Federal health insurance death spiral?

An insurance "death spiral" is driven by adverse selection:  if sicker people are more likely to sign up for the insurance, then rates must increase to compensate the insurers for the higher expected costs.  The higher rates mean that only even-sicker customer will find the rates attractive, so rates must rise again; and the spiral continues.

It looks as if the death spiral has started in Mississippi:

Mississippi will be ground zero for ObamaCare's individual mandate to buy coverage or pay a tax penalty. The state already is near the bottom when it comes to the percentage of the subsidy-eligible individuals who are enrolled via HealthCare.gov — just 38%. 

Now Mississippi's subsidized premiums are about to jump far more than any of the 36 other states using HealthCare.gov. For 30-year-olds in Yazoo City earning about $25,000 (214% of the poverty level), the after-subsidy cost of the cheapest bronze plan will spike by $554, or 60%, in 2016. That will hike the cost of this $6,800-deductible plan — the cheapest way to avoid paying a $695 mandate tax — to just under $1,500.

HT: MarginalRevolution

Adverse Selection, the ACA, and Criminal Records

The Economist Magazine is devoting space to explaining some fundamental economic ideas.  They begin with information asymmetry, which leads to adverse selection, the topic of chapter 19.

Information asymmetry remains a tricky problem for policymakers. Adverse selection is plaguing America’s Affordable Care Act, better known as “Obamacare”. Fewer healthy people than expected have signed up to the government-sponsored insurance exchanges, which limit how much premiums can vary with risk. Insurers are making losses; as a result, they are raising prices substantially (or pulling out altogether). Critics say those price rises will drive away more healthy customers, leading to a “death spiral”. Information economics should also give pause to the “ban the box” campaign, which seeks to forbid employers from asking about job-applicants’ criminal records prior to interview. Having no criminal record is a positive signal; removing that information makes information asymmetry worse. Recent research suggests that banning the box causes American firms to discriminate by race, such that employment of low-skilled black and Hispanic men falls. Adverse selection indeed.

Does OpenDoor have an adverse selection problem?

Interesting post from our friends at Marginal Revolution on OpenDoor Labs, a company the provides liquidity (for an average price of 7-12% to homeowners) to housing markets by buying and re-selling houses.

An analysis of property records prepared by Michael Orr, a real-estate expert at Arizona State University, shows that, through mid-December, OpenDoor had bought and sold just over 200 homes. It paid an average $230,000, reselling them within 90 days for an average of $245,000.

However, they do hold an unsold inventory of houses:

But the records show OpenDoor also owned about 30 homes as of mid-December that it had failed to resell for at least six months

If the pricing model is estimated with data from ordinary transactions, and if homeowners posses information not available to the model, like the “feel” of the house, then we should expect that owners who think the model predicts a price too high will be more likely to sell. This might explain the unsold inventory.

If this kind of adverse selection is a big enough problem, OpenDoor may be forced to charge higher fees for its service, and that will discourage all but home owners with hard-to-sell houses from using the service, which is a kind of Adverse Selection Death Spiral (links here)

Economic effect of Virginia Court ruling: adverse selection

If the ruling in Virginia stands, that the individual mandate in President Obama's Healthcare plan is unconstitutional, then only the sick people will sign up for the insurance:

what you will get is a death spiral in the insurance markets, as the healthy people wait to buy insurance until they get sick, and the cost of insurance spikes to the point where no one can afford it.

If only President Obama had read chapter 19

If you sell insurance at a single price, anticipate that high risk individuals will be more likely to buy, and price accordingly. 

Recent data out of Kentucky, which has one of the best performing exchange websites in the U.S., show that the average age of enrollees is about 51, ten years above expectations.  To insure these higher cost individuals, premiums will have to "skyrocket" and this leads to the so called "death spiral." 

This happened in New York, New Jersey and Massachusetts where young people opted out of the system as a whole because of high prices.

“As premiums rose, healthy people dropped out meaning the risk pool was high,” Herrick says. “Premiums rose again, and more healthy people dropped out. The costs for individual insurance were double and triple the national average.”

If President Obama had read Chapter 19, he would have known to anticipate this kind of adverse selection.

Don't worry though, I am sending him a copy of my book. 

HT:  Roberta