Five Things You Need to Know About the Obamacare Death Spiral

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Not wanting to depart from a rich tradition of sensational reporting and hyperbolic claim-making, many media outlets along with television and radio talk show personalities have recently been reporting on a phenomenon which has been dubbed as the “Obamacare death spiral”. With millions of Americans still in the process of signing up for healthcare and joining the newly created insurance marketplaces, it’s important to separate fact from fiction it order to develop a better understanding of what the so called “death spiral” actually is and how it might affect those wishing to sign up for healthcare. Here are the five most important things you need to know about the so-called death spiral and how it might affect you.

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What is the Obamacare death spiral?

Anyone who’s followed healthcare news this past month or turned on a cable news show has likely heard politicians or pundits refer to “the Obamacare death spiral”. The most succinct explanation of what the death spiral actually is as follows: a scenario in which the healthcare premiums of individuals who sign up for insurance under the newly created insurance exchanges increase to the point at which enough young and healthy individuals are discouraged from enrolling, further increasing the price of premiums.

To gain a more complete understanding of the death spiral, it’s necessary to take a step back and evaluate one of the basic principles of the new healthcare law: the inclusion of the individual mandate. One of the driving principles behind including the individual mandate in the Patient Protection and Affordable Care Act was the belief that it would be an effective way to eliminate what’s known in economics as the free-rider problem. In economics, a free rider is an individual who utilizes goods or services without having to pay for them. With universal healthcare, the free rider problem is as follows: if healthcare is made available to all, but there’s no requirement for people to purchase healthcare, then sick and elderly individuals (those who need moderate or large amounts of n0n-emergency medical care) will be the primary consumers of healthcare while young and healthy individuals (those who would likely only need medical care in the case of an emergency, in which situation they could go to a hospital and receive care regardless of their ability to pay for it) would choose to forgo getting healthcare. The result of such a scenario is that the new insurance exchanges would create high-risk insurance pools which would likely pay out a lot in coverage. In order to make a profit under such a scenario, insurance companies would have to increase the cost of premiums.

The free rider problem had greater implications for the entire healthcare market because in order to make the risk pool stable and keep premiums down, there would have to be enough young, healthy people to balance out those who are older, sicker, or have a greater likelihood of requiring healthcare. The proposed solution to this problem was what would eventually develop into the individual mandate. The individual mandate, which is the requirement that all eligible individuals purchase healthcare, was first proposed in the 1990s by the conservative-leaning think tank, The Heritage Foundation, as an alternative to the single-payer system of universal healthcare. Democrats adopted the individual mandate as one of the underpinnings of the PPACA during the 2009 healthcare debates.

 

What conditions will trigger the death spiral?

An increase in premiums, while undesirable, isn’t enough to result in a “death spiral”. Instead, the Obamacare death spiral refers specifically to a situation in which a lack of young, healthy enrollees causes premiums to rise so drastically that young individuals are even further dissuaded from enrolling, causing premiums to hike even higher. This cycle of increasing premiums and decreasing enrollment is known as a positive feedback loop – or as the media is more apt to call it, a vicious cycle or death spiral.

While there’s no way to conclusively determine what proportion of enrollees will need to be healthy in order to create a stable risk pool that doesn’t exert an upward pressure on premiums, many healthcare experts estimate that around 40% of new enrollees under Obamacare would have to be young adults in order to create a stable risk pool. The Congressional Budget Office predicted in May 2013 that there would be a total of seven million new enrollees by the end of the first open enrollment period, currently set for March 31st, 2014. If this projection turns out to be accurate, it would mean that 2.7 million of the new enrollees would have to be young adults. While this bottom line of 40% of enrollees is a good starting point when it comes to determining whether or not Obamacare is likely to descend into a death spiral, there are a number of other factors that need to be examined, but more on that later.

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What does the current enrollment data show?

On January 13th, the Department of Health and Human Services announced (full enrollment data can be found here) that over 2.1 million Americans had signed up for coverage by December 28th, including 1.2 million who enrolled through the Federally Facilitated Marketplace (FFM). Of those enrollees, 24% were between the ages of 18-35 and an additional 6% were below the age of 18. One of the more encouraging statistics shows that during the month of December there was an eight-fold increase in the number of young adults who selected an insurance plan.

