Trying to Avoid an Insurance Debacle

New York Times; February 22, 1987 – Brent Nance is an insurance broker. As such, the thought of writing policies for people who are at high risk of developing AIDS makes him shudder.

But Mr. Nance is also a homosexual, the founder and president of Concerned Insurance Professionals for Human Rights, a Los Angeles-based trade group that combats AIDS-related discrimination by insurance companies. And his loyalties are torn. ”I am caught in the middle,” he sighed. ”I sometimes feel like I’m trapped in an aerosol can waiting for someone to relieve the pressure.”

A trapped feeling of a different sort is spreading throughout the life and health insurance industry, as executives begin to grapple with the ramifications of the AIDS crisis. The disease, which is almost invariably fatal, raises a specter of claims on life and health policies that could bankrupt insurance companies.

Yet the industry faces a somber Catch-22. It knows that homosexuals and intravenous drug users have a higher probability of contracting the disease than others. And it has access to medical technology that would enable it to spot people who are more likely to develop AIDS. Those two factors give the industry the ability to spot – and refuse insurance to – many people who may file huge AIDS-related claims down the road.

But when insurance companies have tried to refuse insurance to people on the basis of their life styles or of predictive medical tests, they have been charged with discrimination. Some states, in fact, have forbidden them to use the medical tests altogether.

The result is that insurance executives are finding themselves in a tightening vise between shareholders, clients, regulators and society at large. How they ultimately balance the host of competing demands, and whether they are forced by watchdog agencies or the courts to alter underwriting practices to promote social goals, could set precedents with far-reaching consequences for the insurance industry’s future.

Already, the AIDS crisis has generated a spate of as-yet-unanswerable questions, among them:

* Do insurance companies have a right to force applicants for life or health insurance policies to submit to medical tests that pinpoint whether they have a predisposition to develop AIDS or a variety of other illnesses?

* What is the proper balance between the individual’s right to privacy, and the insurance industry’s right to know about life style factors, such as sexual preference, that can materially affect a person’s chances of developing a given disease?

* To what extent can, or should, the insurance industry shoulder the huge costs associated with catastrophic illness?

* Does government have a right to constrain the freedom of insurance companies to make decisions based on statistics?

To some, it is a simple matter of economics. ”Everyone is entitled to quality health care, but everybody is not entitled as a matter of right to health insurance, which is a private- sector contractual relationship,” said Karen Clifford, counsel for the Health Insurance Association of America, a trade group. Added James Pritchett, Jr., president of the Great Republic Insurance Company: ”People buying insurance want to put their money in the pot with those who have the same potential risks that they do. If you’re sick and I’m well, I don’t want to pool my money with you.”

Others say that the industry simply cannot ignore the societal costs of refusing insurance to people with a high risk of developing AIDS. ”Either way, the public will end up picking up their health care tab, if not through higher insurance premiums, then through welfare programs and, ultimately, higher taxes,” said Thomas Stoddard, executive director of the Lambda Legal Defense and Education Fund, a New York-based organization that handles homosexual discrimination cases.

Clearly, the combination of the AIDS epidemic and medical testing breakthroughs has turned the theoretical underpinnings of insurance inside out, probably irrevocably. ”The underlying premise of insurance is that people should pay a premium that reflects the risk threat they add to the pool of those insured,” said Dan M. McGill, chairman of the insurance department at the University of Pennsylvania’s Wharton School. ”As medical advances lead to more accurate and sophisticated risk assessment, underwriting decisions involve not just pure classification and financial matters, but political and social considerations as well.” MORE than 30,000 people have been diagnosed with AIDS, considered 100 percent fatal, since it was first identified in the United States six years ago. By 1991, the total number of cases is likely to hit 270,000. Homosexual men remain the primary risk group, accounting for more than 70 percent of cases diagnosed to date, but many experts predict that the disease will soon spread more rapidly into the heterosexual population.

Acording to the United States Public Health Service, the annual cost of treating AIDS patients could reach $16 billion by 1991. Insurance officials estimate that by then the annual total cost to their industry could be well over $10 billion. ”If the current projections about the severity of the disease are valid, then the implications for the industry are awesome,” said James Dederer, senior vice president and general counsel of the TransAmerica Life Companies.

The numbers are not undisputed, however. The insurance industry often cites figures released by the Centers for Disease Control in 1985, which place the average cost of treating an AIDS patient from the onset of illness to death at about $150,000. Homosexual rights groups counter that use of home care and alternative facilities like hospices can bring that cost as low as $40,000.

In fact, insurance companies are more concerned about the impact of an AIDS epidemic on life insurance, most of which is sold through individual policies, than on health insurance; more than 85 percent of Americans receive health insurance through their employers, who bear the major financial burden of paying for health care costs.

So far, AIDS claims for either health or life insurance have been relatively modest. The Lincoln National Life Insurance Company has paid out $10 million on 250 health and life insurance policies; TransAmerica has paid out $6.2 million on 68 life insurance policies; the Travelers Companies has paid $2.5 million for 59 life and health claims; and the Northwestern Mutual Life Insurance Company, $6.5 million for 87 life insurance claims.

