Nicholas Simon was just 34 days old when he received his first rejection letter.

"Dear Nicholas Simon," began the March 2008 letter. "We appreciate your interest in the Aetna Advantage Plans for Individuals and Families. After careful evaluation . . . we are unable to offer coverage and have declined your application."

Nicholas seemed unfazed by the news, slurping down his mother's milk, emitting a manly burp and drifting off into post-nursing bliss.

His great transgression was he had jaundice on his fifth day of life. The bilirubin count in his blood - a key measurement - was 13.9.

"At 5 days old," said his pediatrician, Herbert Cady, "anything under 15 is normal."

Aetna felt otherwise. "Over 12 can indicate an underlying liver condition," said Aetna's Cynthia Michener. "We couldn't price a policy in a range that anybody could actually pay for. If we can't price affordably, we don't accept."

The rule that excluded baby Nicholas Simon for a preexisting condition is one of the thorniest - and most reviled - parts of commercial health insurance. Ending it could make insurance more expensive but the country seems poised to make the change.

President Obama told the nation Tuesday that "health-care reform cannot wait," and vowed "quality affordable health care for every American."

A key to accomplishing this, Obama said repeatedly during his campaign, is eliminating preexisting-condition exclusions that deny coverage to countless Americans like little Nicholas Simon.

Health insurers also want to change the rule if everyone is required to get insurance.

Even Louisiana Gov. Bobby Jindal, making the Republican response to Obama on Tuesday, said his mother was pregnant with him when she arrived in America but that his parents could not get insurance to cover his birth.

"I was what folks in the insurance industry now call a 'preexisting condition,' " Jindal said. He added: "We stand for universal access to affordable health care coverage. We oppose universal government-run health care."

In the coming weeks and months, in his budget and through legislation, Obama must clarify exactly how he intends to make good on his promises. Currently, 45 million to 50 million Americans have no health insurance, and their ranks are expected to swell with the economic downturn.

Most Americans today get health coverage through group plans offered by employers. When workers receive insurance through their jobs, an insurer cannot exclude them from coverage, or charge more, because of a preexisting condition.

But for increasing numbers of Americans who are losing their jobs and their group coverage - or who never had it to begin with - a primary option is to buy insurance as an individual or family on the open market.

In 44 states, including Pennsylvania, insurers are allowed to deny coverage - or charge more - to individuals and families because of preexisting conditions, according to the Kaiser Family Foundation.

Without insurance, these sick Americans too often go without needed care, or go into debt paying out of pocket. A report by the Institute of Medicine confirmed this week that the uninsured get sicker and die sooner.

The exclusion "is in some ways the ugliest corner of our current system," said Len Nichols, director of the Health Policy Program at the New America Foundation.

By day seven, the jaundice affecting little Nicholas was gone, and parents Joe Simon and Kathy Fisher of Mount Airy never realized their baby was anything other than perfect until Aetna's rejection letter arrived.

"This is ridiculous," his mother said last spring.

Nicholas was lucky. He was not harmed by Aetna's denial.

But his story is illuminating.

The baby's mother works for Philadelphia Citizens for Children and Youth, an advocacy group devoted in part to procuring health insurance for children.

That is irony.

When she learned her baby had been denied coverage, she called her boss, Shelly Yanoff.

"It was outrageous," Yanoff said. "This seems an indictment of the system."

Yanoff's agency is small, and agencies like hers in recent years - along with many small businesses - get hit hard by soaring insurance costs. PCCY's premiums rose 15 percent a year for several years.

Increasingly, small employers are forced to raise the premiums their employees pay, often beyond what they can afford.

Pennsylvania had the second-highest number of people - more than half a million - who lost employer-based insurance of any state between 2000-2001 and 2006-2007, according to the nonprofit Economic Policy Institute.

The addition of an infant or anyone who is medically expensive to a small group plan can send rates soaring for everyone.

So last year, on advice of a benefits consultant, Yanoff decided to pay for an individual policy for little Nicholas Simon rather than adding him to PCCY's group plan. The idea was this would be a cheaper option.

Yanoff never dreamed he would be rejected.

And when he was, Kathy Fisher just added her son onto her group plan at PCCY.

Insurance adviser David Waters, who recommended the individual policy, said he was not surprised when Aetna denied the infant's coverage.

"Most insurance companies are really afraid of the first six months of a baby's life," he said. "If there are any problems, that is when those problems come out."

Insurers such as Aetna defend the exclusion by saying this allows them to keep individual plan costs affordable and competitive.

"They are doing what our laws allow them to do," said Nichols, the health policy adviser. "And if they weren't aggressive about this, they'd be priced out of the market. Their competitors would get the healthy people and they'd get everybody else. This marketplace punishes sainthood."

New Jersey is one of a handful of states where insurers cannot deny coverage for preexisting conditions, or even consider them, when issuing an individual policy. Waters says the rates for individual policies are two and three times higher in New Jersey, and his clients there complain about the high costs.

Last year, in Pennsylvania, Gov. Rendell tried to pass a law prohibiting insurers from excluding people because of preexisting conditions.

The bill passed the state House but died in the Senate. Rendell will try again this year.

Sam Marshall, president of the Insurance Federation of Pennsylvania, opposed the Rendell bill in part because he thought it was not universal. And if coverage is not universal, he said, the industry needs to be able to consider preexisting conditions.

"You don't want people buying insurance only after they become sick," he said. "If there was no preexisting-condition clause, we'd all wait and just sign up for insurance when we checked into the hospital."

Ann Torregrossa, an architect of Rendell's plan, disagrees. Most people, she said, want the security of insurance, but when they're forced into the individual market, they too often cannot get covered.

"We're all hanging by a string here," Torregrossa said, "and this baby's case really represents how vulnerable we all are."

Contact staff writer Michael Vitez at 215-854-5639 or mvitez@phillynews.com.