ObamaCare Death Spirals

by John Goodman,

The ObamaCare exchanges are in danger of experiencing death spirals.

A death spiral occurs when pricing in an insurance market spins out of control. If an insurance pool turns out to be more expensive than originally thought, the insurer must raise its premiums. As the premium rises, some healthy people drop their coverage. With a sicker group of enrollees, the average cost per enrollee will be higher and premiums must be increased again. That leads more healthy people to drop out — leading to more premium increases.

This cycle continues until the only people left in the pool are very sick and very expensive. They must be charged a premium that roughly equals the cost of their care. But this is a premium they can’t afford, of course, and so it is a premium the insurer cannot collect. The ultimate end of a death spiral is the insurance pool equivalent of bankruptcy.

The most common reason for a death spiral is government price fixing, usually in the form of community rating and guaranteed issue (where everyone is charged the same premium and the insurer must take all comers). Healthy people leave the pool because they are being over-charged. Sick people remain because they are being under-charged. This would not occur if each enrollee were charged a premium that reflects his/her actuarial risk.

The most obvious reason that Obamacare is in danger of experiencing death spirals is the difficulty of enrolling. Unless things improve, only the sickest and most desperate customers will persist long enough and hard enough to successfully enroll, while the young and the healthy will find better things to do with their time.

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