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If one person in a small firm with a serious health condition underwent treatment for the condition, the insurer could and did charge the employer extremely high premiums to maintain coverage. [1]
The resulting bad reputation health insurers were getting from those draconian underwriting practices was becoming widely known by both the public and the politicians. By the mid-90’s, the situation had deteriorated to the point where the state legislature in Colorado (and in other states) began to propose new laws reforming what the insurers could and could no longer do. In 1994, our state passed the so-called 1210 Plan, which said that group premium rates could only vary by age, location, and family size. It prohibited insurers from using an individual’s current health status or claims experience as underwriting criteria. This was an underwriting restriction that they now had to live by.
But if because of newly imposed restrictions the insurer could no longer keep a medically high risk person out of the insured group, who would? The answer at that time was the underwriter of last resort: the employer. How could the employer protect the group from future claims and resulting higher premiums down the line? By being very careful about whom he hired, for one thing.
A downside to underwriting restrictions is that they provide an economic incentive for employers to discriminate against them when hiring. Labor market discrimination can replace underwriting discrimination. [2]
Ironically, due to the insurers no longer playing the role of gatekeeper, small employers had indeed acquired their own economic incentive to practice labor discrimination against employees who were perceived to be future high risks.
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