This is as good a summary as I have seen of this term of art.  Bottom line, the health insurance industry has been granted immunity from discriminatory practices (as well as HIPPA and ADA) which allows them to follow what some politicos and legals term “the prudent man rule”. What does this mean?  If you have been sick, they do not have to cover you for that condition for up to 12 months, or could refuse coverage all together (in the case of an individual policy).  This just confirms the fact that health insurance companies have strayed from their original purpose (and by extension all forms of insurance) which was risk sharing. Under the current practice, they are risk arbitragers, looking to put off risk somewhere else to maximize return on investment and profitability.  This is one item that could be changed without any sweeping new health plans or legislation.

Insurance companies try to discourage people from waiting until they get sick in order to purchase health insurance. One way in which they do this is to impose pre-existing condition exclusion periods. This means that if you have a medical problem which exists at the time you enroll in or purchase your health insurance, the insurance company will deny all claims pertaining to this medical problem for a certain period of time.

If you have job-based coverage, the pre-existing condition exclusion period is limited to 12 months (18 months if you are a late enrollee) and only applies to conditions for which you sought treatment in the 6 months leading up to enrollment. You may be able to apply creditable coverage to offset your pre-existing condition exclusion period. For example, if you were on an individual policy before enrolling in your job-based coverage, you may be able to subtract the amount of time you were covered on your individual policy from the pre-existing condition exclusion period.

The rules governing pre-existing condition exclusion periods in individual policies vary widely from state to state. As a general rule, they are very different from the rules limiting pre-existing condition exclusion periods in job-based coverage. Check out these consumer guides which contain state-specific information about pre-existing condition exclusion periods in individual policies.

REFERENCE: About.com:Health Insurance