Faulty Website is Only the First ObamaCare Crisis

Who brought the phrase “health Insurance death spiral” into the ObamaCare debate?  Was it Sarah Palin?  Rush Limbaugh?

While it may seem provocative or alarming in context of the current political climate, it’s actually a common term in the vocabulary of health insurance actuaries.

Insurance-death-spiral2The setup for a classic insurance death spiral is one of the most hyped features of ObamaCare, guaranteed issue.  This is the insurance industry label for offering health insurance with no health screening so that those with pre-existing conditions are automatically accepted.  A predictable response to guaranteed issue is the phenomenon the insurance industry calls “adverse selection,” the tendency of people who are already sick or believe they are at risk of needing medical services in the near future to buy health insurance, while those in good health tend to forgo the expense.

We exposed the President’s politically motivated deceptions regarding pre-existing conditions here.  Put bluntly, the only way an insurer can absorb the extra cost of guaranteed issue and not go broke is by collecting extra money from healthy people.

The death spiral begins if fewer healthy people than anticipated sign up and pay premiums.  The insurer loses money and must set premiums even higher, driving away even more healthy people.  Eventually, the premiums become so high that only those who need immediate, expensive, medical care will buy a policy and the company has no choice but to complete the death spiral by exiting the health insurance business.

After three weeks of website failure the President stepped up to the cameras to attempt to reassure America:

Little ObamaYou’ve probably heard that the new website where people can apply for health insurance and browse and buy affordable plans in most states, hasn’t worked as smoothly as it was supposed to work [but] the product of the Affordable Care Act…is quality health insurance that’s affordable. And that product is working. It’s really good…the health insurance that’s available to people, is working just fine. In some cases, actually, it’s exceeding expectations

It’s true that the website is not the insurance.  But it’s also true that when the ObamaCare website crisis has finally been resolved the next crisis will be a looming death spiral.  Some 50 million Americans are not covered by employer provided insurance or government programs.  In some states Medicaid eligibility criteria have been expanded to accept higher incomes so some of those uninsured will find a home in this program that provides free health care paid for by taxpayers. 

Those with pre-existing conditions who don’t qualify for Medicaid will be highly motivated to buy policies on the exchange.  But there are two strong, adverse selection incentives pushing back on the fundamental assumption that underpins ObamaCare, that nearly all young, healthy people will obey the individual mandate and purchase policies at prices high enough to cover the extra cost of guaranteed issue:

  1. The fine for not buying insurance isn’t nearly as much as the insurance for most people, and the law puts limits on the IRS’s ability to collect it, making it less than fully enforceable.
  2. The same guaranteed issue that enables people who are already sick today to make one monthly premium payment and then be “covered” is also an incentive for the young, healthy people who are supposed to get stuck with the cost to postpone buying their own insurance until such time as they need expensive medical services.

Why not “beat the system” by going without insurance until you need it?  After all, the President spent two years demonizing insurance companies for “discrimination against’ the uninsured, deliberately planting the perception in the mind of the public that those companies could easily cover pre-existing conditions but simply chose not to out of avarice.

Today, all the attention is focused on the dysfunctional website.  But fixing it will only accelerate the onset of worse troubles.

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