By: Chris Medrano
On Thursday of last week, Trump made a comment that went unnoticed by many.
If we don’t pay lots of ransom money over to the insurance companies, [Obamacare] would die.
Unfortunately, he’s got a point. Currently, the Obamacare markets are being sustained by billions of dollars in illegal corporate welfare to coax insurers to remain and prevent a death spiral.
A death spiral is not a partisan slur. It’s a technical term in the insurance market. To understand how we got to this point, we need to step back and understand how insurance works.
CONGRATS, YOU ARE STARTING AN INSURANCE COMPANY
Insurance is an amazing tool to transfer risk and helps millions of people when disasters hit. To start your very own health insurance company, you at the very least need the following ingredients.
A lot of capital
A pool of healthy people
The people in your pool must be healthy when they enter. Otherwise, it is no longer insurance to give them care. You are just giving them a subsidy. That is a very nice thing to do, but it is not a sustainable business model.
Once you have a bunch of healthy people paying premiums into your pool, it’s easy to pay for a few people’s treatments when illness strikes.
This is foundational to understanding the insurance market. Your customers pay when they are healthy so costs don’t break their backs if/when they get sick.
What happens when a lot of people in your pool are sick? Obviously, you will need more money to pay for them since doctors and providers don’t work for free. Usually, you can raise your prices a little to pay for the sick people and no one bats an eye.
A critic of capitalism may point out that you could raise the prices for your own profit instead of care. That may be tempting, but you may not want to. If you raise the price in a way that impacts consumers’ pockets, you could lose customers to other companies. That’s why competition in an open market is vital to keep prices honest.
But what if you get to the point where there aren’t enough healthy people in your pool to pay for the needs of the sick people? You will need to raise premiums on everyone. This is not good. Healthy people–usually younger–will say “Screw this. The cost for insurance isn’t worth the risk of getting sick,” and they will leave the insurance pool. (Obamacare’s individual mandate tried but failed to prevent this.)
As your ratio of healthy to sick people gets even worse, you will need to raise prices again and the cycle starts all over.
At a certain point, your insurance company suffers too many losses. Your only option, unless you want to start paying out of pocket for everyone, is to pull out of the market and stop selling insurance. When this cycle spreads throughout the market, it is called a death spiral. Today, we are seeing the beginning signs of a death spiral as insurers start to leave the exchanges.
What happens to the sick people you were paying for? As we are seeing today, those people get dropped as insurers bail the market left and right. Just this weekend, Aeta announced they would be pulling out of Virginia’s exchange. In Tennessee, 40,000 people are set to completely lose their coverage. Thousands more across the country face the same situation.
This is a direct result of Obamacare’s regulations. (The details are best left to another blog post, but a good mental model is to think about dominoes falling in the wrong order.)
While it is true that the markets themselves are not in an actual death spiral currently, it is very likely they would be if it weren’t for these bailouts. According to Jennifer Rubin of The Washington Post,[T]he CBO found that “the nongroup market would probably be stable in most areas under either current law or the [AHCA].” That supposes that the administration does not take active measures to sabotage the current system.
Sabotage, according to Rubin, would mean stopping these bailouts, known as cost-sharing reduction (CSR) payments, to help insurers pay for care. The Obama administration resorted to paying these billions to keep insurers in the exchanges. Now, under intense pressure, Trump is continuing to make those payments.
The other component to remember, however, is that these bailouts are illegal. They were never appropriated by Congress. Healthcare analyst Sally Yates writes for USA Today:
When the GOP-controlled House sued the Obama administration in 2014 over this precise point, Judge Rosemary Collyer of the U.S. District Court for the District of Columbia sided with the House but allowed the subsidy payments to continue pending an appeal to the Supreme Court.
Should Trump cease these payments? No way. At least not without a backup strategy. Doing so would only weaken the markets further.
Would Trump’s American Health Care Act (AHCA) fix these problems? That is highly debatable. But the public needs to grasp that the Obamacare exchanges have effectively fallen apart, exacerbated costs, and are being propped up on the taxpayer dime.
Originally Posted on 3rd Law Blog