• Calming down about death spirals, continued

    Given some of the recent developments, I wanted to quickly follow up on my post from last week, which weighed potential consequences of a mandate delay if the administration couldn’t get their act together with HealthCare.gov sometime soon. They’ve since brought on Jeff Zients who has promised front- and back-end functionality by November 30. Moreover, the administration has extended the deadline for enrollment without penalty by six weeks, from February 15 to March 31.

    I hardly meant to suggest that delaying the individual mandate for one year would be a carefree policy move (I think I described it as the “worst-case scenario”). But I do think that risk corridors make the prospect—however unlikely and unpalatable—less apocalyptic than if that provision didn’t exist.    

    To clarify, it’s true that reinsurance and risk adjustment  (the other risk mitigation programs in the ACA) are narrowly tailored to redistribute profits and losses between insurers. Under reinsurance, fees collected from insurers are redistributed exchange plans with high proportions of high-risk beneficiaries until 2016. Risk adjustment is a permanent program that shifts funds from plans with relatively healthy enrollees to those with relatively sick populations. These discourage insurers from cherry-picking beneficiaries. But the regulations conceive of risk corridors differently:

    The temporary risk corridors program permits the Federal government and QHPs to share in profits or losses resulting from inaccurate rate setting from 2014 through 2016.

    I’m not saying that risk corridors were constructed with a delayed mandate in mind. Surely they weren’t! But I do think that they’re a feature that could (very, very temporarily) help insurers weather systemic selection problems, with or without such a delay.

    Though Megan McArdle doesn’t seem to share my cautious optimism with regard to risk corridors, she makes a good point about the role of subsidies in mitigating adverse selection. This was echoed in the comments on last week’s post, and it’s something Austin has touched on previously.

    Jonathan Cohn summarized this incredibly well:

    What you may not realize (because few people do) is that the subsidies, by design, protect people from rising premiums. The law basically dictates what these folks pay for the typical, “silver-level” Obamacare plan, no matter what the insurer charges. This is critical. It means that rising premiums won’t affect the willingness of those people to enroll—which means, in turn, they’d still have incentive to sign up next year, as long as the technological bugs were gone and Obamacare online was working. (Subsides were a missing element of those ill-fated reform experiments in New Jersey and elsewhere.)

    The exchanges could experience adverse selection with or without the mandate in place during the first year. But a “death spiral” isn’t some inevitable consequence of that; the phenomenon requires a stepwise cycle of prices rising and people dropping coverage. By limiting price increases borne by beneficiaries, eliminating incentives to drop coverage—and thus, future price increases—subsidies create a kind of ceiling on adverse selection.

    About three-quarters of people we might expect to shop on the exchanges (those who are currently uninsured or have individual coverage, and won’t qualify for Medicaid) have incomes below 400% FPL. The chart below* breaks out that population by age and income level.


    People above 400% of the poverty line could still encounter rate increases, but those should be fairly tempered by the ubiquity of subsidies. Even if enrollment through HealthCare.gov is distorted by the website’s glitches, insurers won’t be completely blind in pricing for 2015; functional state exchanges (like Kentucky’s) will offer some guidance on what “normal” enrollment expectations might look like.

    Obamacare’s “death spiral” woes are overblown. The law was designed to survive a messy rollout.

    * You can find the data used for this chart, its methodology, and a further breakdown of the 18-35 set here.

    Adrianna (@onceuponA)

    • I’m not sure how the premiums are going to be tempered for those over 400% because of the premiums, other than the hope that the capping of the out-of-pocket premiums limits adverse selection among those receiving subsidies.

      And as I’ve pointed out before, for young people with incomes above approximately 230-300 percent of poverty (depnds on the state), there are no subsidies. That number will move up over time as premiums increase, but just some very rough estimates based on the chart above suggest that of the 10.5 million uninsured 35 and under (just an eyeball calculation), about 4 million will receive no subsidies in at least the first year. And that doesn’t even take into consideration the people who get subsidies but decide they don’t need insurance and elect to pay the tax instead (or not – the tax is about as close to a voluntary assessment as there is in modern tax law).

