Death Spirals
A death spiral occurs when pricing in an insurance market spins out of control. If an insurance pool turns out to be more expensive than originally thought, the insurer must raise its premiums. As the premium rises, some healthy people drop their coverage. With a sicker group of enrollees, the average cost per enrollee will be higher and premiums must be increased again. That leads more healthy people to drop out — leading to more premium increases.
This cycle continues until the only people left in the pool are very sick and very expensive. They must be charged a premium that roughly equals the cost of their care. But this is a premium they can’t afford, of course, and so it is a premium the insurer cannot collect. The ultimate end of a death spiral is the insurance pool equivalent of bankruptcy.
The most common reason for a death spiral is government price fixing, usually in the form of community rating and guaranteed issue (where everyone is charged the same premium and the insurer must take all comers). Healthy people leave the pool because they are being over-charged. Sick people remain because they are being under-charged. This would not occur if each enrollee were charged a premium that reflects his/her actuarial risk.
Death spirals can also happen in an unregulated insurance market. It can occur, for example, if insurers offer to renew coverage indefinitely without adjusting individual premiums for changes in health conditions, while the enrollees are free to leave and find cheaper insurance if their health condition is better than average. (See the description here and note that “change of health status insurance” would eliminate this problem.)
Why is this topic important? Because the ObamaCare exchanges are in danger of experiencing death spirals. The most obvious reason is the difficulty of enrolling. Unless things improve, only the sickest and most desperate customers will persist long enough and hard enough to successfully enroll, while the young and the healthy will find better things to do with their time. As Yuval Levin explains:
People who are highly motivated to get coverage in a community-rated insurance system are very likely to be in bad health. The healthy young man who sees an ad for his state exchange during a baseball game and loads up the site to get coverage — the dream consumer so essential to the design of the exchange system — will not keep trying 25 times over a week if the site is not working. The person with high health costs and no insurance will.
Even if the glitches get fixed and the exchanges operate as smoothly as originally envisioned (buying insurance was supposed to be as easy as buying an airline ticket at Travelocity), ObamaCare faces a triple whammy that almost no one is paying attention to.
Here are the problems:
- State risk pools and the ObamaCare risk pools are about to officially close and dump their high-cost enrollees on the health insurance exchanges.
- Both public and private employers are about to dump their retirees on the exchanges.
- Employees who are trapped by job lock will leave their employer plans and head toward the exchanges as well.
In all three cases, people with above-average health care costs will be attracted to the plans in the exchanges and odds are they will go for the gold and platinum plans while they’re at it — because this insurance will look cheap, compared to their expected health care costs.
Before going on, let’s stop to reflect on how monumentally stupid the designers of ObamaCare were in even allowing the possibility of what is about to happen. More on that below.
On January 1, 2014, the state of Texas will formally end its risk pool and the 23,000 people who are enrolled there are expected to seek insurance in the Texas (ObamaCare) exchange instead. It will be a good deal for the state, which has been spending more than $12,000 per enrollee operating the pool. Other states will follow suit. So will the ObamaCare risk pools — some run by state governments and some run by the federal government — which currently insure about 107,000 people.
Then there are city governments throughout the land that have promised post-retirement health care benefits to retirees who are not yet eligible for Medicare. This is the age group that is the most expensive to cover. Under health reform, not only are there federal subsidies in the exchanges, the law limits the premiums charged to no more than three times the premium charged to enrollees in their twenties (although the actual cost of coverage is more on the order of six to one). Detroit, for example, is trying to send 8,000 city retirees to the Michigan exchange.
Similar efforts are expected in the private sector. According to a Towers Watson survey, more than half of employers that offer health care benefits to pre-65-year-old and post-65-year-old retirees plan to discontinue them.
Then there are those currently trapped in jobs they would like to leave but don’t because their health condition would cause them to pay very high premiums or perhaps be denied insurance altogether. Here is liberal columnist Wendell Potter:
An untold number of Americans for all practical purposes are indentured servants in large corporations, locked into jobs they don’t like but won’t dare quit because of their employer-subsidized health coverage.
By making the discriminatory practices of insurance firms unlawful, which will bring to an end their ability to cherry pick only the policyholders they want — the young and healthy — the Affordable Care Act will give American workers the key to that lock.
