to Charge?

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By Trisha Torrey. Patient Empowerment Expert

Updated May 12, 2013.

When it comes to obtaining any form of insurance, whether it's homeowners, car, or health-related insurance like life insurance, disability or health insurance, you must go through an application process that determines how insurable you are, and at what cost.

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It should be noted that, with the passing of the Affordable Care Act. health insurers may no longer deny an application. Life and disability insurers may make whatever decisions they wish.

The process begins when you fill out an application. On that application, you are asked a variety of questions that will help the company you have applied to decide whether or not they are willing to insure you.

Your application then goes to the people who make insurance decisions, called "underwriters."

The underwriting process consists of three steps.

First, they decide how much of a risk to their profits you present. Second, they decide whether your level of risk is acceptable by figuring up how much you might cost them in claims, based on that risk assessment. (If they anticipate your claims will cost them too much, then life or disability insurers will reject your application.) And third, if they decide that yes, they will insure you, then they determine how much they will charge you for their insurance.

Perhaps the easiest example of how this works is car insurance:

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You buy a new car and apply for car insurance. On the application, you are asked questions about the car itself (How old is it? How many miles has it already been driven? Is it a sports car?), and you are asked questions about you and your driving record (How long have you been driving? Have you ever gotten a speeding ticket or had an accident?).

That information is then sent to the underwriters. They go in search of additional information (data) that you may or may not even know exists, both to get more information about you, and to make sure you told the truth on your application. For example, they will contact the DMV (Department of Motor Vehicles) to see about tickets or accidents, they will check your credit score to be sure you are responsible enough to pay your bills on time, and they will check into information about the car you bought to see what kind of safety record it has.

Once they have collected your data, they will determine how much of a risk you and your car are to insure. If they think they can keep most of what you pay them (meaning you are a safe

driver and your car has a good safety record) then they will be willing to insure you, and your premiums will be relatively low. If they think you might present some problems (you tend to have a lead foot on the accelerator, or your car has a lousy safety record), then they may decide to insure you, but your premiums will be higher. (If you have an accident, but have paid them more money, they will still get to keep enough money.) If you or your car are a bad risk (too many tickets and you want to insure a sports car), then they will reject your application; they will not underwrite your insurance.

Underwriting for life, disability, health or medical insurance works in much the same way, but these underwriters have some different rules they must follow.

Similar to car insurance, when you want to buy any sort of health-related insurance, you begin with an application. You must answer questions about your physical body and health, your mental health, illnesses or conditions you have, your height and weight and more. Included in that application will be your signature which gives the underwriters the permission they need to acquire plenty of data about you and your health.

Your application will be turned over to the underwriters. They will pull data from a variety of sources, like the Medical Information Bureau. FICO (for both credit information and medication adherence information ) and Intelliscript or MedPoint, two companies that track prescription histories. Armed with that information, which will reveal everything from what diagnoses you have ever been given, to what tests have been ordered, or what drug prescriptions have been written or filled, the underwriters will decide whether they want to take the risk of insuring you, and whether they can profit from taking that risk.

Remember, health insurers are no longer allowed by law to deny you coverage. (Life and disability insurers are not under that same obligation.) However, insurers can charge you whatever they think they need to charge so they can make a profit from you. If you are too sick, and therefore too expensive, and would impose too much of a risk, they will simply offer you insurance at a very high price that will cover the anticipated costs of your care, and their profits, too. If you think the price is too high, and you decide against buying their insurance, it won't really be much of a loss to them.

As of early 2012, there are no limitations on what an insurance company can charge for health insurance. As smart patients, we must be smart about shopping around for the best insurance pricing possible .

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