Thursday, October 29, 2015

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 — just 38%. 
Now Mississippi's subsidized premiums are about to jump far more than any of the 36 other states using 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


  1. Observing the occasion that I had to sign up with Medicare this past week, my attention to medical insurance matters had a peek of interest.

    The federal health insurance death spiral was predicted from the start. See the article in the Federalist, by David Hogberg, 06/02/2015, “The Obama Death Spiral is Still Coming.” (1) Far too few young people have signed up for health insurance as predicted, even as the penalty, paid as an additional “income tax”, didn’t dissuade. The insurance premiums of most, if not all plans, has increased to cover the rising costs faced by the insurers.

    The article states that the large private health insurers realized losses suffered on the federal exchanges in states where the exchanges operated were not covered, have raised rates ranging from 18 - 52%. Hogberg refutes Paul Krugman, a NY Time columnist, who wrote that premiums would only increase 2 - 4%. (I know that is not true from person experience this past September when my own insurance premiums increased far more than that.) The three year risk corridor program where insurers who make a profit are supposed to share monies with those who did not, has inherent problems as the profits were small.

    The spiral refers to the rising number of younger, healthy people, (who would have less utilization), who do not participate in purchasing their own health care coverage. The lack of premiums from this class of potential individuals forces the insurance companies to charge ever higher premiums on the remaining classes. Eventually the premiums become unaffordable, with a rising dropout rate. The sicker patient classes are forced to absorb more costs, producing financial burdens. The demand curves shift in response to the price (premium) increases (less demand). And the price curves shift upward due to the demand (for health services) increases. The government created its own “Kobayashi Maru scenario.” (2)

    Lee Lichtenstein
    (1) Hogberg, David, the Federalist,
    (2) The Kobayashi Maru is a test in the fictional Star Trek universe. It is a Starfleet training exercise designed to test the character of cadets in the command track at Starfleet Academy. The Kobayashi Maru test was first depicted in the opening scene of the film Star Trek II: The Wrath of Khan and also appears in the 2009 film Star Trek. The test's name is occasionally used among Star Trek fans or those familiar with the series to describe a no-win scenario. (Modified from Wikipedia for brevity. LML)

  2. In Froeb’s blog, “Federal health insurance death spiral?” the author explains that sicker people tend to seek out insurance, which makes rates rise, and rising rates makes the policy attractive only to the sickest. So, rates rise and rise. He attributes this to adverse selection or hidden information. Adverse selection arises “when one party to a transaction is better informed than another.” (Froeb, pg. 241) In this case, information is hidden from the insurance company. They cannot distinguish between the high and low risk customers. The insurance company should try to correctly anticipate the high risk customer and set rates accordingly. Froeb goes on to cite an example in which Obamacare ignited a death spiral in Mississippi. A Forbes article by Avik Roy (2014) suggests that reports show healthier and younger people have avoided Obamacare-based insurance, causing the cost of this insurance to increase over time. Another writer explained it this way, “Young healthy suckers who were supposed to get their pockets picked to fund this idiotic scheme are taking a pass, depriving the insurance companies of the easy money Obama promised them, and their bailout mechanisms have been disabled.” (Hayward, 2015) A 2015 New York Post article confirmed it, saying, “Last Thursday, the administration predicted enrollment for 2016 will be less than half what the Congressional Budget Office predicted in March,” citing the adverse selection and the death spiral as the culprit. (McCaughey, 2015)
    McCaughey, B. (October 19, 2015) Obamacare is entering its dreaded death spiral. New York Post. Retrieved from:
    Roy, A. (January 13, 2014) Adverse Selection: Obamacare Exchange Enrollment Skews Much Older Than U.S. Population; Cost Increases Likely. Forbes/ Politics. Retrieved from:

    Hayward, J. (November 19, 2015) ObamaCare Death Spiral: America’s Largest Health Insurer Ready to Bail. Breitbart. Retrieved from:

    Froeb, L., & McCann, B. (2016). Managerial economics: A problem solving approach (4th ed.). Mason, OH: South-Western Cengage Learning.

  3. The effects of adverse selection on the intake of patients into my practice. (Chapter 19)

    Although I am not a ‘health care insurer’ in the sense and definitions presented in our text and adjunct material, my dental practice, because of its general anesthesia availability component, sees such an increased spectrum of patients that the aspect of adverse selection comes into play with each potential new patient we interview and accept. Since the buyers (patients) often attempt to hide behavioral issues, psychological problems, physiological (medical) concerns, and emotional quandaries, which are often totally separate from their oral and dental needs, I have to protect the practice by specific and intense screen procedures. These patients always have a much heavier draw upon the practice’s personnel in the amounts of time, patience, and overall interaction parameters.

    Sometimes (often, always), this cornucopia of patients have had great difficulties with dental treatment in other offices. Practices that are gear for high volume delivery of services (often “in-network”, participating provider situations) will not have the patience, empathy or skilled personnel to interact correctly. Such patients have very high levels of fears and anxieties, as well as specific phobias (i.e. needle phobia, the drill phobia). Frequently, the patient’s specific physiologic problems were interferences for dental treatment (i.e. very severe gagging reflexes). Repeatedly, the medical problems could not (or would not) be addressed or handled by the previous dentist, such as very high blood pressure, severe diabetes, “allergies to ‘Novocain’”, or problems with antibiotics. And the “difficult to treat” are often referred to my office after unsuccessful or traumatic attempts were undertaken elsewhere. Such patients have disabilities involving autism, severe behavior and anti-social issues, dementia, Parkinson’s disease or CP (cerebral palsy). (And many other problems)

    It is the task of my team and I to ferret out as much information about the patient (and family) as we are able in the short periods of time that are appointed for the initial examination (extensive, including medical, dental, social, etc., as well as the x-rays and appropriate clinical examinations) and the week-later follow-up consultation discussing my “Review of Findings” and the recommended Treatment Plan and conversation regarding the dentistry, anesthesia, patient expectations, payment arrangements, and office polices. This affords the best chance to use risk management principles to reduce having a ‘worst case scenario’ of accepting the wrong patient into the practice.

    My access to the personal information of the patient and attending care givers (support providers and payers of the professional fees)is limited and variable; it is truly an asymmetric relationship. We get the’ bad customers’; the “all you can eat" -- "and they certainly do” who eat up the staff’s time, empathy, and other emotional supports; and those most likely to have a problem during treatment (often of the patient’s making). The more knowledge and intelligence I can gather about the patient early in the process, the more it allows me better assessment. I can make appropriate fees for the services to be rendered and estimate the necessary time requirements. In this manner, somewhat an analogy to the insurance industry, I can categorize the risks inherent and involved with any particular patient and their associated (un-revealed) problems.
    Lee Lichtenstein

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