The health care reform death spiral

October 20th, 2009 | by Brian Schwartz |

James C. Capretta has a fine description of what economists call the “death spiral” that results from requiring insurers to issue policies to everyone (guaranteed issue) at prices that do not reflect their health risks (community rating). It’s happened in states, and it can happen nation-wide:

Insurance death spirals occur when regulators force insurers to offer coverage (“guaranteed issue”) at premiums below the known risk of those they are insuring, without any assurance that the shortfall can be made up elsewhere. When insurers comply with these rules and offer relatively low cost health insurance policies to all comers, quite predictably, many sick people step forward to sign up. When the insurers then try to turn around and charge higher premiums to the relatively healthy to cover their costs, the healthy, also quite predictably, are more reluctant to enroll because they can see the premiums they would have to pay would very likely exceed their health-care costs. So they often say “no thanks” to the insurance and decide to take their chances by going without coverage instead. As more and more healthy people exit the marketplace, insurers are then forced to raise premiums for everyone who remains, which only further encourages the lower risks to opt out. This vicious cycle of rising premiums and an increasingly unhealthy risk pool is called a ‘death spiral’ because it eventually forces the insurer to terminate the plan.

This is not a hypothetical, textbook scenario of what might happen to a poorly run insurance market. It has happened before — many times and in many places. See, for instance, the experience in Kentucky, and in Washington state, and in Maine too. There’s no reason it couldn’t happen nationwide.

Read the whole post at National Review Online: The Baucus Death Spiral.

(via Health Reform Hub.)

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  • Since the overwhelming majority of Americans want this kind of reform -- guaranteed issue, no denial of preexisting conditions, no dropping sick people, no price discrimination against sick people, and these pieces pull in strong majorities in Congress, they are certainly going to happen.

    All along, it was clear, instantly to those who understand economic and gave it a bit of thought that only if everyone signs up for comprehensive coverage would the cost of sick people be spread across a wide base.

    Thus the "mandate" -- requirement for everyone to buy coverage. Enforced by a penalty.

    But since there are always people worried that aliens will take over Earth, or the U.S. suddenly be like Cuba, etc., the mandate penalties are being lowered.

    The lower penalties threatens to result in the "death-spiral" described above.

    But, another approach is also being used -- to raise the affordability subsidies (paid to lower income households to help them buy health insurance) so that the costs of insurance will not be overwhelming for households even if of lower income.

    The idea is that this will reduce the number of people that choose to avoid getting coverage.

    One thing people forget about the mandate though.

    Until reform, if you choose to risk it and have no health insurance, then if you got some serious health situation, you would be liable for all of the costs you would be able to pay. Goodbye savings, hello debt.

    So...it's either a mandate on the one hand, or a clear risk of bankruptcy on the other.

    There's no free lunch.

    Getting the huge advantage of know you will get good health insurance no matter what is something that in turn you should have to pay for.

    Alternatively, we could let people choose to have no coverage, and then let them die when they have a real health emergency or situation, but...we're not that cruel.

    Instead, similar to speed limits, DUI laws, and other insurance requirements of many kinds, you have to pay to play.

    If you want health insurance yourself someday, then you have to participate.

    I think this is the reason the idea of the mandate itself has broad popular according to polls.

    Congress should suck it up, and set the mandate penalty (for having no insurance) to be equal to the full annualized average cost per uninsured person of free care in 2008.
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