When Health Insurance Sticker Shock Meets The 'Death Spiral'

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The ObamaCare mystery question of the day is whether individuals will face higher health insurance premiums next year—and the short answer is many will.  But the bigger problem will be in years two, three and four, because some (maybe most) of the health care plans could go into what actuaries derisively call a health insurance “death spiral.”

We are being inundated almost daily with media stories about what will happen to health insurance premiums under ObamaCare.  Retired health actuary Mark Litow and I helped initiate that debate with an opinion piece in the Wall Street Journal last January.

We claimed that premiums could double for some individuals, especially young and healthy people who live in states that managed to keep health insurance premiums relatively low.  Several other groups, including a subsequent analysis from the American Academy of Actuaries, have generally confirmed our original assessment.

The threat of higher premiums has put the left in a projectile sweat because it defies the narrative that ObamaCare would be “affordable.”

And it’s not just ObamaCare officials who are worried; health insurers are also concerned.  As the Wall Street Journal recently reported, “The biggest health insurers are eschewing many of the exchanges out of concern that many of the individuals who will purchase coverage need it because they have chronic illnesses or other medical conditions that are expensive to treat.

“Too many sick patients could mean that the collective inflow of premiums insurers reap from the exchanges won’t cover their total costs.  And it remains unclear how many young, healthy people will sign up.”

That problem is exacerbated by the fact that the law is designed to overcharge the young and healthy so that older and sicker people can be charged less.  It’s a huge wealth transfer from the young to the old.  Problem is, the young don’t usually have much wealth to transfer.

The fear that the young and healthy will go AWOL next year has the Department of Health and Human Services (HHS) pumping out millions of taxpayer dollars in advertising in the hope of getting them to enroll.

The administration also has been funding studies and trotting out HHS Secretary Kathleen Sebelius to reassure everyone that health insurance will be CHEAP.  Her message is not to worry: The federal government will be subsidizing those premiums by—what else?—transferring wealth from taxpayers to those buying coverage on the health insurance exchanges.

Health policy analysts have rightly challenged the administration’s assertions, but they too are focusing on the first year.  And while the first year is a problem, it’s the subsequent years that could ultimately lead to the collapse of a health plan.

When actuaries set the premiums for the first year of a plan—ObamaCare has four new so-called “metal plans” (bronze, silver, gold and platinum)—they are working with a lot of unknowns.  The uninsured spend, on average, about 38 percent of what an insured person spends.  That means there will likely be a big utilization increase once the uninsured get coverage.

Plus, when people have been uninsured for a while, there is usually a spike above the normal utilization rate for some period of time, and then it eventually settles down to the normal utilization trend.  How much should actuaries factor in for that spike?

The actuaries make educated estimates and decide on a premium.  But they won’t have “experience”—actual utilization rates—for a year or 18 months.  If they get a disproportionate number of sick people in the pool, which ObamaCare is designed to do, premiums will rise.  That increase usually drives the healthiest people out of the pool, looking for lower rates to match their healthier condition.  The pool gets smaller and sicker, forcing up the rates again, driving out the next wave of people, and so on, until the insurance pool is very small, very sick and very expensive.

That’s the death spiral.

What’s happening now is that health insurers and actuaries across the country are trying to figure out how to price the plans.  In addition, they are getting political pressure in several states to keep those premiums as low as possible.  A lot of left-leaning politicians want to be able to claim ObamaCare really is affordable—even if it isn’t.

Because ObamaCare ignores—thumbs its nose at, really—every actuarial principle known to man, there is a very good chance that a number of the health plans, and especially those in the government-run exchanges, will enter the death spiral within a few years.

Summing up, getting the young and healthy to sign up for ObamaCare will only be the first challenge.  Getting them to stay, once they find out just how unaffordable the Affordable Care Act is, will be an even bigger hurdle.

