Are the Exchanges Doomed to a Death Spiral?

There is talk that the insurance exchanges are headed for doom – people were sicker than expected and rates are rising fast, perhaps driving healthier people out. Before we start planning the funeral, let’s examine the evidence.rumors_of_my_death

Death Spiral Proof: John Goodman states in Forbes that “around the country, insurers are asking for rate increases in the range of 20 to 40 percent.” Proof positive that enrollees were much sicker than the insurers expected.

Counterpoint: The rate increases are not surprising, since insurers never before had low-income, uninsured people as customers; six out of 10 exchange enrollees in 2014 had previously been uninsured. Compared to staid, predictable privately insured customers – who by definition could afford the cost or who had an employer paying most or all of it –exchange enrollees were wild animals.

Insurers had difficulty anticipating what these new customers would be like – how sick they would be, how much pent up demand they would have, and how they would use the plan.

Score: We’ll score one for the death spiral side on this one – the rate increases are stemming from sicker-than-expected people, whether that is because insurers undershot themselves or because the exchanges are indeed attracting mainly sickos.

Death Spiral Proof: Seventy-six percent of the eligible people at 100 to 150 percent of federal poverty are enrolled in exchange plans; compared to two percent of the eligible at over 400% of federal poverty.   More people getting high subsidies – who also tend to be sicker – are using the exchanges.

Counterpoint: The purpose of the exchange is to deliver subsidies to lower income people. The fact that higher income people did not use the exchange is logical and not an ominous sign. The high income people must be buying elsewhere, since they have the lowest rate of uninsurance of any of the income classes.

Score: Half a point for each side, since it is true that the exchange is serving a high proportion of people at lower income levels and higher illness levels.

Death Spiral Theory: (Note we have run out of death spiral proof and are now onto theory.) Given the high cost/high illness population and the rising rates, healthy people will choose not to renew. This will leave the remaining group with fewer low-cost healthy people, and rates will go even higher in the future. Every year low-cost healthy people will leave, until only the very sickest people find it attractive to buy health insurance.

Counterpoint: A death spiral relies upon sick people staying sick and buying insurance; and healthy people staying healthy and skipping insurance year after year. But healthy people do not remain low cost year after year; eventually, their pet ferret will bite them, their teenager will get severe and mysterious headaches, or their trick knee will play its last trick. In the following year, they might think twice about skipping health insurance. Likewise, sick people do not necessarily remain high cost year in and year out. A recent study on working age people found that a high cost person (in the top 10% of spenders) has a greater than 55% chance she will not be a high cost person a year later.

Score: Points off for the death spiral team. Their theory relies upon people knowing in advance whether they are sick or healthy, acting upon that belief by buying or skipping health insurance, and then having medical bills that match their expectations. This has to continue year in and year out, in order for the death spiral to gain momentum, sucking in sick people, spitting out healthy people, and raising rates.    

Final Tally: The exchanges have a ways to go before they can be declared death spirals. Characteristics of the exchanges – sicker people, lower incomes – are inborn traits, not signs of a death spiral to come. Rising rates are more about the insurers’ unfamiliarity with the exchange population than they are about the exchange itself or its future.

Like Mark Twain, the exchange can say the report of my death was an exaggeration.

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