Fix Obamacare’s Death Spiral

President Trump’s first executive order, allowing federal agencies to waive Obamacare regulations, shows that the president is serious about reforming the provision of health insurance.

There is no time to waste. Under the Affordable Care Act, premiums for a mid-level plan are predicted to increase by 25 percent on average in 2017.  This imposes a significant financial burden. Additionally, in the 39 states served by the federally-operated online market, one in five people shopping for insurance will have only one plan available.  

The increase in premiums and the accompanying increase in the share of high-risk individuals covered by an insurer is known as adverse selection, or, more popularly, the death spiral.  Adverse selection was supposed to be prevented by the ACA’s mandate that all people buy health insurance.  Insurance companies operating in the ACA marketplaces depend on healthy people signing up in order to balance the risk pool, as these individuals pay the same premiums but have a much lower chance of making expensive claims.  

Unfortunately, the mandate has been ineffective in preventing adverse selection.  This is mainly because the mandate is not truly a mandate.  The penalty for not having purchasing insurance in a given year, and thus not complying with the mandate, is either $695 or 2.5 percent of income.  Those purchasing insurance in ACA marketplaces tend to be low income, so the penalty is often $695 or not much above this figure.  While this may be a significant amount of money to those making less than $30,000 a year, it is often less than the health insurance policies offered on the ACA marketplace exchanges.  As a result, healthy individuals can and have opted to pay the penalty rather than purchasing insurance.  

The reason that many healthy people choose not to buy health insurance is that even the lowest level plans offered in the ACA marketplaces are expensive. As well as adverse selection, which raises premiums, they are required to offer generous levels of care, including maternity leave, drug abuse and mental health coverage, and unlimited lifetime coverage .  A range of options does not exist.

President Trump has taken a stand against ACA on his first day in office.  During his campaign, he claimed that he wants to make insurance marketplaces more competitive by allowing the sale of health insurance across state lines.  The president has also claimed that some insurance companies offering coverage in ACA marketplaces are operating in a monopolistic way and are making lucrative profits.  Simply getting rid of state lines would not be effective, as broader network co-operatives have underperformed limited network insurers.  It would also struggle to bring more competition in the marketplaces, as adjusting to state regulations and establishing new network providers is a lengthy process.  

There more feasible ways to address the adverse selection death spiral.  Healthy people should be given an incentive to sign up—perhaps by giving a discount to those who sign up early. This would discourage people from purchasing insurance only when they are sick and face higher health care costs.  At the same time, a wider variety of insurance plans should be offered, as this would make it more likely for healthy people to purchase some insurance, while still having options for those who want a higher level of coverage.   An example would be offering catastrophic plans, under which insurance only pays for major medical emergencies and not smaller health care costs.

During the campaign Trump repeatedly said that he wants to increase competition in the market for health insurance by allowing insurance companies to operate across state lines.  While this may have a marginal effect on premium costs, it does not directly address adverse selection.  Instead, Trump could decrease the risk-pool for insurers and counter the adverse selection death spiral by making the penalty for not purchasing health insurance financially harsher and offering a variety of insurance plans, including bare-bones plans.  

Health insurance premiums are skyrocketing and large insurance companies are dropping out of ACA marketplaces, due primarily to a serious adverse selection problem.  New legislation would not be complete without a solution to the death spiral.

Anthony Valleca is a contributor to E21.

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