I’m confident that this newfound freedom — taken for granted in every other developed country — will usher in an era of entrepreneurship and new business development, the likes of which we’ve never seen before. Our best and brightest will be able walk away from the jobs they’ve been shackled to and go into business for themselves or go to work for a smaller company — even one that doesn’t offer health care benefits — without fear of being uninsured.
Okay, even allowing for a lot of hyperbole, I think Potter is right about one thing. Millions of people will leave their employer plans and enroll in the exchange — paying premiums well below the expected cost of their care.
[There is a fourth whammy: Employers that self-insure (covering more than half of all insured workers) will find ways to dump their sickest employees on the exchange. The methods are somewhat complicated and it will take them a while to figure it out, however. So I’ll reserve that for another day.]
What should the ObamaCare designers have done? Here are four common sense suggestions:
Same subsidy for everyone. Any time the government subsidy is greater in the exchange than it is at work or in a risk pool, adverse selection is virtually guaranteed. The way to prevent that is to make sure the subsidy is uniform.
No dumping. In general, no health plan should be able to gain financially by dumping their sickest members on some other plan. If Detroit wants to send its retirees to the exchange, then insurers ought to be allowed to charge Detroit retirees a special premium equal to the average cost of that group. Similarly for risk pools — whether state or federal. They should have been required to maintain their previous level of effort, either by continuing their pools or by paying supplemental premiums for those members who go to the exchange.
Enforce a COBRA Rule. People coming to the exchange from an employer plan should be required to exhaust their COBRA benefits before being eligible for a new plan. This is another way of discouraging some health plans from dumping their sickest enrollees on other plans.
Penalize Gaming. Medicare Part B, Medicare Part D and Medigap insurance are all guaranteed issue and community rated. Yet they have no mandate. The reason that works is because people are penalized if they do not enroll when they are eligible. Under Medigap, the person who waits to enroll until he has a health problem can be medically underwritten in many cases. If this had been done with ObamaCare, the controversial mandate (the one that went all the way to the Supreme Court!) would never have been necessary.
I’m glad you pointed out that the free market isn’t immune to death spirals. We need to have realistic expectations. The difference is, in the free market a death spirals occurs because people are becoming better off elsewhere, in a regulated market, perverse incentives cause people to act against their interest.
I’ve had my concerns about focusing on the system glitches when arguing against ObamaCare, but you make some great points here. The glitches are more than just a minor annoyance.
Very timely.
The bottom line is: Sick people will flock, healthy ones will flee.
The points that you’ve just made all lead to the same end: a system that spins out of control faster than even the detractors have imagined.
“Before going on, let’s stop to reflect on how monumentally stupid the designers of ObamaCare were in even allowing the possibility of what is about to happen.”
We need to be cognizant of the possibility that this was all done for a reason. The left never wanted an ObamaCare type system, they wanted and still want single-payer. I’m wary that they introduced a system designed to fail, but fail in such a way as to whet enough people’s appetites for government run health care that the push for single payer would have plenty of support.
I’m sure they’ll find a way to turn a government failure into a condemnation of the free market.
“Never attribute to malice that which can be adequately explained by stupidity”.
I think you give them way too much credit.
Failing with major government muck ups is not the way to convince the populace into having the govt. take over.
Actually, speaking as one on the left, I and others would prefer single-payer, in part precisely because it avoids the dumping, gaming, etc problems outlined above, but more importantly, because unlike Obamacare, it actually would cover everyone.
We accepted Obamacare, not out of some nefarious calculated plot to hatch a system that would fail, but because it’s all we could get. And even that was a hard sell.
That said, if you are suggesting that, once introduced to the idea that access to care is a right, Americans will agree , and that, if Obamacare fails, they will decide that returning to a time when insurance companies could dump people in order to remain profitable is not an acceptable solution, that they might therefore be more inclined to embrace single-payer as a solution taht covers everyone.
if you are suggesting that could happen, and furthermore, if you are suggesting that the left would be OK with that, well guilty as charged.
