The Death Spiral
“Obamacare is in a death spiral.” -Kevin McCarthy, House Majority Leader
“It’s not working and that’s why it’s in a death spiral.” -Speaker Paul Ryan
“It is in a death spiral.” -Mark Bertolini, Aetna CEO
“Certainly, we don’t know what the endgame is, but the symptoms of the death spiral are beginning to show themselves.” -Michael Tanner, Cato Institute senior fellow
The death spiral. Maybe you’ve heard of it? Apparently, the ACA is in the midst of one, or at least that’s what conservatives would have you believe. I’ll be the first to admit that the ACA has some problems (serious problems), but it’s not yet at death spiral, though the GOP is on its way to creating one. Yes, premiums and deductibles are sky high (though they’ve actually gone down in many areas throughout the country this Open Enrollment season). People are understandably unhappy about paying even more this year. But high premiums do not in and of themselves equal death spiral. There’s more to it.
Insurance (all types) is a pool full of high risk and low risk individuals. In health insurance, high risk people are “sick” people, those with pre-existing conditions. Low risk people are healthy, usually young people. High risk people cost insurers more than low risk people because they use more services for which the insurer must pay. To balance this cost, insurers need healthy people to pay into the pool but not use expensive services. With payments from both healthy and sick, the insurer can afford to pay the costs of services.
What happens when there aren’t enough healthy people paying into the pool? This is called adverse selection, and it is what leads to the death spiral. The insurer is forced to raise premiums in order to cover the high risk peoples’ expenses. When an insurer raises premiums, those who are healthier are likely to forego their coverage in order to save money. This results in a mostly sick risk pool, and to cover the costs the insurer must raise prices even more. The less-sick people flee the pool, leaving only the very sickest. This cycle continues until the pool is no longer sustainable and you have a death spiral. The insurance market collapses upon itself.
Prior to the ACA, the death spiral was averted by excluding people with pre-existing conditions from the pool or by charging them exorbitant amounts to join. Few sick people in the pool meant few extreme costs to cover and insurers made nice profits off of their generally healthy risk pools. But the popular provision of the ACA, called guaranteed issue, that forces insurers to cover people with pre-existing conditions, would be too costly without enough healthy people to balance the pool. Remember that mandate? The one that everyone hates because it tramples our freedom? That’s what keeps the death spiral from happening. By mandating that most Americans purchase insurance, the ACA ensures that healthy people will buy in to the risk pool. All those healthy people help the insurers cover the costs of the sick. Balance is maintained.
So, what happens if our president gets his way? What if Republicans decide to include repeal of the individual mandate in their upcoming tax bill? Pressure from the current administration on members of Congress could mean the “penalty” for not having insurance will be gone when the new tax bill rolls out. Many conservatives will rejoice! Think all those young, healthy people are going to stick around in their expensive health insurance plans that they don’t need? They didn’t in KY, NY, and WA when those states required guaranteed issue without a mandate prior to the ACA. Some will stay, sure, but many will leave. Those who are left are the ones who need their insurance, likely because they have pre-existing conditions. What do we call it when there are more sick people than healthy people in the pool? Adverse selection. What does adverse selection cause? Death spiral.
So why the claims of ACA death spiral? The risk pool is still unbalanced, but it’s stabilizing. The penalty for not maintaining coverage under the ACA, was, frankly, too low to entice enough young healthy people to enroll. That along with the great numbers of people with pre-existing conditions who can now get much coveted coverage means costs are going up as insurers struggle to pay. Are insurers taking a hit? Yes. Are they on the verge of going under? Certainly not. Had Congress funded the risk corridors as planned under the ACA, insurer losses would not be such a problem and premiums could have been stabilized. Risk corridors are funds that help insurers take on the losses they inevitably incur when covering a higher risk pool. Insurers didn’t get those funds, and obviously aren’t happy about it. Conservatives, oft to be in support of large corporations and never to miss a chance to tear down Obamacare, love to echo insurers’ cries.
To be clear, our current system of excessive health care spending is not sustainable. The law is in dire need of fixes and the system needs reform. However, we are by no means in a downward spiral of death. Obamacare is very much fixable if politicians come together and work on it. Unfortunately, most are not willing to do so, and some Republicans would rather toss the baby out with the bathwater so to speak by repealing and replacing instead of fixing. Uncertainty is never good in any insurance market, and we have a lot of that right now as conflicting political messages abound and the law remains in limbo. It’s made this Open Enrollment- a time of year when hard working citizens such as the self-employed, minimum wage earners, and early retirees can sign up for otherwise affordable coverage- volatile and scary. Let us not make it worse. If the GOP decides to repeal the individual mandate, healthy folks will drop their coverage in a flash. As healthy people drop out and the sick remain, what do you get? Adverse selection. Adverse selection can lead to what? An actual death spiral.
