That Which Makes the ACA Stronger Might Also Kill It

Ezra Klein is convinced that the new enrollment figures for the ACA exchanges demonstrate that there will be no “death spiral“:

No one anywhere expected that the risk pool would be balanced by Jan. 1. Major health laws always follow the same pattern: The people who badly need insurance sign up first, and they tend to be older and sicker. Younger people sign up later — typically right before the penalty hits. So far, the age pattern in Obamacare enrollment is tracking the age pattern in enrollment for the Massachusetts reforms quite closely.

And even if the age mix of the exchanges remains at its current levels, Klein believes that the results will be manageable:

The Kaiser Family Foundation estimates that if the market’s age distribution freezes at its current level — an extremely unlikely scenario — “overall costs in individual market plans would be about 2.4% higher than premium revenues.” So, in theory, premiums costs might rise by a few percentage points. That’s a problem, but it’s nothing even in the neighborhood of a death spiral.

Moreover, provisions of the ACA designed to help manage the transition will kick in:

That calculation, however, omits the transitional policies in Obamacare that help insurers keep premiums low as the risk pool sorts itself out over the first three years. Add those in, and it’s unlikely that 2015 will see any premium increase at all. Robert Laszewski, a consultant for the insurance industry, agrees. “I think the 2015 rates will be the rates you’re looking at today, more or less,” he says.

Avik Roy offers a more skeptical take. He begins by stating that “[w]e may not get as far as a true ‘death spiral,’” but he offers a different interpretation of recent findings, e.g.:

As Philip Klein notes, a recent article by Larry Levitt, Gary Claxton, and Anthony Damico of the Kaiser Family Foundation described an enrollment of 25 percent among 18-34 year olds as a “worst-case scenario,” estimating that insurers would lose money on these plans, because “overall costs…would be about 2.4% higher than premium revenues.”

2.4 percent may seem like a small number, but given that the average insurer has profit margins of 4 to 6 percent, a 2.4 percent loss on premiums—before we even count overhead costs—is a serious problem. It’s why Humana reported to the Securities and Exchange Commission that it expected meaningful losses in its exchange-based plans.

I would emphasize the fact that if the threat of the individual mandate penalty helps keep the risk pool fairly balanced, it will be because there will have been a widespread public information campaign informing people that they are subject to a nontrivial penalty for failing to purchase insurance that at least some people will consider quite expensive (provided that they aren’t among those who’ve had their insurance policies canceled). And if insurers experience significant losses, as seems well within the realm of possibility, taxpayers will be obligated to make up much of the difference. This might be the right policy. It’s not at all obvious, however, that it will be popular. Rigorous enforcement of the mandate and the transitional mechanisms for protecting insurers might both be necessary to get the ACA exchanges up and running and they might endanger the ACA’s political health.

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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