The severe technical problems that continue to plague the federal Obamacare exchanges (and some state-run ones) have got people contemplating some pretty extraordinary scenarios.
Some of these have to do expressly with the fact that people cannot readily obtain coverage. The idea of delaying the individual mandate, which not two weeks ago was dismissed by the Democrats as a right-wing fantasy, is now being advanced by some Democratic senators, since you can’t very well fine people for not being able to use a site that doesn’t work. We may (and should) soon be talking about “grandfathering” all 2013 insurance plans, too, as millions of people in the individual market have their coverage cancelled with nowhere to go.
But the scenario most frequently talked about is the possibility of an “insurance death spiral” in the exchanges. And here I think two kinds of misunderstanding have been rampant — one that might cause us to understate the danger and another that might cause us to overstate it. Major adverse selection problems in the exchanges are, and always have been, likely, but a death spiral as it is usually understood is not.
An insurance death spiral, or adverse-selection spiral, would be a kind of second-order consequence of the website fiasco: The fact that it is so difficult to sign up for exchange coverage may mean that only highly motivated consumers do sign up, and those are likely to be people with high expected health costs. If the exchanges end up containing too many people in poor health and not enough people in good health, insurers could take massive losses in 2014 and be forced to dramatically raise premiums for 2015 plans to better price the risk they would be taking on. Those higher premiums would cause even more healthy people to avoid getting coverage, leaving the risk pool in even worse shape and so driving even further premiums hikes, and the cycle would continue. Several states have seen this kind of catastrophic degradation of insurance risk pools over the years when introducing insurance rules like those that will govern the exchanges (most notably New York and Washington State, as Peter Suderman noted this week), and many observers (not to mention insurers) now fear we may see it in the new exchange system.
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