I’ve been blogging a lot over the past week or so about the risk of an insurance market "death spiral" -- where young people stay away, so the only people buying insurance are old and sick, causing the cost of insurance to rise over time and pushing ever more healthy young people out of the market.
Adrianna McIntyre says that we shouldn’t worry; there’s a provision in the Patient Protection and Affordable Care Act that deals with this:
I’ve argued in the past that delaying the individual mandate for a year wouldn’t provoke a full death spiral; it would be an uncomfortable hiccup, but it’s not enough time for the whole market to unravel. More importantly, there are deep-in-the-weeds protections baked into the Affordable Care Act: risk adjustment, reinsurance, and risk corridors.
These programs -- collectively called the “three Rs” -- aid insurers if they wind up enrolling a population that is sicker and more expensive than projected. They do a crucial bit of policy work: we want plans competing on efficiency and quality, not their ability to attract the healthiest patients.
The programs have related functions, but risk corridors will play the biggest role if the individual mandate does get delayed. Their entire purpose is to stabilize premiums during the first three years of Obamacare, when it’s especially difficult for insurers to price plans.
Here’s how it works: exchange plans (QHPs) projected how much their risk pool would cost overall in 2014, their “target” cost. If they’ve significantly miscalculated -- or, say, if a mandate delay causes adverse selection that they couldn’t have predicted -- HHS will take action:
"The risk corridor mechanism compares the total allowable medical costs for each QHP (excluding non-medical or administrative costs) to those projected or targeted by the QHP. If the actual allowable costs are less than 97 percent of the QHP’s target amount, a percentage of these savings will be remitted to HHS (limiting gain). Similarly if the actual allowable cost is more than 103 percent of the QHP’s target amount, a percentage of the difference will be paid back to the QHP (limiting loss)."
Total transfer depends on how badly the insurer miscalculated:
Basically, today’s worst-case scenario is that HealthCare.gov takes months to fix and the mandate is delayed until 2015, resulting in widespread adverse selection. Insurers wouldn’t recoup all losses, but the risk corridor program provides their bottom line with a substantial buffer. Importantly, it doesn’t need to be budget neutral; if the math demands it, the government can pay out more than it collects through the program. This could be expensive -- the CBO scored the health law as though risk corridors were budget neutral -- but it could also be offset by foregone subsidies.
I don’t find this reassuring. These mechanisms were not put in place to prevent a death spiral, and they aren’t designed to do that. Rather, they were put in place to prevent an entirely different problem: insurers trying to cherry-pick healthy people out of the pool (by, say, offering a policy that comes with a free gym membership). The idea is that there’s a huge tax on excess profits -- and a subsidy for losses -- so that it doesn’t make sense to expend a lot of energy trying to get a better patient mix.
The mechanisms do ensure that insurers will not go bankrupt from getting a much older and sicker pool of folks than they expected. But I wasn’t really worried that insurers would go bankrupt; the major insurers have enough reserves to last them a year and a keen eye to their own self-interest. Rather, I’m concerned that insurers will raise premiums a lot next year, which will mean a big spike in subsidy payments and an adverse-selection death spiral among the folks who buy unsubsidized insurance. And since the risk adjustment transfers do not cover all their potential losses, insurers still have a pretty strong incentive to price based on their 2014 costs -- which is to say raise premiums by a lot.
Now, if McIntyre is suggesting that these adjustment payments might be used as a sort of slush fund to pay off insurers in order to nominally keep premiums low, at potentially massive expense to the federal budget, well, perhaps they can. I’m not a lawyer, so I won’t presume to comment on the legality of such a maneuver. I will, however, point out that this is not a good idea. It’s fiscally irresponsible at a time when budget deficits remain at near-record postwar levels. (Post-World War II, I mean.) And while many of the law’s supporters may feel that increasing the deficit is a trivial problem compared with the problems of the uninsured, this law was sold to the American public as something that reduced the deficit. The administration should not deliberately violate that trust -- not least because spiraling costs could put the law they championed in jeopardy. Big health-care expansions in states such as Tennessee have been rolled back in the past when it was discovered that they put too much pressure on the budget.
If we’re looking for reasons to be sanguine about a possible death spiral, I’m actually more hopeful about the subsidies than the risk adjustments. The subsidy calculation is a bit complicated, but here’s a simple summary: If you make less than 400 percent of the federal poverty level, the cost of the second-cheapest, or "silver," plan on your exchange (a moderately high level of deductibles and co-pays) is capped at 9.5 percent of your income or less. (The exact percentage starts very low and rises as your income does.) Effectively, that’s a hard cap on the cost of a reasonably comprehensive policy for a large percentage of the people who will be buying on the exchanges.
That may put a hard stop on the exodus of young, healthy people from the system. Once they’ve hit the cap, their premiums will stop rising. The cost to the federal government will go up, of course, and that’s a big problem, because we haven’t budgeted for a big adverse-selection problem. But this will probably mitigate at least some of the exodus that we saw in states like New York and Massachusetts.
However, I don’t find this too comforting, because it’s not clear to me whether this will be enough. If you’re a single person making $45,000 a year, it’s nice to know that you can’t be made to pay more than $350 a month for insurance. On the other hand, if you’re taking home something north of $2,500 a month -- less, if you’re self-employed -- then $350 a month for insurance with fairly high deductibles and co-pays might not be in the budget. We may lose young, healthy people well before they hit those caps.
