Several commentators have talked about a death spiral for the Obamacare health insurance exchanges. What do they mean?
One of the keys for any insurance plan to work is that a lot of healthy people have to sign up to cover the costs of the sick. For car or homeowner’s insurance, losses such as accidents, tornadoes, and fires are mostly random and potentially devastating, so most people put their dollars into the collective insurance pot knowing that every now and then they will be the ones with a legitimate claim.
This is more of a problem in health insurance, because many people have more predictable expenses, mostly those with pre-existing chronic diseases, either multiple diseases that demand lots of care or a single expensive disease such as multiple sclerosis or some cancers where the yearly medication costs might approach $100,000. Part of the Obamacare plan was to incentivize/force healthy people and small to medium size businesses to buy into health insurance exchanges or pay a penalty if they don’t. And therein lies the problem.
The four biggest U.S. health insurers recently reported $2 billion in losses this past year in the exchange plans. They are all planning on pulling out of many markets, leaving many markets with just one or two insurers offering these products. The state of New York recently approved the largest rate hike for health insurance exchange plans since Obamacare started. Insurers in other states have asked for rate increases of 50% or more.
With this reality in mind, here is how the death spiral works. Insurers raise their premium rates and deductibles one year, so more healthy or mildly chronically ill people decide not to renew their plans and pay the penalty instead. This leaves a sicker population behind, which then causes the next year’s expenses per person to be even greater, which causes insurance companies to ask for even higher rates. This causes even more non-severely-ill people to opt out of the exchange the next year, which leaves an even sicker insured population behind, and so on and so on. Eventually the insurance becomes so expensive, almost no one can afford it and the whole insurance approach collapses. That is the health insurance death spiral.
As you can imagine, the Obamacare supporters say the death spiral isn’t happening and the detractors say it is. It probably depends which state you’re in, but overall my sense is that it is happening, just at different rates in different states. It will eventually hit all of them if nothing is done.
Assuming that Hilary Clinton is elected president and the Republicans retain control of the House, nothing significant will change in the existing Obamacare laws and the whole exchange approach will eventually fail because no one will be able to afford it. Whether this is a good or bad outcome depends on the underlying political leaning of the commentator. The inescapable reality is that no one in the public or private sector is seriously disrupting the underlying reasons U.S. healthcare is so exorbitantly expensive, so our insurance costs remain exorbitantly expensive.
And while medical cost Rome is burning, U. S. senators are patting themselves on the back for their bipartisan efforts to pump even more money into new drug development, which will only increase costs further.
And so it goes.