Question

Congress enacted the Health Insurance Portability and Accountability Act (HIPAA) to potentially help millions of employees gain access to group health insurance. The key provision of HIPAA requires insurance companies and health insurance plans administered by employers who self-insure to provide all employees access to health insurance regardless of previous medical conditions. This provision is known as “guaranteed issue” and is a controversial topic in the insurance industry. Explain why this is controversial legislation.

Short answer

The act is controversial because insurance firms desire more consumers who don't utilize their coverage than those who do, which might lead to financial difficulties.

Step-by-step solution

HIPAA

TheHealth Insurance Portability and Accountability Act (HIPAA) is a federal law established inthat stipulates, among other things, that all employees employed by businesses must have access to health insurance, regardless of their past health status.

Similarly, this legislation attempts to safeguard each individual's health information, known as "protected health information," in which individuals have the right to know and decide how their medical information is used, as well as to improve the quality of medical services provided to them.

Implication of the Act 

The implications of this measure, in the first instance, fall on companies that must insure all of their employees, and, more importantly, on insurance companies. This is so because having to insure anyone without a review of their risk creates a "guaranteed issue." Now insurance companies will have to raise the price of their policies because they face an adverse selection situation in which they do not know all of their clients' medical problems.

As insurance firms aim to have more consumers who do not use the policy than individuals who do, this might lead to solvency issues. Similarly, increasing the rates for not having information on the insured can cause people who are normally healthy and represent a lower risk for the insurer to decide to void the contract. Thus, exacerbating the asymmetry of information is involved because the number of policyholders who are less healthy and represent a higher risk increases.

Thus, the Health Insurance Portability and Accountability Act (HIPAA)is controversial.