What Is An Insurance Death Spiral? Could It Bring Down Obamacare?

A spiral staircase inside one of the Vatican M...
A spiral staircase inside one of the Vatican Museums (Photo credit: Wikipedia)

Articles are popping up everywhere about the “insurance death spiral”. Many analysts predict the death spiral will destroy our new Obamacare health plan. So what is this ominous death spiral? Is there any reason to be worried?

How it Works

According to Larry Levitt, a vice president at the Kaiser Family Foundation, “A death spiral is a[n insurance] pool where you have disproportionately sick people enrolling, which causes premiums to go up, and then healthy people drop out because it’s a bad deal, and then premiums rise more, and so on”. There have been concerns about young, healthy people failing to enroll in Obamacare, thus undercutting the effectiveness of Obamacare when the premium pool becomes too small to sustain the entire program. If this occurs, the government will be forced to fund the program with funds from somewhere else… Naturally, people are concerned this will ultimately mean an increase in taxes.

Another concern is that people will seek insurance outside the ACA marketplace. Forbes Magazine claims that Obamacare premiums will eventually rise and people will begin to look outside the marketplace for more affordable options, despite the federal subsidies.

Several Safeguards are in Place

Despite the media’s rampant scare-mongering, several experts have emerged who believe Obamacare will endure. According to a Washington Post Blog, Obamacare can’t possibly fall into death spiral, because there are several fail-safe mechanisms in place. First, the tax subsidies – people won’t drop out of Obamacare because if they can’t afford the coverage, they are eligible for a tax subsidy from the federal government. Second, risk corridors – this means that when an insurance company’s actual cost turns out to be higher than what they estimated, the federal government pays them a portion of that increase, to offset the losses (this principle also works in reverse – if an insurer’s cost is lower than estimated, they pay money to the government). This will help insurers get through the first few years of Obamacare without too much risk (and keep them in the marketplace). Third, reinsurance – the federal government will partially reimburse insurers for any really expensive new policyholders, i.e. someone who burns through $50,000 of benefits in one year. Last, the requirement to purchase Obamacare (or, the individual mandate) – the federal government is banking on the fact that people will purchase coverage under the ACA because they want to avoid the fees. To see what your fee would be, see my article What Happens If I Don’t Buy Obamacare Coverage? .

The Role of Insurance Commissioners – Helpful or Counterproductive?

According to a this CBS article, the American Enterprise Institute contends that premiums won’t increase significantly because State Insurance Commissioners will be under political pressure to keep premiums affordable. In the past, Insurance Commissioners have overwhelmingly failed to keep insurance premiums low. Now, in a refreshing change, the spotlight will be on them. However, if an Insurance Commissioner is vetoing premiums, there is currently nothing to stop insurers from simply leaving the market. Three large insurers have already largely stayed out of the Obamacare market: Aetna, United Healthcare, and CIGNA.

Conclusion:  While it seems that no one can predict exactly how effective the ACA insurance marketplace will be, the general consensus is that the safeguards will keep it afloat for the first few years, but after that, anything could happen.

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One comment

  1. No matter how young and healthy you are you can still have an [expensive] accident. Just something to think about from the Georgetown University health plan, as advertised on the Washington Metrorail.

    Smart people would. Kind of like the Aflac agent I talked to last week. Smart people go running for insurance and security.

    Like

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