The Health and Human Services enrollment report also revealed a number of statistics about who is enrolling and what types of insurance plans those individuals are choosing. Of those who selected plans from State-Based Marketplaces (SBMs), 53% were female and 47% were male. 55% of individuals who purchased a plan through the FFM were female and 45% were male. Additionally, it was revealed that the most commonly chosen “metal” tier was the silver tier, with 60% of enrollees choosing silver plans, 20% of enrollees choosing bronze plans (the bronze tier contains plans which provide the least coverage), 13% choosing gold plans, 7% choosing platinum plans, and 1% choosing catastrophic plans.

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What other factors can affect whether or not Obamacare enters a death spiral?

A number of healthcare reporters, including Sarah Kliff of the Washington Post and Matthew O’Brien of the Atlantic, have pointed out that the 40% statistic that is commonly offered up as proof that Obamacare is headed towards a death spiral is somewhat misleading. While it’s important that young individuals enroll with the newly created healthcare exchanges, there are a number of other important factors which will contribute to the overall success of the PPACA. I’ve listed a few of them below:

State-by-state data matters: The Patient Protection and Affordable Care Act presented states with two options for setting up an insurance exchange. They could either create their own insurance exchange, which fourteen states opted to do, or they could default to the federal insurance exchange as the remaining thirty-six states did (some states opted for state-federal partnerships). As the Pew Research Center notes, the number of uninsured individuals and the demographic and health composition of those individuals varies from state to state. Since each state’s exchange is run independently, a large number of healthy enrollees in California won’t offset the effects of sick enrollees in Kentucky and vice versa.

The devil is in the details: It’s easy for journalists and pundits to throw out the 40% statistic without delving into further analysis of what’s actually needed in order to avoid creating a high-risk insurance pool which increases the price of premiums. In reality, however, that 40% statistic represents an attempt to paint a very clear picture with a large brush. While young people tend to be healthier than middle-aged or elderly adults, that isn’t always the case. A significant number of 20 something-year-old enrollees with chronic health conditions will drive up the price of premiums significantly more than 60-year-old enrollees that are in perfect health and don’t have a family history for most diseases. The point here is that younger individuals tend to be healthier than older individuals, but it’s not entirely accurate to equate ‘young’ with healthy or ‘old’ with sick.  The actual percentage of enrollees who need to be young individuals may change slightly depending on the overall health of enrollees both young and old.

The healthier you are, the longer you wait: This is an argument which has been cited by many of the defenders of the PPACA, and if history is any guide, will likely turn out to be right. This argument, in all its simplicity, states that the first people to enroll for health coverage are going to be ones who need it most: the elderly, the sick, and people with pre-existing conditions or a family history of certain diseases. On the other hand, young and healthy individuals are more likely to bide their time and wait as long as possible before they sign up. What this means is that the composition of insurance pools is likely to shift as we approach the deadline to enroll, which is set for March 31st. This same phenomenon occurred in 2007 in Massachusetts after the state set up its insurance exchange. The following graph, created by Jonathan Cohn over at the New Republic, shows how the composition of Massachusetts’ insurance pool shifted over time.

 

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What are the best and worst case scenario for Obamacare enrollment?

Out of all the plausible scenarios, the worst case scenario for Obamacare would be that the current statistics hold and around 25% of the final enrollees are young adults. This scenario, while not ideal, wouldn’t be that bad – and it certainly wouldn’t lead to a death spiral. The Kaiser Family Health Foundation, in their analysis of enrollment data up until mid-December, found that if young adult enrollment was 50% below target (meaning that young adults made up around 25% of the insurance pools), average insurance premiums would increase by 2.4%. While such a scenario would cause the list of President Obama’s hollow promises to grow, it wouldn’t be enough of an increase to cause a death spiral.

The best case scenario is one in which there is a significant uptick in the percentage of young adults who are purchasing healthcare plans as we creep closer to the final deadline to enroll and avoid the penalties which were created as an enforcement mechanism. If the 40% threshold (or something reasonably close to it) is met, it’s possible that premiums for insurance plans purchased through the government-run exchanges might be lower than average. Such a scenario isn’t out of the question. Business Insider reported that, by early December some states running their own exchange (Maryland for example) already had young adult enrollee percentages as high as 27%.  The most compelling argument for this scenario is also one of the most well known – young people they’re invincible. Keeping in mind the assumption that many young and healthy individuals will wait to the final days before trying to enrolle, Larry Levitt, Vice President of the Kaiser Family Foundation is actually encouraged by the number and percentages of young adults who have purchased healthcare. “In many ways, I’ve been pleasantly surprised at how many young people have enrolled early on” he states.

There you have it. The not-so-deadly and not-so-spirally death spiral in a nutshell.

 

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