a solid/easy market-based solution to pre-existing conditions in health care/insurance

John Cochrane in the WSJ on a market solution to deal with pre-existing conditions...

Anytime you attach conditions to insurance, then the overall cost will rise. But this would seem to be an ethical and efficient approach to the problem...

Even if you don't like the massive health-care package being considered in Congress, you have to admit that health insurance and health care in this country are not working well. There are two basic problems:

First, if you get sick and then lose your job or get divorced, you lose your health insurance. With a pre-existing condition, new insurance will be ruinously expensive, if you can get it at all....Second, health care costs too much....

The problems are real, but the proposed remedy—even more government intervention—is counterproductive. A market-based, deregulation-focused reform is possible, and it will work...

A truly effective insurance policy would combine coverage for this year's expenses with the right to buy insurance in the future at a set price. Today, employer-based group coverage provides the former but, crucially, not the latter. A "guaranteed renewable" individual insurance contract is the simplest way to deliver both. Once you sign up, you can keep insurance for life, and your premiums do not rise if you get sicker. Term life insurance, for example, is fully guaranteed renewable. Individual health insurance is mostly so....

The right to future insurance could be transferable to another company, for example, if you move. You could have the right that your company will pay a lump sum, so that a new insurer will take you, with no change in your premiums. Better, this sum could be occasionally placed in a custodial account. If you got sick but had something like a health-savings account to pay high premiums, you could always get new insurance. Insurers would then compete for sick people too....

How do we know insurers will honor such contracts? What about the stories of insurers who drop customers when they get sick? A competitive market is the best consumer protection. A car insurer that doesn't pay claims quickly loses customers and goes out of business. And courts do still enforce contracts....

UPDATE (9/30/09): In researching a paper I'm writing on market-based health care reform, I just discovered that Cochrane had an article published on this subject in the Journal of Political Economy (one of our top three or four journals)-- in 1995. He's been banging on this drum for 15 years-- and I'm happy to grab a drum and play alongside!