What is wrong with charitable hospitals? They will now be fined if they can’t jump through gov’t hoops to prove they are helping people in financial need. A one payer system will lead to rationing and little in innovation. Public housing is not the gold standard. Do you think any society can provide gold standard care to the masses? It will be substandard and rationed. I hope you are very young. A 72 year old Britain had occluded carotid arteries and decided to go back to England for the needed surgery so it would be covered by her countries one payer system. Problem is when she saw the doctor in England he agreed with his American counterpart but had to inform her that England’s National health plan does not cover that surgery for women her age. She had to come back to the U.S. to pay privately for the surgery.
Problem with this picture when we go one payer no longer will there be any choice …you won’t even know there are options because your doctor will be told by the Independent Committee what you are allowed to treat. RIP AMERICA as we knew it.
Wendall Potter’s criticisms of the current system are just, although I obviously disagree with him on ObamaCare.
Is this supposed to be a recipe for reform, or just a slightly premature obituary?
I think it is both.
It is going to fail, but if they wanted it to fail less they should’ve done these things…
I agree, and in fact have often stated that the PPACA Exchange (now called The Marketplace) would very quickly become a high-risk pool. Even back when it was HR 3962 (which did not pass) it was obvious where it would lead. This adverse risk selection will destroy private healthcare insurance, paving the way to government single-payer, which was the intent all along.
I would think you would have cited this:
“In 2012, the average annual claims cost per enrollee was $32,108.40 Costs varied widely across the states from a low of $4,276 per enrollee to a high of $171,909, with a median of $30,953.50 Not only do claims cost vary across states they also vary across enrollees. In fact, the relatively high average claims per member in the PCIP program are a result of a small percentage of enrollees with average annual claims of $225,000 per person. A recent analysis of claims incurred over a one-year period showed that 4.4 percent of PCIP enrollees accounted for over 50 percent of claims paid, while approximately two-thirds of enrollees experienced $5,000 or less in claims paid over the same period. Individuals incurring high annual costs tend to present with multiple, complex diagnoses, including cancer, heart disease, and degenerative bone diseases.” http://www.cms.gov/CCIIO/Resources/Files/Downloads/pcip_annual_report_01312013.pdf
Insurance in every other field is about sharing risk. In health care it has rapidly turned into sharing costs. Nobody wants to pick up the check when they haven’t had the meal.
I’ve been on the payer side of health insurance and I saw that, in one year, out of 80,000 covered lives, 23 individuals “broke the bank”.
The dysfunctional technology will serve as a barrier to the people needed most, the young, healthy individuals who are expected to pick up the burden of the older, sicker population. Young people like technology, but they expect it to work flawlessly.
I’ve also predicted that Sebelius would wind up taking the fall for all of the failures. If I were her I would have resigned in April 2010.
At least Obama is doing something, that’s more than the Republicans can say.
I wouldn’t say that doing something for its own sake is good. This will certainly make our health care worse and cost more money.
Not true:
http://rsc.scalise.house.gov/solutions/rsc-betterway.htm
Not to mention, free market advocates like the NCPA have been promoting consumer driven health care as an alternative for years.
Adverse selection will always be a problem as long as we have fragmentation of health care financing through a multitude of public and private programs. Efforts to reduce the inequities, such as risk adjustment, will always fall short and only add to the tremendous administrative excesses in our health care financing.
Totally separating health care benefits from health care financing by establishing a single universal risk pool would eliminate this problem – a single payer national health program such as an improved Medicare program covering everyone.
Don–“Administrtive excesses” are the very core of government health plans, as seen in the present Obamacare stack of micro-regulations. Moreover, they are hard to vary by market conditions, customer, or by stages of medical innovation. What the US has right now is a living experiment in the failure to have adequate, wise management talent that can even comprehend what this law will do to the existing healthcare system, and know how to modulate its framework to avoid the worst effects of legislation by slogan, not by reasoning. I’d much rather have the market free to innovate than have any kind of frozen system.
And, if Obama’s failure to recognize the poor performance of this exchanges debut is any indication, the worst risk we have in a national system is that our elected leaders are devoid of the kind of experience that would make them avoid so many basic errors, such as the expectation that young people would act in any way other than in their own interests.
Wanda J. Jones, President
New Century Healthcare Institute
San Francisco
I am no fan of Obamacare, and believe it will be one of the most destructive forces on our already sick economy, but that being said, I disagree with part of your article:
Medigap insurance is not Guaranteed Issue and Community Rated in many states, perhaps in most states. If you miss your 6 month initial enrollment window at 65, then you are SOL unless you can pass underwriting. Also, if you enroll late and manage to still get Guarantee Issue because of a Special Enrollment Period (SEP), you still pay a higher premium via age rating in my state of Florida (Medicareland) and in many other states.
