Full disclosure: I do consulting work for private health insurers, but I had no prior knowledge of the PriceWaterhouseCoopers study before it was released. Having said that, its conclusions were not at all surprising, nor was the heated reaction of the Obama White House. Democrats understand how dangerous the PwC study is to their effort to pass a health-care bill because it exposes a crucial and irrefutable flaw in the health-care plan approved this week by the Senate Finance Committee.
And what is that flaw? In short, the plan sponsored by Finance Committee Chairman Max Baucus would almost certainly lead to a death spiral in many private health insurance markets.
Insurance death spirals occur when regulators force insurers to offer coverage (“guaranteed issue”) at premiums below the known risk of those they are insuring, without any assurance that the shortfall can be made up elsewhere. When insurers comply with these rules and offer relatively low cost health insurance policies to all comers, quite predictably, many sick people step forward to sign up. When the insurers then try to turn around and charge higher premiums to the relatively healthy to cover their costs, the healthy, also quite predictably, are more reluctant to enroll because they can see the premiums they would have to pay would very likely exceed their health-care costs. So they often say “no thanks” to the insurance and decide to take their chances by going without coverage instead. As more and more healthy people exit the marketplace, insurers are then forced to raise premiums for everyone who remains, which only further encourages the lower risks to opt out. This vicious cycle of rising premiums and an increasingly unhealthy risk pool is called a ‘death spiral’ because it eventually forces the insurer to terminate the plan.
This is not a hypothetical, textbook scenario of what might happen to a poorly run insurance market. It has happened before — many times and in many places. See, for instance, the experience in Kentucky, and in Washington state, and in Maine too. There’s no reason it couldn’t happen nationwide.
The Obama White House and congressional Democrats convinced themselves months ago that they could avoid the fate of these failed state reform efforts by forcing the young and healthy to buy insurance, whether they wanted it or not. And so, all of the bills under consideration in the House and Senate would make government-approved health insurance enrollment compulsory for all Americans. Those not complying would have to pay a new tax, collected by the IRS.
But the assumption that Congress would be able to hold the line and permanently sustain a punitive new tax on Americans for not buying government-approved insurance was always dubious. And, sure enough, Democrats, staring political reality in the face, have been backing away from a tough “individual mandate,” step by step, ever since they returned from their August recess. The Finance Committee adopted amendments that delayed the mandate’s full implementation and dramatically reduced the tax penalties for non-compliance.
But as Democrats watered down the mandate, there was no commensurate adjustment in the insurance rules. The Baucus plan continues to require insurers to take all comers without regard to health risk starting in 2013. And therein lie the makings of an insurance market fiasco.
Robert Laszewski, a long-time observer of the health-insurance scene and no political partisan, wrote a devastating blog post on Monday documenting the folly of the Baucus plan. He cites several very real examples of low- and moderate-wage families that would clearly be better off financially if they paid the tax and waited to sign up for insurance until they were really sick. It’s hard to imagine any insurance actuary coming to a different conclusion about what would happen if the Baucus plan were actually enacted into law.
Of course, the insurance industry is bringing renewed attention to this problem because it is hoping to get a tougher mandate back into the Senate bill. That seems highly unlikely at this point, and would be a real mistake in any event. The problem with Obamacare is not insufficient governmental force; the problem is that the Democrats are pursuing the wrong goal. They are desperate to enact something they can call “universal coverage” without any coherent plan to slow the pace of rising costs. In that context, a new entitlement for subsidized insurance is exceedingly expensive, which is why the sponsors try to hide some of the costs behind mandates, hidden taxes, compulsion, and insurance regulation. However, as they are now finding out, there’s no free lunch here. Someone has to pay for it all. It’s just a question of who and how much.
What Democrats should be doing is working with Republicans on a sensible plan to gradually introduce reforms that would inject more market discipline into the health sector, thus making coverage more affordable for everybody. If, however, they insist on trying to pass something like the Baucus plan instead, they should be informed of the consequences, whether they like them or not. As matters stand now, if the Baucus bill were to become law, in a couple of years Congress would be forced to take up the issue again to clean up the mess the bill will have created.