The Weekly Sift

President Obama’s legacy accomplishment has problems that can be patched up. But will they be?

In the insurance business, the big thing you worry about is a vicious cycle called a “death spiral”. It goes like this:

1. An insurance company realizes it isn’t making enough money because it’s paying more claims than expected. In other words, the risk pool is riskier than it predicted.
2. It tries to increase profits by raising premiums.
3. Supply-and-demand works in the usual way, so the increased price causes fewer people to want the product. But because of the unique properties of insurance, the people who drop coverage are mostly the ones who think they are less likely to make claims; the insurance was worth it to them at the old price, but not at the new. Meanwhile, the high-risk customers, the ones who will want insurance at virtually any price, all stay.
4. As the low-risk customers defect, the risk pool gets even riskier. So the insurance company is back at Step 1, paying too many claims to make the profit it wants.

To a certain extent this cycle happens whenever an insurance company underestimates risk or overestimates the number of people who will want its coverage. But usually the effect damps out. In other words, each time around the cycle, fewer and fewer people drop coverage at Step 3, so after some small number of price hikes, a new equilibrium is reached: The higher premium covers a smaller, riskier insurance pool while still leaving the company a profit.

But in a death spiral, the cycle never damps out and there is no new equilibrium. Or, more precisely, the equilibrium point everything trends towards is zero: No one is covered, so the zero premiums balance the zero claims.

Now let’s talk about ObamaCare: Millions of people have signed up for insurance through the ObamaCare exchanges, but not as many as expected. In particular, not as many young, relatively healthy people have signed up. So the total covered population is sicklier than the insurance companies had planned on, and they’re not making money the way they thought they would.

So Step 2 is starting to happen: Last Monday, a report from the Department of Health and Human Services (HHS) said that baseline premiums on the ObamaCare exchanges would be going up 22% on average. In addition, some insurance companies have decided to pull out of the ObamaCare marketplace in a various states, reducing competition and making it easier for the remaining insurers to raise premiums.

That raises the question: Is this a blip that will quickly settle out into a new equilibrium, or is it the start of a death spiral?

It’s hard to get good information on this, because everyone knows which answer they want: Conservatives want a death spiral, and liberals want a blip.

Underenrollment. Let’s start with numbers. Back in 2010, the Congressional Budget Office projected much higher enrollment than we’ve seen.

CBO and [the Joint Committee on Taxation] project that, under current law, 6 million people in 2014 will receive insurance coverage through the new exchanges. Over time, more people are expected to respond to the new coverage options, so enrollment is projected to increase sharply in 2015 and 2016. Starting in 2017, between 24 million and 25 million people are expected to obtain coverage each year through exchanges, and roughly 80 percent of those enrollees are expected to receive subsidies for purchasing that insurance.

That didn’t happen. 2016 enrollment through the exchanges was about half the projection, around 10.4 million, and (prior to the premium increases) the most optimistic estimates projected around 13 million for 2017.

You can argue about why. Maybe the carrots (subsidies) and sticks (the individual mandate’s tax on the uninsured) weren’t as compelling as they should have been. Or maybe the scorched-earth nature of Republican resistance made a partisan issue out of decisions that (in an alternate universe) might have seemed public-spirited. Larry Leavitt pictures that alternate universe:

Imagine a world where the ACA passed with significant bipartisan support and there was a national effort involving politicians of all stripes and figures, and athletes, all encouraging people to get insured. That is not the world we live in. It’s more like what happened in Massachusetts [with RomneyCare].

Instead, we saw something altogether unprecedented in American history: a well-funded ad campaign trying to convince people to avoid a government program that had already been enacted into law. Who can forget the Koch Brothers’ creepy Uncle Sam who was going to “play doctor” with you?

For comparison, try to imagine it’s 1942 and some anti-war billionaires blanket the country with creepy Uncle Sam posters to convince people not to buy war bonds, or it’s 1966 and ads interrupt The Beverly Hillbillies to scare seniors out of signing up for Medicare. Nothing remotely like that happened or could have happened under the political culture of those eras. But it did for us.

Premiums. One important thing to realize about ObamaCare premiums is that up until now they’ve been running under the original projections.

There are a variety reasons for that: In part, it’s that healthcare inflation in general has been lower since the Affordable Care Act started coming into effect.

But a piece of it is also that insurance companies lowballed their initial offers, hoping that once people had health insurance they’d be reluctant to give it up or switch companies. The LAT’s Michael Hiltzik reports:

Some big insurers have found that their initial estimates of customer costs were unduly optimistic. They set premiums lower than they should have, sometimes to buy market share, and incurred losses as a result. Rate-increase requests in the double-digit range for 2017 are the harvest

So what looks like a malfunction in the program might just be premiums getting back to the level they should have been at to begin with.