Medicare Advantage and Medigap have always had an effective mandate because not only do you pay penalties if you enroll late, but you are also effectively locked out until Open Enrollment periods come around. If you are for instance eligible for Medicare Part B in November, and you have not enrolled by March 31st of the following year, you are then locked out of Medicare part B for 15 months !! Should anything serious happen during these 15 months, you end up in bankruptcy court, and oh, by the way, when you do get to enroll, you do so with a lifetime penalty surcharge.
Obamacare needs a STRONG mandate, (it does not have one now) because unlike someone who is 65 and still sort of relatively healthy, the time to face reality for a healthy 21 year old may be 30 or 40 years, more than long enough for the whole program to enter the death spiral, crash and burn…to fine ash.
“Should anything serious happen during these 15 months, you end up in bankruptcy court”
Many seniors with limited assets declined and continue to decline gap insurance in Florida where the rates are partly determined by zip code. That leads to a considerable increase in their discretionary spending especially in certain areas.
Bankruptcy might be a concern, but how much more risk do Medi-gap uninsured carry than their counterparts that carry the policy? Medicare patients have a lot of out of pocket costs so bankruptcy can occur in the most fully insured individual. Most without Medi-gap will find providers that will take less or no money for the 20% and the hospitals knowing a person will go bankrupt will mostly settle for what they can get. They already got 80% and the 20% is still limited under the Medicare prevailing rates.
In the end Medi-gap could be called a rip off, but those with assets will mostly carry it to diminish the large risks.
You missed my argument about the 15 months without part B.
The seniors with limited funds don’t have a problem. They can take Medicare Advantage or stay in just A and B. They don’t need the “risk” coverage that a Medigap policy provides, because the have nothing of value to cover. When they have that liver transplant for $300K they simply provide evidence of their poverty, pay the hospital $10/mth going forward, and let the rest of us pay his/her bill through higher prices on everything.
The senior who has income and assets, yet ignores the “mandate” to pay for Part B at 65 is the one that potentially ends up in bankruptcy court.
Yes, you are correct.
My point was that seniors on Medicare can go bankrupt with or without expensive Medigap policies. Many seniors without significant assets choose to keep their money and not buy Medigap because they perceive they are better off without it. A lot of them went to Medicare Advantage programs when it became available. We agree.
Good morning, John–
It is Monday and so I look forward to your latest blast with anticipation, and today’s offering did not disappoint.
It offers a prime example of the flaws of the health care debate in America. Instead of focusing on health care, we focus on a completely dysfunctional health care financing system.
We can’t fix health care financing until we fix health care delivery.
The sickest of the sick who are at the vortex of the health care death spiral are in fact cash cows for the health care delivery system. The rewards for over-treatment and inefficiency are just too great for providers to pass up; so we have obscene costs for patients with chronic or terminal illness.
Even kids, if asked, would be able to figure out that the sickest patients– who fuel death spirals–should receive care, but should do so at centers of excellence, which are usually centers of efficiency as well.
At the end of the day, we should all be looking to the next generation of ACO’s–the ones that make the patient the focus. Imagine an ACO that is accountable to patients! Imagine patients being responsible for their own well-being and following their doctors’ orders, being rewarded for taking care of themselves, and for volunteering to take care of others. Health care would then become a community activity like an old fashioned barn-raising. Imagine that in exchange for their cooperation in lowering health costs, people were given discounts by their providers and community businesses. Upon reaching critical mass, patients, providers and businesses could evolve easily into a co-op. This is the next generation of ACO’s. We have the tools, the informatics and the methods–all we need is to free ourselves of the dichotomy in the debate.
Health insurance is in a death spiral–not because of underwriting criteria, but because health care delivery is mis-incentivized and therefore wasteful. Add to that dysfunction the absence of cost-based pricing and there is no way the system can survive. We must, therefore, reinvent the health care economy from the grassroots up, starting with the patient and his or her responsibilities, then creating a fair exchange for cost-effective care.