But because AIDS has an average four-year incubation period, insurance companies are terrified that a flood of claims looms ahead. ”We don’t know how many people we are currently insuring who are already infected,” said Dr. Donald Chambers, Lincoln National’s medical director.

Lacking a crystal ball, the insurance companies are fighting for what they see as the next best thing: an unfettered right to screen out those at highest risk through use of the HIV antibody test, which can determine who has been exposed to the AIDS virus but not who will actually get the disease. Insurance industry critics, who say that only between 20 and 30 percent of those testing positive will eventually get AIDS, want to restrict the use of the test, and of other marker tests expected to become available in the near future to identify those at risk of developing cancer, diabetes, and other illnesses.

Apocalyptic language is being used by both camps. ”Stripping insurance companies of the ability to assess risk literally rips out the foundations of insurance and marks a very dangerous precedent that could ultimately destroy the industry,” said Ms. Clifford of the Health Insurance Association.

The use of marker tests by insurers ”is a form of eugenics that will result in a marketplace premium for Aryan perfection, and second-class treatment for everyone with any predisposition to any illness at all,” counters California state Assemblyman Art Agnos, who successfully sponsored state legislation banning use of HIV antibody testing by insurers.

A handful of other jurisdictions have also banned the use of the test for insurance purposes. New York State is conducting a policy review that should be completed within several weeks.

Insurance companies are fighting back. For example, an estimated three dozen insurers stopped writing individual policies in Washington, D.C., when the district banned testing last June. ”They’ve tied our hands by making underwriting too much of a risk for us there,” said Dr. Chambers of Lincoln National, one of the companies that withdrew.

On the national level, the Office of Technology Assessment is studying the issue of all marker tests and their impact on the insurance industry. But for now, it is the AIDS antibody test that is the main sticking point. With an estimated one to two million Americans already infected with the virus, but not necessarily with the disease, ”use of the test will create a huge class of uninsurables,” warned Jeffrey Levi, executive director of the National Gay and Lesbian Task Force.

Gay activists say the test unfairly stigmatizes people who get positive results. They are particularly concerned about the confidentiality of critical medical records compiled by insurance companies, which regularly exchange information through the Medical Information Bureau, a central clearinghouse. That concern could easily spread to the heterosexual community as well, in the face of recent suggestions by the Centers for Disease Control for mandatory AIDS testing for all hospital patients and marriage applicants.

For their part, the insurance companies say the specter of huge claims is too great to take a chance. According to Barbara J. Lautzenheiser, a Hartford-based consultant to the insurance industry, studies show that a 34-year-old man with evidence of exposure to the AIDS virus is at least 26 times more likely to die within seven years than the average person. That is in contrast to a twice-as-high death rate for smokers, and four times for those with diabetes.

Thus, insurance companies insist that without free rein to screen out potential carriers of the AIDS virus, they will have to raise premiums for everyone. They insist it is not a case of discrimination against homosexuals, noting that they reject or charge higher premiums to insurance applicants on the basis of such health and life style factors as high blood pressure and smoking. ”We should be able to deal with AIDS the same way we deal with any other disease,” said Dr. Robert Gleeson, associate medical director for the Northwestern Mutual Life Insurance Company.

Homosexual rights advocates have an answer to that, too. They note that antidiscrimination laws prevent differential underwriting based on sex and race, and some states have forbidden insurance companies to test for such factors as sickle cell trait, which affects mainly blacks. STATE insurance commissioners charged with regulating the industry are caught in the crossfire. ”Both the insurance companies and gay rights groups have very valid and serious concerns,” said James Corcoran, New York State’s Superintendent of Insurance. ”We’re trying to build some kind of bridge between them, but balancing the equities involves difficult and painful decisions.”

Insurance companies are not waiting for the outcome of the ethical or legislative skirmishes. They are using antibody tests at an accelerating pace.

Home Office Reference Laboratory Inc., a Kansas-based facility that conducts medical tests for the insurance industry, estimates that it now runs HIV antibody testing on more than 5,000 blood samples a month, double the number a year ago. It expects the number to double again this year.

In the fall of 1985, TransAmerica became the first company to announce publicly that it would use the test on a regular basis; the company now requires it for anyone applying for a life insurance policy above $250,000, and has tested more than 10,000 blood samples.

Aetna routinely tests anyone over the age of 16 who is applying for a $450,000 policy. On Jan. 1, the Travelers started testing anyone between 18 and 50 seeking $500,000 in life insurance, and says it is considering testing for health insurance, too. Mutual of Omaha has among the most liberal testing rules, routinely testing only people applying for life insurance policies of more than $1 million. Most companies say they also test if there is any medical indication that the applicant is at risk for AIDS.

Insurance companies say that the testing has made them less vulnerable to people who have been exposed to the virus but try to hide that fact when applying for insurance. They cite a trade association study indicating that 44 percent of AIDS death claims occurred within two years of issuance of the policy, compared with 8 percent for all death claims. ”Some individuals who either know or have reason to believe that they have been exposed to the virus purchased insurance without providing that knowledge to the company,” said Ms. Lautzenheiser, the consultant.

