September 12, 2017

Breakingviews: Cheap Genetic Tests Leave Insurers Exposed

by Breakingviews

Cheap genetic tests will leave insurers exposed. 23andme, for example, earlier this year started telling its more than 1 million customers if they are at higher risk of developing Alzheimer’s, Parkinson’s and other diseases. That is giving the Alphabet-backed firm a booster shot of some 50 percent to its $1 billion valuation as it looks to raise $200 million of new equity, TechCrunch reported this week. Such success, though, has a downside.Those whose test results contain bad news may well want more health, life and disability coverage. That could breed adverse insurance selection, making the dysfunctional U.S. healthcare system worse.

Some uncovered risks are severe. Overall, 12 percent of women develop breast cancer, but that rises to about 60 percent for those with one gene variant. Economic studies show patients in poor health or likely to give birth or suffer a heart attack choose more generous health insurance. Genetic testing offers customers more chances to fine-tune their coverage. Treating cancer can cost over $100,000 per year.

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That creates a problem if insurers set premiums based on the typical risk of developing a disease. More policyholders than expected will be affected, putting pressure on available capital. Raising premiums prices out people with little risk of contracting cancer; those more at risk will pay, resulting in an unhealthier pool of customers – and fewer of them, which would hurt an insurer’s bottom line. Such meltdowns aren’t just theory. Mispricing the cost of long-term care has made long-term-care insurance policies hard to get nationwide and forced some insurers to liquidate.

Insurers can already ferret out a history of genetic disease by asking questions about family health when people take out a policy – and adjust the price or reject the application accordingly. U.S. law forbids health insurers from considering pre-existing disease or genetic risk in underwriting, whereas life- and disability-insurance firms may do so, except in some states. Companies focused on those areas may be able to avoid the worst effects, though customers may find it difficult to buy coverage.

It’s a different story for health insurance. The wider availability of genetic tests will increase demand – prices have declined rapidly to a few hundred bucks per customer. The more customers use them to decide how much health insurance to buy, the more insurance companies will be blind to its risks until, potentially, it’s too late.

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