On National Review’s health care blog, James Capretta does a brilliant job in describing the dynamic that would be put in place if the Baucus health care bill becomes law. It’s the same problem the post office faces: they keep raising rates for stamps because nobody is buying stamps and as prices go up fewer and fewer people buy stamps so they have to raise rates even higher. With insurance, by forcing insurers to sell policies to high risk individuals (without charging a premium) they have to raise rates for everyone, which means fewer healthy people are going to buy insurance, which makes their risk pool even sicker, and they have to raise rates again. Here’s how Capretta describes it:
Insurance death spirals occur when regulators force insurers to offer coverage (“guaranteed issue”) at premiums below the known risk of those they are insuring, without any assurance that the shortfall can be made up elsewhere. When insurers comply with these rules and offer relatively low cost health insurance policies to all comers, quite predictably, many sick people step forward to sign up. When the insurers then try to turn around and charge higher premiums to the relatively healthy to cover their costs, the healthy, also quite predictably, are more reluctant to enroll because they can see the premiums they would have to pay would very likely exceed their health-care costs. So they often say “no thanks” to the insurance and decide to take their chances by going without coverage instead. As more and more healthy people exit the marketplace, insurers are then forced to raise premiums for everyone who remains, which only further encourages the lower risks to opt out. This vicious cycle of rising premiums and an increasingly unhealthy risk pool is called a ‘death spiral’ because it eventually forces the insurer to terminate the plan.
This is not a hypothetical, textbook scenario of what might happen to a poorly run insurance market. It has happened before – many times and in many places. See, for instance, the experience in Kentucky, and in Washington state, and in Maine too. There’s no reason it couldn’t happen nationwide.
Oh, but don’t worry, President Obama promises that if you have private health insurance you’ll get to keep it. And if you believe that…