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Since the launch of healthcare.gov, commentators have given us plenty of reasons to be concerned about Obamacare. Most of the legitimate complaints have seemed to be permissible side effects of a generally good law, but one issue had me genuinely worried. The possibility that the health insurance market would fall into a so-called “death spiral” has been presented effectively and I could find no satisfactory response to quell my fears. In fact, I set out to write this op-ed with the thesis that a disastrous Obamacare death spiral was quite likely.
As I started putting in the legwork, though, it became clear that my case didn’t quite add up.
An insurance death spiral is unquestionably a real and dangerous phenomenon. The process is best exemplified by my home state of New York, in its failed 1993 attempt at health care reform. Concerned that the old and sick were being denied coverage or offered unaffordable insurance, the state legislature passed two requirements. First, every individual must be offered insurance. Second, every individual must be given the same price for insurance.
The young and healthy saw premiums rise to the level of the old and sick, and all premiums rose to pay for those with pre-existing conditions. The healthiest no longer saw insurance as a good deal and dropped their plans, which further raised the average cost for the insurers. To cover costs, insurers raised premiums again, so the next-healthiest individuals dropped out. Premiums rose again, the next healthiest dropped out; lather, rinse, repeat.
This is a death spiral. By 2008, New York’s average individual-insurance monthly premium was $388, the highest in the country. Between 1994 and 2009, the number of holders of individual insurance dropped by 96 percent.
Fortunately, Obamacare is nothing like New York’s reform. It’s more or less a clone of the successful Massachusetts reform of 2006, despite Romney’s claims to the contrary. In the words of Jonathan Gruber, architect of both Romneycare and Obamacare, “they’re the same fucking bill.”
Both are carefully crafted with the goal of preventing a death spiral, and Massachusetts has proven the success of this model for seven years. Here are five provisions that ensure the national plan will go the way of Massachusetts and not New York.
First, Obamacare has an individual mandate that discourages the young and healthy from dropping their insurance. Some say the penalty is too low to have an effect, but the initial $219 annual penalty in Massachusetts was paid by only four percent of residents—by far the lowest uninsured rate in the country. The Obamacare penalty is pegged to income and by 2016 will exceed $1250 for the median family.
Second, Obamacare provides subsidies for those who can’t afford premiums, giving assistance to young policyholders who might otherwise drop out. While New York offered no subsidies and Massachusetts covered a percentage of premiums on a sliding income scale, Obamacare is even more cautious, covering the entire cost of a Silver plan except for a fixed percentage of income. That is, if premiums rise, the 86 percent of individuals eligible for subsidies will see zero change in costs. The “sticker shock” stories represent the experience of 0.7 percent of Americans (14 percent of the five percent with individual insurance).
Third, Obamacare allows premiums to vary with age and tobacco use. The variance is limited to 3:1 for age and 1.5:1 for tobacco use, but this is nothing like the one-price requirement that set off the New York death spiral. Under Obamacare, a young non-smoker can pay $200 while an old smoker pays $900—far more conservative than Massachusetts, which limits premium variance at 2:1.
Fourth, Obamacare’s minimal coverage requirements and limits on deductibles make insurance more attractive to individuals, despite the fact they raise premiums. Since New York’s reform had no such requirements, all insurers began offering leaner insurance packages—raising the lowest deductibles to $5,000 and denying assistance with diabetes and AIDS—in the hopes that the sick would choose competitors’ more comprehensive plans. Consequently, the sick were stuck with this bare-bones coverage while the healthy opted not to pay for minimal insurance and dropped out.
Fifth, Obamacare includes temporary “reinsurance” and “risk corridors” programs that ensure price stability in the first three years of the program. The former is insurance for the insurers, providing federal assistance for costs incurred above $60,000 for a single person to ease the burden of having to cover those with pre-existing conditions. The latter incentivizes accurate pricing, funneling a percentage of profits from insurers who overpriced premiums to those who underpriced premiums, relative to how much they ended up spending.
The list goes on, but I won’t bore you with further technical details.
The Affordable Care Act is 906 pages long and commentators shouldn’t be expected to read the whole thing. But with some digging around, it’s not hard to find plenty of information from non-partisan sources to influence your position. It now seems immensely unlikely to me that Obamacare will fall into a death spiral—but I strongly encourage you to develop and present an opposing case.
Milo B. Beckman ’15 is a government concentrator in Eliot House.
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