Like the fabled Yeti, the adverse selection death spiral is the stuff of legend, intimidating, capable of untold devastation, yet seldom seen. Even today, as it leaves a path of destruction, bystanders point their fingers elsewhere, finding scapegoats among mere mortals. But I believe that I have seen the death spiral. And it is truly abominable.
How else to explain the shocking increases in some health insurance premiums — 20 percent, 30 percent, even 40 percent! If this is the exercise of market power by evil insurers, they must also be stupid insurers. Why wait until now to extort their customers when they have presumably possessed this evil power all along? And why fan the flames of populist hatred when the political winds are already blowing so hot and hard? Besides, the bottom line profits do not square up with the premium increases. Even with these premium increases, insurers will still use the vast majority of their revenues to cover provider costs. It has always been this way before; there is no reason to believe it will change now.
No, I swear it is the death spiral at work. I’ve seen its footprints. During this latest downturn, many individuals have dropped their insurance. It stands to reason that those who need insurance the most, those with chronic healthcare needs, are disproportionately clinging to their coverage. As the risk pool loses its healthiest members, premiums must climb. There is no other logical explanation for what is going on. And, unfortunately, it won’t stop here. Facing steep increases in premiums, more healthy Americans will drop coverage, and premiums for those who still demand coverage will soar yet again, making a mockery of the whole concept of insurance. Thus the death spiral leaves its trail of destruction.
This is how it must be in a competitive health insurance market when employers no longer feel obligated to offer insurance and legislators lack the wisdom to mandate coverage. I fear that before too long, private health insurance will be the exclusive province of those fortunate enough to work for large employers who have natural risk pools. Congress tried to destroy private health insurance by giving us the government option. But Congress is no match for the supernatural forces of the market. The death spiral may yet accomplish what Nancy Pelosi has long dreamed.
Note: This is the original Code Red blog — Independent, willing to take on all self-serving political rhetoric, and based on economic research. Do not accept substitutes!