Insurance industry critics neither condone such behavior nor deny that it has occurred. But they say they will not budge in their anti-testing stance unless the industry and regulators guarantee confidentiality of test results. Under current law, the Medical Information Bureau is subject to subpoena by government agencies, and some states require private doctors to report positive antibody results to a central registry.

”A positive test result, if disseminated, is like being branded with a yellow star,” said Mark Senak, legal director of the Gay Men’s Health Crisis, a New York AIDS services organization. ”It not only marks an individual as uninsurable, but can have a devastating impact on that person’s ability to obtain housing, employment, and financial services.”

If insurance companies are restricted in the right to test, they may become even more dependent on life style factors to assess risk. And that opens its own Pandora’s Box of discrimination charges.

Homosexual rights activists say that many insurance companies already are engaging in what they call ”sexual orientation underwriting,” using such non-medical criteria as residential district, marital status, living arrangements, beneficiary and occupation to weed out those they consider likely to be homosexuals. In the past year alone National Gay Rights Advocates, a San Francisco-based legal defense fund, has brought at least a dozen complaints before state insurance departments. In one case, the North American Life and Casualty Company rejected a San Diego man for life insurance based in part on an investigative report that quoted a ”residential informant” as saying that the ”applicant was a little too close to his partner” – who was, in fact, his housemate, lover and beneficiary. Under pressure from the state, North American Life finally issued the policy last fall.

Similarly, California courts will soon decide whether Great Republic discriminated against homosexuals; the company issued a a memo to its agents requesting them to solicit answers to a supplemental questionnaire from single males without dependents in ”occupations that do not require physical exertion.” The memo cited as examples restaurant employees, antique dealers, interior decorators and florists. Although the memo has been withdrawn, the ccse remains in litigation.

The insurance industry and homosexual rights groups remain miles apart on most issues, but they have found some common ground. Both sides advocate statewide high-risk health pools that would be subsidized by the insurance industry, private employers, and, to a limited degree, the public sector. These pools would be open not only to those in a high-risk group for AIDS but to anyone with a catastrophic illness, or predisposition to develop one, that makes them otherwise uninsurable.

Eleven states have such risk pools, and Congress is expected to pass legislation this year that would create strong tax incentives for other states to do the same.

THERE is a chance that the issue of sexual orientation underwriting will soon be defused, too. In December, the National Association of Insurance Commissioners, an organization of the commissioners of all 50 states, unanimously adopted a set of AIDS underwriting guidelines proposed by a group that included both industry representatives and homosexual rights activists.

The guidelines condemn the use of sexual orientation underwriting. They stress that strictly medical questions regarding an applicant’s history of sexually transmitted diseases, drug abuse, and early warning symptoms of AIDS or AIDS-related complex are a more effective way to assess a predisposition to AIDS.

The N.A.I.C. has no enforcement authority, but it is hoping that state insurance commissioners will promulgate regulations adopting the guidelines. ”The commissioners are not necessarily on the cutting edge of social change,” said Benjamin Schatz, director of National Gay Rights Advocates’ AIDS Civil Rights Project. ”The guidelines will make it politically safer for them to take a stronger position.”

For now, though, many commissioners are acting cautiously. For example, Mr. Corcoran of New York has stated publicly that he disapproves of the AIDS antibody test, but he has not issued a policy enforcing that position. Testing in New York continues as the department conducts its policy review. ”If we have dragged our feet, it’s so that no one goes off half-cocked on this debate,” insisted Kevin Foley, the department’s director of public affairs.

The Massachusetts Division of Insurance has taken a more aggressive stand. In December, Commissioner Peter Hiam issued a written policy prohibiting insurers from using the test. While most of the companies doing business in the state have agreed to comply, North American Life, the New York Life Insurance Company, Aetna and seven others have refused, arguing that the commissioner does not have the authority for such a mandate.

”My hope is that we will be able to work out a solution that may be a model for other states to follow,” said Mr. Hiam, who expects a resolution within a matter of weeks.

”Massachusetts is being viewed by other jurisdictions as a bellwether,” said a top executive at one of the companies that uses testing. ”It’s 50-50 whether it will go to court.”

If it does, it will probably be a long, dragged out case, a ”battle to the end,” as Randi Friedman, counsel at the Massachusetts Division on Insurance, puts it. But bellwether or no, an end in Massachusetts is unlikely to mean an end to the insurance questions raised by the AIDS crisis. In fact, perhaps the only point of true unanimity among all participants in the controversy is that it will not be resolved for years to come. THE STATES DECIDE ON AIDS ANTIBODY TESTS

Most states either have, or are considering, some version of a law or regulation affecting how widely insurance companies can use tests for the AIDS antibody virus in deciding whether to grant insurance policies. But insurance industry insiders and homosexual activists say that five jurisdictions will probably set the patterns for future rules on AIDS antibody testing – either because of their aggressive stance, or because of the size of their homosexual communities.

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