      Finally the subsidy caps run up against a limit of their own in 2019 I believe. At or near that point in time, if spending on subsidies exceed some fixed percentage of GDP (I believe it’s around 0.5%, but I’m going from memory here), then subsidy amounts are adjusted to put more of the premium expense on the insured. So the 9.5% cap becomes, say, 11%, while the 4% cap becomes 5%, and so on up and down the line. The more people are exposed to premium increases (and of course everyone receiving no subsidy has full exposure) the greater the likelihood of a death spiral occurring.

      So, yes, the subsidies can somewhat mitigate or at least delay a death spiral, but I’m not at all confident they can prevent it.

      • But a high percentage of the young high income earners are insured through their jobs. Self-employed high income earners are mostly older.

        • I’m not really sure that $30k for a 30 year old qualifies as ‘high income,’ and I expect that a married couple with no kids earning $66k combined feel very wealthy either. Solidly middle-income, maybe.

          • The poverty level in 2013 for a single person is $11,490 and $23,550 for a family of four. Young single people earning more than $43,960 (agreed “higher” income, but not “high” income) and young families earning more than $94,200 are mostly getting insurance through employers. Few young people earn more than 400% of the poverty line through free-lance or entrepeneurial work, but those that do are indeed losers in this case in the short term, if they don’t have pre-existing conditions. Note that young families of four often include a fertile female who may well see her rate drop while her male partner’s rises. But you are right, there will be some losers under the ACA, but not as many as you claim.

            • Well, we’re really not talking about “most young people” and where they’re getting their insurance. We’re talking about the young uninsured primarily, as well as those that are currently in the individual market. That’s what’s going to determine whether a death spiral occurs or how fast it occurs. And ‘young’ extends up to 35 when we’re talking about health insurance (at least that’s the cutoff I’m accustomed to seeing), so it isn’t all 23 year olds working at Gap right out of college.

              Time will tell what will happen, of course. But if young people fail to sign up for the exchange-based plans (or individual plans outside the exchanges too I suppose, although I expect those to be relatively rare) in sufficient numbers, well, that’s a problem that will kick off a death spiral, led by increasing premiums based on the expenses of an older and sicker than expected population.

              Oh, and it should probably be noted – the people who are so darn sure all this will all work out just fine are basically the same people who told New York, Massachusetts, New Jersey, and several other states that they should embrace community rating and guaranteed issue, it would all work out just fine. That was such a disaster that the Obama administration included this failure as part of their argument for the individual mandate. This should not inspire a great deal of confidence in the policy judgement of these people, especially given the risk of failure.

    • The internet exchanges aren’t a fundamental feature of the ACA. What matters is the law, that insurance companies have plans available. Currently, the only problem is matching potential customers with plans and subsidies — but both the Gov’t and insurance companies have plenty of experience doing just that without some technological solution.

      Yes, it will be more tedious for potential customers if they have to call several insurance companies and inquire about plans. And maybe 20-somethings might find that horribly backwards, but to anyone else, it’s a standard way of doing business.

      • There’s another problem though, and it’s that the insurers don’t have access to the federal subsidy data, so they can’t give it to people who enroll directly. The only way to get this data is through Obamacare and if it’s not working, then the private insurer sign-up isn’t working either.

    • But if the courts find participants in federal exchanges to be illegible for subsidies, then they will face the full cost of the ACA-compliant plans, and death spirals will ensue in those states?

      For people who could afford their now cancelled plans, the imposition of new coverage requirements, without subsidies, will leave them in far worse shape. Hardly “if you like your coverage, you can keep it”

    • The subsidies rise with the premiums, as long as the insurance increases faster than their household income. It seems to me that insurers would love this scenario, for, other than competition, they can continue to make their ever-increasing prices affordable.
      This is why I suggest the government has a program with insurers that provide similar coverage with lower subsidies.
      By lessening the burden of government, that innovative insurer should receive some of those lower subsidies back as “dividends.”
      Don Levit

    • Higher insurance rates under Obamacare may be greatly exaggerated. Under Obamacare, young people across the country will be able to get insurance at a very affordable rate. The success of the Affordable Care Act depends on this segment of the population signing up for policies to offset the costs of older, sicker Americans. http://web.archive.org/web/20160524043143/http://insuranceexchangehq.com/obamacare-young-people/