We can do this. Several sacred cows must be barbecued. But we–the patients–hold both the power and the responsibility to demand common sense solutions. It is time to think beyond politics, beyond Big Insurance/Big Health influence and take back control of our care and our costs.
Anyone interested in helping out should contact me.
Best regards,
Charlie Bond
Charlie–Your vision of possibilities is emotionally appealing, but daunting. As a healthcare futurist, I have long observed that the easiest way to get something right is to do it outside of the existing system, then become popular enough to be adopted back at the home base.To me, the most new methods can be introduced via a target group-specific combined primary care/chronic disease management center with members who are case managed against customized health plans and protocols. These can be started at relatively low cost. Create a network of these around a service area, and see to it that high cost patients have effective case managers and cross-trained physicians.
Wanda Jones
San Francisco
Healthcare will not improve until we educate the masses about personal responsiblity. If you have a chronic illness and do not manage it such as diabetes and your HbA1C is over 8 you should have to pay more taxes to found your own care. They do this in Germany. We don’t hold patients accountable. Drug companies would rather you do not change your lifestyle but just take one drug that then requires you take another and another until you are on 3-5 lifestyle medications. Works great for the drug companies. Then you become even more chronically ill so you need the hospital which can charge 400% of medicare allowable to insurance for an MRI with a 1.5 telsa outdated machine and poor software compared to the private company which gets 150-200% of medicare allowable with a better machine. Does any of this make sense? Then we can have a outpatient hospital PT at a YMCA which gets $250 per visit when a private PT gets $45 for the exact same thing. Why is one CPT code paid differently to providers for the same service? This system is so broken because of government. You are so foolish to think a one payer system will improve it. We need to stop medicating everything and support treatments that have a patient gain personal responsibility. Prozac is not the first line of defense for depression in England …Exercise groups are. There is so much research to show exercise was as effective or better for alleviating depression as prozac.
I agree that education is essential in improving some of the problems within our healthcare system. There should be repercussions for those that have been educated and choose to remain noncompliant. Disease prevention and wellness programs are more popular than ever. If people are rewarded for attempting to improve or maintain their state of health, they will be more likely to use the programs. Education needs to be emphasized to the younger generations that are currently healthy and probably not realizing the effects they will be facing in years to come with the healthcare system.
this is what happens when government tries to compete against the free market
The chances of having a happy and healthy old age were much better when insurance companies were beholden to the consumer and the consumer pocket book/bank account than to the government and the resources that defy quantifying.
People buy into Medicare at age 65 because if they don’t, it becomes 10% more expensive for each year delayed. If seniors can learn that, so could 30-somethings.
Arent you really saying “if the government can control 65 year olds, why cant they control 30 year olds?
The fourth “self-insured” dumping issue you alluded to is actually worse than you might think. Poor risk fully insured groups are moving to self insured arrangements (getting down to 50 or more employees). If you have a young healthy group self-insured avoids most of the ACA financing issues of price compression, medical loss ratio, community rating with bad risks, etc. Of course, once a self-insured group has older and less healthy members (or just a few high cost individuals) they can shift towarfds the gov’t exchanges (especially after 2017 if states expand the size of groups eligible for the exchanges).
However, keep in mind the added cost of all these anti-selection issues will be covered by increaseed subsidies and added “penalties” for employers and insurers. Politicians don’t care about anti-selection cost increases – it’s NOT THEIR MONEY.
Ron,
Dont forget, with no annual cap, what will happen with lasers. Unknown territory.
Sorry about typo – “good” risk groups are moving to self-insured – until their claims get higher than average.
We need a full accounting of the risk-adjustment (reinsurance) that is happening in the exchanges. It looks quite clear that the reinsurance is not adequate to prevent is adverse selection.
I was very surprised to see. Prof. Tyler Cowen in the NY Times argue for full federalization of Medicaid. Some states are trying to do that! I think it will lead to worse cost increases, because the federal government will finance but the state governments will spend. It would be a horrible incentive.
John–
What would you and the other commenters give for a giant “dashboard” that could illustrate these principles, assumptions and guesses about where the healthcare and insurance system is now, and where various employers are and what provider situations and costs are. Then to track it as all these players morph into other animals entirely. The other factor to be modeled is the knowledge/wisdom quotient of healthcare and government leadership. So far, the government has equated quality care with getting “free” mammograms and prostate exams! What about the astounding improvements being introduced now via stem cell therapies? Will the government push back on these because the initial cost is high, or pull them forward because of their astounding efficacy?
