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The Weekly Walk of Shame: Health-Care Reform Redux

Brian Orelli
October 1, 2010

This Motley Fool series examines things that just aren't right in the world of finance and investing. Here's what's got us riled up this week. If something's bugging you, too -- and we suspect it is -- go ahead and unload in the comments section below.

Today's subject: The full health-care reform bill doesn't kick in until 2014, but some parts start at different points over the next four years. Starting last week -- six months after the law became effective -- new insurance plans weren't allowed to deny health insurance for children under the age of 19 if they have preexisting conditions.

The change led WellPoint (NYSE: WLP  ) , UnitedHealth Group (NYSE: UNH  ) , Aetna (NYSE: AET  ) , Cigna (NYSE: CI  ) , and Humana (NYSE: HUM  ) to announce that they would no longer offer new kids-only plans because of the added risk.

No longer issuing new policies upset Health and Human Services Secretary Kathleen Sebelius, who wrote a letter to the industry last week expressing her concern, and accusing the insurers of acting in bad faith.

Why you should be indignant: I'm no lover of health insurers -- my family has been turned down for insurance because of a preexisting condition -- but what did Sebelius expect to happen? You can't expect health insurers to act against their best interests.

Insurance is simply a risk-sharing system. Insurers just add up the estimated medical costs for all the people in the risk pool, add a little to cover their costs and profits, and divide by the total number of people in the pool.

When you allow people with preexisting conditions into the pool, the estimated medical costs go up, requiring the policy premiums to go up. That, in turn, causes those least likely to rack up medical expenses to drop coverage, because the insurance isn't worth the higher cost, which shifts the price even higher.

It gets worse, because the practice allows people to wait to buy health insurance for their children until they're actually sick. People can take from the system