And then there are the people who aren’t eligible for subsidies. My understanding is that they’re expected to be a relatively small portion of the folks who end up on the exchanges. But according to the Kaiser Family Foundation, 5 percent of the population was already buying insurance on the individual market. Many of them are ineligible for subsidies. But the same adverse-selection pressures will apply to them without the individual mandate because it will be hard to maintain any significant price difference between the exchanges and the rest of the individual market. The markets are complementary: If prices for similar policies are too different, unsubsidized consumers will simply buy wherever they are cheaper.
Does this mean that we are definitely going to have a death spiral? Of course I can’t say that; I’m not psychic. There are various steps that the administration might take, legal or quasi-legal, to try to get the insurers to keep selling cheap policies even as their costs rise. And as I pointed out a while back, the young may buy simply because this is now the law of the land, even if it’s difficult, and even if we delay the individual mandate.
But, of course, there was no way to be 100 percent certain that invading Iraq would turn out badly; smart critics of that policy argued (correctly) that invading Iraq ran unacceptably high risks. The goal was a great one: Free Iraq from a dictator who was a destabilizing geopolitical force and help the Iraqi people to establish a prosperous and functional democracy. But the downside risk of embroiling the U.S. in an unwinnable war that would kill a lot of Iraqis and destabilize the region even further was horrifying, and all too likely. Looking at the aftermath, I sure wish I’d listened -- and even more that our leaders had.
Which reminds me of something that I’ve been wanting to say. I admire the way that fearless liberals have come out to criticize the rollout of the exchanges -- much more quickly and completely than supporters of the Iraq War managed, I’m afraid. (Though of course, in fairness, the malfunctioning exchanges are right here where everyone can see them, not thousands of miles away.) But as with Iraq, I fear that the bitterness of the debate in the run-up is making the administration and many of its supporters discount too deeply the valid criticism coming from the opposition. It is true that I, and many others who are talking about the problems with these exchanges, opposed the health-care law; my preference is not for a delay but for completely getting rid of this law, and starting over with something that works better. (More on that later.)
But I’m also an American who wants our insurance market to work. My first preference is for Obamacare to go away, making room for a more market-oriented solution. Failing that, of course I want Obamacare to work as its designers envisioned, rather than destroying the market for individual insurance and costing the federal government boatloads of money that it doesn't have. It’s just that I don’t think this is the most likely outcome, and frankly, it’s looking less likely with every ham-fisted management decision that endangers the long-term health of the system and gains only some evanescent political advantage.
In this, I expect I feel much the same way as patriotic critics of the war who wanted the troops brought home ASAP because they thought that our efforts in Iraq were doomed -- but, failing that, would rather have seen their opponents proven right, their country prevail, and peace and prosperity come to Iraq.
That’s why I want to either see the whole law delayed for a year or see the whole law go forward -- even though I understand that, yes, the latter choice would mean hardship for uninsured folks who get hit with a fine. Not because it’s 100 percent certain that we’ll end up in a death spiral, but because a merely high risk of a death spiral is unacceptable to me, and I should hope to everyone else. Isn’t the foundational rule of health care to first do no harm?
Obamacare’s insurance market reforms were not designed to stand on their own. They’re designed to operate together; pull out one piece, and you risk breaking the whole thing. Don’t believe me? Then take it from someone you presumably trust: the Obama administration.
The minimum coverage provision [i.e., the individual mandate] is essential to ensuring that the Act’s 2014 guaranteed-issue and community-rating reforms advance Congress’s goals. … As Congress expressly found (and as experience in the States confirmed), those provisions would create an adverse selection cascade without a minimum coverage provision, because healthy individuals would defer obtaining insurance until they needed health care, leaving an insurance pool skewed toward the unhealthy.
The guaranteed-issue and community rating provisions ensure that all individuals have access to health insurance priced according to community-wide rates, rather than individual risk factors. Congress understood that, in a market governed by those provisions but lacking a minimum coverage provision, healthy individuals have an incentive to stay out until their need for insurance arises while, at the same time, those with the most serious immediate health-care needs have a strong incentive to obtain coverage. Premiums would therefore go up, further impeding entry into the market by those currently without acute medicate needs, risking a “market-wide adverse selection death spiral”…and restricting the availability of affordable health insurance -- the opposite of what Congress intended.
That’s from the solicitor general’s response to the Supreme Court. Of course, he was talking about a general repeal of the individual mandate, not a temporary delay. But if the administration announces a delay after insurers have committed to sell policies at prices that assumed a mandate (and functional exchanges), the administration may find it has thrown away the credibility it would need to persuade insurers to try again next year. Not to mention their credibility with young, healthy folks, who may simply assume that they can count on another delay.
Again, none of this is a 100 percent certainty. But the Affordable Care Act’s insurance market reforms have created a system prone to what Charles Perrow dubbed “Normal Accidents.” By "normal," he didn’t mean “minor” -- the lead exhibit was Three Mile Island. Rather, he meant something like “hard to avoid.” The system is both complex and tightly coupled: All the pieces are interdependent, so a failure in one part is apt to cascade throughout the market. This is not a system where you want to start pulling out one piece to see how well the rest can get along without it.
The administration clearly understood this -- right up to the point where a major component failed. Now it's apparently planning to keep the reactor running with as many pieces as possible in the hopes that none of it will unexpectedly blow up. This is not sound policy thinking, or even sound political thinking, and I think that all of us who care about keeping insurance available for ordinary Americans should try to talk them out of it -- for their good, as well as our own.
To contact the author on this story:
Megan McArdle at firstname.lastname@example.org