Miss seeing you out here…
Wanda Jones
San Francisco
This post raises several interesting questions:
a. Other nations deal with death spirals through extensive and expensive risk adjustment funds. As John Graham suggests, the ACA may have such a fund in reserve. One hopes so!
b. Individual insurance with Aetna, Blue Cross, etc has been in various death spirals for years. I am very glad that Dr Goodman mentioned this.
c. Dr Landes is correct about the effect of large claims. I wrote a piece called Where do the Medicare
Dollars Go? this summer that was in several blogs.
A man from Mars (or England) who did not understand drug prices or the billing practice of academic hospitals might wonder how we can spend $300,000 or more on any single person.
I believe that the time for price controls on transplants, preemies, etc is long overdue. That would not end all death spirals but would delay them a lot.
Potter is wrong about people leaving their employer coverage for exchanges. If you’re eligible for minimum essential coverage (MEC) through your employer (even if you don’t take it), you don’t qualify for a premium tax credit, thus virtually ensuring that exchange coverage will be more expensive. The only way around it is if your employer requires your contribution to their coverage to be more than 9.5% of your household income. http://www.irs.gov/pub/irs-drop/n-13-41.pdf
KK, you are correct.
BUT if the MEC plan does not meet the 60% MV test, then the off employee might also qualify for a subsidy
You’ve misread Potter’s comment entirely. He isn’t talking about people dropping employer coverage for exchanges WHILE STILL AT THE EMPLOYER. His point is that many people who might like to leave their company to start their own business, haven’t felt like they could do so because, either a pre-existing condition prevented them from obtaining individual coverage or it was too expensive. His point is, now they could leave their jobs and then get coverage on the exchanges.
Ted,
If they drop the employers coverage to go to the exchange, and that coverage met affordability, MEC, and MV benchmarks, then they will not be eligible for a subsidized plan on the exchange
Ralph, I still don’t think we are talking about the same thing. If I have coverage through my employer, and I think I can get a better deal on the exchange, so I cancel my employer coverage, then you are right, I probably don’t qualify for a subsidy. But Potter’s quote (from the article) isn’t about people who want to change coverage while at the same job, but rather about people who want to change jobs – start their own business or go work for a small company that doesn’t offer coverage. He says that, the pre-Obamacare system discourages that, particularly for people w/ pre-existing conditions who couldn’t get reasonable individual coverage. THose people, once they become self-employed or move to a small employer that doesn’t offer coverage, would potentially be eligible for a subsidy.
but that isn’t what Potter was talking about in the quote from the article.
HAre you trying to tell me that, if
Wendell Potter is blowing smoke if he believes that millions of people suffering from job lock are going to quit their jobs and go out and start successful businesses just because they now have access to “affordable” health insurance. Yes, the opportunity may remove some of the friction in labor markets. But really! Some guy, suffering silently in a job he hates just so he can have health insurance for himself and possibly, his family is going to now quit such job and start the next Google or Tesla or even the next Domino’s. Not likely.
BTW most entrepreneurs are young and single. Health insurance is either not on their mind or fairly cheap ( at least until Obamacare came along).
Simple economics. Something apparently no health care policy maker in DC understands.
See the Incidental Economist for a description of the risk adjustment and risk corridor provisions of the ACA for insurance companies.
Basically, if the claims experience of an insurer in the first 3 years of the ACA is very bad (at least 8% above projections), then the government will make up most of the difference.
This is exactly what Germany and Switzerland and Singapore and other nations do. They backstop the insurance companies so that death spirals do not occur.
Now these risk adjustment and corridor subsidies will run into the billions.
Some Republicans will undoubtedly take aim at them.
The utter absence of risk adjustment is why the US private insurance market has been unstable. Carriers that get too loose in underwriting have no backstop against losses, so they pull out of bad markets very fast. This is true in LTC and disability insurance just as much as health insurance.
It could well be that insurance markets (like agriculture for example) just cannot be sustained as pure laissez faire. There is too much painful destruction.
This does not bother me very much but others will be troubled.