The Affordable Care Act and the Death Spiral

Anything called a “death spiral” sounds very ominous. But according to John Goodman of the National Center for Policy Analysis, our new healthcare law is traveling down this very path.

As Goodman explains, a death spiral – for the insurance set-up, not people – happens for the very reason the ACA should exist: the costs get 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.”

Goodman says while government price fixing and an unregulated insurance market commonly lead to a death spiral, the ACA has yet another glaring catalyst- enrollment difficulties. He predicts that without improvement, “Only the sickest and most desperate customers will persist long enough and hard enough to successfully enroll, while the young and healthy will find better things to do with their time.”

At Job Creators Network, we believe the problem with the Affordable Care Act is not what it tried to do, but what it failed to do: control costs. Putting people in charge of their own health care dollars is one way to achieve this. Watch our newest video for more on why people are re-thinking the health care law: 

Other recommendations from Goodman worth consideration:

Same subsidy for everyone. Any time the government subsidy is greater in the exchange than it is at work or in a risk pool, adverse selection is virtually guaranteed. The way to prevent that is to make sure the subsidy is uniform.

No dumping. In general, no health plan should be able to gain financially by dumping their sickest members on some other plan. If Detroit wants to send its retirees to the exchange, then insurers ought to be allowed to charge Detroit retirees a special premium equal to the average cost of that group. Similarly for risk pools — whether state or federal.  They should have been required to maintain their previous level of effort, either by continuing their pools or by paying supplemental premiums for those members who go to the exchange.

Enforce a COBRA Rule. People coming to the exchange from an employer plan should be required to exhaust their COBRA benefits before being eligible for a new plan. This is another way of discouraging some health plans from dumping their sickest enrollees on other plans.

Penalize Gaming. Medicare Part B, Medicare Part D and Medigap insurance are all guaranteed issue and community rated. Yet they have no mandate. The reason that works is because people are penalized if they do not enroll when they are eligible. Under Medigap, the person who waits to enroll until he has a health problem can be medically underwritten in many cases. If this had been done with (the ACA), the controversial mandate (the one that went all the way to the Supreme Court!) would never have been necessary.