Genetic testing offers great hope for future progress in treating diseases since individuals can in many instances reduce the consequences of genetic defects if they find out about them sufficiently early. For example, a woman who discovers through a simple blood that she has a BRCA1 or BRCA 2 defect has an extremely high chance of getting breast cancer if she does nothing about it. However, she can greatly reduce her risk of breast cancer by having her ovaries removed, and by other more extreme surgeries.
On the other hand, if little can be done to combat the adverse health consequences from having serious genetic defects, individuals may not want to know about them. This would explain why many persons with a high chance of having a genetic mutation that guarantees they will eventually get Huntington's Disease never take the simple test to determine whether they have this mutation since nothing is known yet about how to moderate the deadly consequences of Huntington's.
Particularly where successful health interventions can reduce the medical consequences of a genetic defect, individuals would like to have health insurance prior to taking a test to determine whether they carry that defect. Insurance prior to testing is a viable form of insurance since persons with similar risks ex ante can be pooled in determining insurance rates. Companies would be willing to offer insurance on genetic defects prior to testing since at that stage they would generally be at least as well informed, and often would be better informed, than individuals are about the chances of their having genetic defects. The premium for coverage of any particular genetic defect would then be determined by the product of the probability of having that defect multiplied by the cost of treating it. The premium would vary across different pools of individuals who have different probabilities of testing positive, and different treatment costs. The added premium to cover this risk would be small if the defect was not common, or if treatment costs were not major.
One major problem arises when individuals get tested before seeking insurance, and only take the extra insurance coverage when they discover that they carry a serious genetic defect. Of course, insurance companies would ask applicants if they have already been tested, but applicants for insurance conceal information about their HIV status and other diseases that would raise the cost of coverage if they revealed positive test results. The fear of insurance companies that they would be less well informed about these risks than those applying for insurance because applicants conceal information about testing is what makes these companies want to test many applicants before offering them insurance. Unfortunately, there is nothing to insure after testing since those individuals who test negative do not want coverage, while in the absence of controls over premiums, individuals who test positive would have to pay the full cost of any treatment.
The looming Congressional law on testing would try to handle this problem by forbidding insurance companies to raise premiums to individuals with genetic defects. This only introduces one more regulation in insurance markets, and there are already too many of them. A better way is to penalize individuals who withhold information from insurance companies about the outcomes of genetic tests. If the penalties were set high enough to effectively deter lying about test outcomes on applications for insurance, individuals would then have an incentive to seek insurance against the risk of genetic defects prior to taking any genetic test. Under these conditions, companies would offer insurance that would reflect the expected costs prior to testing of insuring individuals with different risks of genetic defects. Companies might require testing of persons after they are insured if knowledge about whether they were carriers of defects would significantly reduce the cost of preventing or moderating the disease if it eventually occurred.
One major problem remains even if insurance companies tested everyone with a reasonable risk of having genetic defects after they had insurance. Individuals who test negative afterwards would not want to continue to pay the extra premium they had been initially charged when they had a higher than average risk of having a genetic defect. They would threaten to change insurance companies if their premiums were not lowered. Insurance companies would then be left in the initially high-risk pool only with those who tested positive, and they would force these persons to pay the higher premiums appropriate for their high risk revealed ex post. Companies would then again want to know prior to providing insurance whether individuals are positive or negative, and they would then adjust their premiums according to the results.
The fundamental problem here is the inability to write long-term individual health insurance contracts that commit both insurance companies and individuals to remain together for an extended time period. This contractual limitation distorts other risks in the insurance market as well. Individuals who are revealed to be healthier than average as they age will seek insurance rates that take account of this information even though initially they paid rates that were adjusted to their expected health status. Individuals who are revealed over time to have worse health than expected will either lose their insurance coverage or face much higher premiums.
Health insurance coverage through large employee groups helps mitigate the problem caused by genetic testing. Individuals who test negative are not likely to change employers in order to take advantage of this information to get lower premiums since this adjustment in premium would generally form a small part of their overall compensation. Similarly, employees who are revealed to have genetic defects do not impose large costs on employers or other employees unless they are a large fraction of total employment. Of course, employer based health insurance under present arrangements is defective because employees who change jobs may have trouble finding employment if they tested positive for a genetic defect. The solution to this problem is to encourage a move toward a system that allows health coverage portability, so that coverage moves with employees when they change jobs.