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March 8, 2017

Will the Republican Replace Plan Sink Into A 'Death Spiral'?

  Forbes

It’s important to understand that Obamacare’s exploding health insurance premiums and collapsing insurance exchanges were the result of President Obama and the Democrats abandoning standard actuarial practices. In their replacement plan, Republicans have done essentially the same thing.

And I fear the result could also be the same.

Obama does not believe a health insurer should be allowed to decline coverage (known as “guaranteed issue”) in the individual (i.e., non-group) market nor charge more if an applicant has a costly medical condition.

Notice, Democrats don’t seem to mind if a life insurer declines coverage to an applicant with a terminal medical condition. Nor if a property insurer declines coverage to a homeowner whose house has just burned down. They only wanted to eliminate health insurance underwriting.

But underwriting is what insurers do. In a free market, people apply for coverage and the insurer charges a premium or declines coverage based on the risk the applicant brings to the pool.  If the government arbitrarily eliminates underwriting, which Obamacare did, then some people will game the system.

With respect to health insurance, that means many young and healthy people remained uninsured—and signed up only if they needed coverage. Because Democrats abandoned the free market principle of underwriting, they took a number of backend steps to mitigate the gaming. They:
  • Imposed a mandate to have health insurance and penalties for those who remained uninsured;
  • Restricted the times someone could enroll in a plan even if they were healthy;
  • Provided subsidies to lower- and middle-income workers to defray their out-of-pocket cost for coverage; and
  • Created a number of backdoor cross-subsidies—reinsurance, risk corridors and risk adjusters—to try and reduce insurers’ potential losses due to “adverse selection,” i.e., when there is a disproportionately large number of sick people in the pool.
Even with all of those mitigation efforts too many people stayed out. Premiums began to rise, driving even more people out of the pool, which became progressively smaller, sicker and more expensive. That’s what’s known as the “death spiral” in health insurance.

Many of us warned at the time that young and healthy people would likely stay out of the insurance market until they needed care, and that’s exactly what happened.

Instead of abandoning guaranteed issue and letting health insurers do what insurers do, underwrite, Republicans are retaining Obamacare’s guaranteed issue provision.

Under their new plan, if a person wants to buy coverage in the individual market during an open enrollment period, insurers have a 12-month “look back.” If the person has been uninsured more than 63 days in that period, the insurer will charge the applicant 30% more than the standard premium for the next 12 months. Apparently, that 30% increase will happen even if the applicant is healthy.

Republicans retain subsidies and restricted enrollment times like Obamacare. They eliminate the backdoor cross-subsidies, but create a new, largely unexplained, state stability fund.

But the question is whether the 30% increase for those who were uninsured is large enough to encourage young and healthy people to enter the pool and stay there?

Let’s say a formerly uninsured enrollee’s normal premium is $500 a month. That’s $650 with the 30% penalty. The person could pay the premium for two or three months, have needed surgery and then drop the coverage. So that’s an extra $150 for a few months vs. saving thousands of dollars by remaining uninsured for years.

A longtime friend in the insurance industry who has always opposed guaranteed issue suggests that the Republican tax credit will encourage insurers to develop policies that equal the credit, lowering the cost of insurance. And that most individuals will choose coverage because the tax credit is generous enough to absorb most or all of the cost of a policy. Let’s hope he's right, because that’s what needs to happen.

Ironically, both House Speaker Paul Ryan’s “A Better Way” and Dr. Tom Price’s health reform proposals supported the free market approach: allowing insurers to decline coverage to the roughly 3 million people who are both uninsured and uninsurable. And both of them created a safety net program, known as a state-based high risk pool, to provide coverage to that group of people. But the Republican leaders apparently abandoned that approach and embraced one of the primary provisions in Obamacare that caused premiums to rise and risk pools to collapse.

The good news is that it typically takes a few years before a death spiral kicks in. So Republicans might be able to fix the problem in the future if guaranteed issue begins destroying the pools. But it seems like a strange policy to include when the goal is to make health insurance more affordable and accessible.


 

  • TaxBytes-New

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