Subsidies. One reason to think that the premium increases won’t start a death spiral is that most of the people who use the federal exchanges get some amount of subsidy. As their premiums go up, their subsidies do as well. So the sticker shock is diminished.

The people to watch are the ones whose incomes are too high to qualify for subsidies. According to Leavitt, that’s about 15% of the people who use the federal exchanges, but also almost seven million other people whose premiums are based on the rates on the federal exchanges (and whose business the insurance companies are figuring in when they set their premiums). If those people start cancelling their policies, then we could be back in the death-spiral scenario. But if they decide that they like having health insurance and are willing to pay the higher premium to keep it, then everything should be fine.

Fixes. Even if the vicious cycle starts, there are fairly simple ways to stop it — if that’s what everyone wants to do. Basically, the problem, if there turns out to be one, is that the incentives aren’t right yet: The subsidies need to be higher or extend to people with somewhat higher incomes. Or the individual-mandate penalty on the uninsured (the one you would pay when you file your 1040 income tax form) needs to be higher.

Other things could be done to lower insurer costs: The sign-up periods might be tighter and more strictly enforced, to prevent people from abusing the system by waiting until they get sick to get covered. Price controls could prevent profiteering by big pharmaceutical or medical-device companies. The bundle of services that need to be included in an ObamaCare policy could shrink.

Or you could change the market in other ways: In parts of the country (like Arizona) where premiums are rising faster because fewer companies compete, adding a public option (i.e., something like letting you buy into Medicare even if you’re not 65 yet) would increase competition.

Or if you want to go whole hog, the entire health-insurance system could be replaced by some kind of single-payer system, as Bernie Sanders campaigned on, and as gets better outcomes for less expense in just about any other advanced country.

The problem is getting any of that through Congress. So far, Republicans have refused to cooperate in making any mid-course adjustments to ObamaCare, in hopes that it will crash. This also is brand new in American politics. Previous programs like Social Security, Medicare, and even the prescription-drug benefit that President Bush added to Medicare in 2003 all have required tweaks as they got up and running. Once a program had been passed into law, Congress typically has accepted it and tried to make it work. But scorched-earth opposition to ObamaCare continues six years after the law passed: The only change Republicans are willing to consider is repeal.

We can’t go back. In the same way that President Obama’s economic critics often conveniently forget how the economy was collapsing when he took office, critics of ObamaCare forget how the old healthcare system was collapsing under the middle class. The poor could get Medicaid, but health insurance was increasingly out of reach for people who weren’t covered through their employers, and employers faced rising pressure to wriggle out of rapidly increasing premiums.

As a result, the number of Americans with no health insurance at all was approaching 50 million. Millions more Americans had “junk insurance” — low-maximum-benefit policies that would quickly be exhausted by any major illness, or short-term policies the insurer could refuse to renew if you got seriously ill. (Many of the much-publicized horror stories about premiums that skyrocketed when ObamaCare took effect were from people who previously had junk insurance. They didn’t pay much, but they would still face bankruptcy if they got seriously ill.) No one knows how many people were trapped in jobs they couldn’t leave because their pre-existing conditions would prevent them from qualifying for health insurance with a new employer.

In 2009, Time correspondent Karen Tumulty drew the lesson from her brother’s inability to pay for his medical care, even though he had insurance when he got sick.

What makes these cases terrifying, in addition to heartbreaking, is that they reveal the hard truth about this country’s health-care system: just about anyone could be one bad diagnosis away from financial ruin.

As the so-called “gig economy” grows, the lifetime-employment ideal of the 20th century is realized for fewer and fewer people, exposing more and more people to gaps in their healthcare coverage that they may not be able to fill due to pre-existing conditions. So going back to the system that was already starting to fail in 2010 would be trading a fixable death spiral for an inescapable one.

Replace? “Repeal and replace” has been the Republican slogan since 2010, but the “replace” part never materializes. Some vague ideas are thrown around: insurance competition across state lines, health savings accounts, and so on. But the discussion always stops short of an actual bill that the CBO could analyze and members of Congress could be asked to support or oppose.

Most likely that’s because the numbers don’t work, either in an accounting sense or a political one. Paul Ryan and Mitch McConnell know they can’t assemble their fractious troops behind any specific proposal. And if they did, the resulting plan would vastly increase the number of uninsured people, while leaving those with insurance vulnerable to losing it if they get sick or change jobs.

The basic vision of ObamaCare — private health insurance made universal through a system of government mandates and subsidies — was created by conservatives who wanted an alternative to a single-payer system. More than 20 years later, those are still the only two viable ideas out there. If you really want to replace ObamaCare, single-payer is your only choice. If that’s not what you want, then you should help fix ObamaCare.