A Private Health Insurance Death Spiral Will Begin on September 23

ObamaCare will have a very long roll-out. While some provisions have already come into effect, others will take many years. When will individuals and businesses first see a consequential impact on their health benefits? I believe that it will be the “slacker mandate,” which commands that health plans cover “children” up to 26 years of age on their parents’ health benefits; and comes into force six months after enactment.

September 23 will mark the beginning of the “death spiral” of private health insurance. Most people correctly anticipate the full force of the death spiral in 2014, when insurers will no longer be able to charge actuarially accurate premiums for applicants with pre-existing conditions. Applicants can wait until they become sick, and then apply for coverage which insurers must offer at a premium which is initially artificially low. This causes healthy people to drop out; and the cycle continues until the risk pool collapses. Insurers must then raise premiums to cover the guaranteed losses and avoid insolvency.

The only way to stop this is to punish healthy people who choose not to buy insurance, via a tax, fine, mandatory payroll deduction of premium, or whatever you want to call the money that the government seizes from you to hand over to Aetna, CIGNA, or whichever health plan the future Health Czar (“Health Choices Commissioner”) deems acceptable. One of the elements of ObamaCare that guarantees its instability is that the financial penalties for not complying with the mandate to carry insurance are too low to ensure that people actually maintain coverage. In 2016, the penalty will be $695 per individual [H.R. 4872§ 1002(a)(2)(c)].

Firms with over 50 employees face a fine of $2,000 per employee if they don’t offer benefits, or have low-income employees who are receiving “premium tax credits” [H.R. 4872 § 1003].  However, the fine is reduced by the first thirty employees. So, if an employer has 55 employees and offers no coverage, the assessment will be $2,000 times 25, which is $50,000. Allocated over the entire workforce of 55, the fine per employee is only $909. (The fine for employers who offer coverage but also employ workers who receive premium tax credits is a little more complicated, but the consequences are similar.) Businesses which employ 50 workers or less are exempt from these penalties. And even these penalties only take full effect in 2016, two years after the rules that require insurers to accept all applicants, regardless of health status. It is therefore likely that small and medium-sized employers will bail out of health benefits, once the government has established the “exchanges” into which they can dump their employees, often for highly subsidized coverage. (This is what Factcheck.org means, when it claims to debunk the Republican conclusion that ObamaCare requires 16,500 new IRS agents by arguing that they will actually be doling out money, rather than taking it in.)

But we don’t have to wait until 2014 for the collapse to begin. The first phase of the death spiral will occur as early as the end of September, when very sick young adults present themselves to their parents’ employers, seeking coverage. The Senate Democratic caucus has unwittingly demonstrated this via a promotional video trumpeting the “reform.” The video’s subject is Freddie Effington, who enjoyed coverage on his parents’ employer-based plan until he turned 21 in 2005. He then went without coverage for two years “hoping to get to the job position” whereby he would get his own employer-based benefits. Tragically, Mr. Effington was diagnosed with Hodgkin’s Lymphoma in 2007.

Now, it is important to understand that Mr. Effington (and his parents) had choices. He could have applied for individual health insurance when he turned 21. As a healthy young man, he would likely have been able to buy it at a reasonable premium in Alabama, his state of residence. Or, he could have taken advantage of provisions of the Health Insurance Portability & Accountability Act (HIPAA), by which he could have applied for coverage without underwriting [45 CFR § 148.120]. HIPAA has significant flaws (which partially explain why the call for “reform” continued after it was passed in 1996). However, it required that individuals maintain continuous creditable coverage to benefit from inclusion of coverage for pre-existing conditions. The requirement to maintain continuous creditable coverage reduced the risk of a death spiral by relying on individual responsibility rather than government power.

The new “reform” blows away that fundamental protection. As of September 23, young adults who are seriously ill and under 26 will immediately present themselves to their parents’ employers, seeking coverage. However, the majority who are healthy will not. Imagine, for example, that you are a plumbing contractor with a dozen or so employees, who offers health benefits. On September 23, you will face this unpredictable liability. One of your workers might show up seeking coverage for his 23-year old son with Hodgkin’s Lymphoma; and perhaps another one with a 25-year old daughter recently diagnosed with an equally dreadful illness. You simply cannot predict how many such cases will present themselves. As a consequence, you will seriously consider dropping health benefits as September 23 approaches.

Some number of innocent employees will be victimized by losing health benefits because of this “slacker mandate,” and compelled to navigate a health-insurance environment that is preparing for chaos. This will present an interesting opportunity for ObamaCare’s political opponents, as the country slides into the mid-term elections.

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