With the disastrous roll-out of the Obamacare exchange website, there has been talk on Capitol Hill about delaying the individual mandate from anywhere to six weeks all the way to one full year. However, the archaic website is only the tip of the iceberg when it comes to the problems with President Obama’s signature piece of legislation. It has been discussed at length how millions of young, healthy people have to sign up on the exchanges in order to make Obamacare work. This is because the federal legislation now forces insurance companies to act as utilities while still taking on all the risk of an insurance company. In other words, they are forced to accept all applicants regardless of health. If there aren’t enough young, healthy people signing up to pay the claims of the sick people, many analysts have predicted a "death spiral" will occur, in which insurance companies will only have older, sicker policyholders, and not enough money in premiums coming in to pay for the claims. To put it mildly, that spells trouble.
So, Obama is between a rock and a hard place. Peter Suderman at Reason magazine has a great piece on the consequences of delaying the individual mandate, as well as what the death spiral would look like. The death spiral has already happened in a few states, who have had similar regulations to the ones signed by President Obama in March of 2010. Suderman begins starts his piece talking about the individual mandate delay: (emphasis mine)
Delaying the individual mandate might seem like an obvious response to the ongoing failure of the federal exchange system. But it’s a rather drastic step. And, in isolation, a potentially problematic one.
That’s because the premiums that health insurers calculated for the exchanges this year were determined based on the assumption that the penalty for remaining uninsured would be in effect, and would encourage people to buy into the market.
If you change the enrollment requirements—by, for example, ditching the mandate—while leaving the law’s preexisting condition rules in place, health plan participation will likely be lower. The result, as one insurance official told NPR yesterday, is that insurers will want to change their premiums. And in this case, “change” means “raise.”
That’s where the real trouble starts. Insurers raising prices as a result of lower than anticipated enrollment is an early step toward an insurance death spiral, in which premiums spike and enrollment figures drop until the only participants who remain in the market are very people paying very high premiums. We know because we’ve seen it before—in New York, Washington, and handful of other states that enacted preexisting condition regulations similar to Obamacare’s but without an individual mandate.
The ONLY prayer Obamacare has of working is by them forcing everyone to purchase insurance. However, the penalties are a fraction of what the premium will be for someone, so they really don’t have an incentive to get coverage right now. It’s much less of a hit to their bank account if they simply go without coverage and pay the fine. It they get to the point where they need coverage, then they can apply, since a carrier isn’t allowed to turn them down. Suderman then points out what happened in New York beginning in the mid 1990s: (again, emphasis mine)
New York state’s guaranteed issue and community rating rules—the two regulations that limit how insurers can charge based on health history and require them to sell policies to all comers—took effect in 1994. At the time, there were about 752,000 policyholders in the state’s individual market, or about 4.7 percent of the non-Medicare population. But by 2009, according to a Manhattan Institute report by Stephen Parente and Tarren Bragdon, the state’s individual market had practically disappeared, leaving just 34,000 participants, or about 0.2 percent of the non-elderly population. Individual insurance premiums, meanwhile, were among the highest in the nation—about $388 on average in 2007, compared with just $151 in California, another big Democratic-leaning state. In New York City, the annualized premium cost for individuals was more than $9,300 and more than $26,400 for a family.
The result, in other words, was a combination of sky-high premiums and far fewer insured individuals.
New York’s regulations have killed the individual market in that state. Now, it can be argued that New York is an aberration, as they have some of the most restrictive insurance regulations in the country. Many insurance companies set up separate entities for the sole purpose of being able to sell their product line in New York. However, two of the main regulations passed by New York in the 1990s, pre-existing conditions and community rating, are two of the key components of Obamacare. Just to show New York isn’t the only state where regulations have killed the individual market, Suderman informs us of what has happened in the state of Washington: (my emphasis added again)
Around the same time that New York was overhauling its insurance market, Washington state was implementing a similar set of health plan rules. Insurers faced new regulations regarding plans sold to individuals with preexisting conditions, and the requirement that they sell to everyone. For a brief period, there was a coverage mandate, but that never went into effect. The state’s individual market deteriorated. One insurer raised premiums by 78 percent in a three year period. As premiums rose, relatively healthier people left the market, and insurers were left covering a lot of very sick, very expensive individuals. In the end, many insurers simply dropped out of the market rather than lose money. According to a report on the reforms commissioned by the insurance industry, there were 19 carriers in the individual market in 1993. By 1999, there were just two—and they weren’t taking new applicants.
So, not only did Washington’s regulations jack up premiums, it forced insurance carriers out of the state. And to add salt to the wound, the two carriers that stayed weren’t taking any new applicants. They decided to only service their existing policyholders.
Suderman points out there are mechanisms in place that will try to prevent this death spiral from taking place, but those built in protections may not be enough if all carriers experience the adverse effects of the new regulations:
Now, it’s true, as The Incidental Economist’s Adrianna McIntrye points out, that there are risk adjustment mechanisms built into the law designed to protect insurers who end up with too many sick individuals. But as a Health Affairs brief on the law’s risk adjustment provisions makes clear, those provisions are designed to make sure that no one plan gets stuck with too many sick individuals. Plans with fewer sick people pay into a fund that creates a backstop for plans with a greater than expected share of sick policyholders. That helps mitigate individual plan risk. But it doesn’t really solve the problem if the entire pool, across most all of the insurance plans, is smaller and sicker than expected. A death spiral that shifts some premium income around is still a death spiral.
He concludes his piece with this warning:
The larger worry is that we may be on track for an insurance market meltdown no matter what happens with the individual mandate. If too few young and healthy people sign up for insurance through the exchanges, for whatever reason, insurers will have to adjust their prices eventually. The access problems in the exchanges exacerbate this risk by making it more frustrating to buy policies; as a result, only the most motivated people—which is to say, the sickest and most desirous of coverage—will end up buying coverage. The same goes for the high individual market premiums that many young adults will be faced with. A mandate delay would make the risk even higher. But it may be the case that Obamacare is heading toward a death spiral no matter what, and that if it remains in place, no plausible policy response will avoid it.
Will we see what has occurred in New York and Washington happen throughout the rest of the country? Well, as they say, past is prologue. If these regulations have already killed the individual market in two states, what makes anyone think the same thing won’t eventually happen in the other 48? And, if a non senior citizen does not have employer provided insurance and can’t afford an individual policy because of how high premiums have gone up, or worse yet, doesn’t have any options because all the carriers have left their state, where do they go? Medicaid???
Read all of Suderman’s piece here.