Monday, March 11, 2013

“No, Mr. Bond, I expect you to die”

Last week, Bob expanded on a statement that appeared in RealClear Markets that “the new health coverage will be austere” - yet as Bob points out, that is a radical re-definition of “austere” because ObamaCare will cost a bundle.

The writer at Real Clear Markets went on to point out that the new ObamaCare coverage could become even more expensive because of an insurance phenomenon called “adverse selection.” The article states "If this sort of adverse selection occurs, it will raise costs to insurers. To guard against this, insurers are likely to price the coverage at a premium."

I'm surprised RCM says this.  The statement suggests adverse selection is not likely - iffy - but, if it arises, no problem - the insurance companies will price "at a premium”.

On the contrary, I think adverse selection is very likely and that increasing premiums is no solution.  Pricing at a premium is likely to make adverse selection worse, not better.  I think the administration knows this; I’m certain that the insurance companies know this; I’m surprised that Real Clear Markets does not.

When the buyers have a choice  - as they will under ObamaCare - richer plans always face an adverse selection risk.  That's because the higher premium for the richer plans is an incentive to buy a lesser, less-expensive option, especially for people who believe they are in good health.  Raising the premium for a richer plan increases the incentive to buy a lesser plan.  Therefore raising premiums is likely to make adverse selection worse.  This can eventually produce the so-called death spiral.

Here’s how that could happen. As fewer of the healthiest people buy the richer ObamaCare plans (or as more of the healthiest people drop out) the average health of the remaining ObamaCare insurance pools gradually worsens.   This drives premiums further upward; that results fewer healthy buyers and an even less-healthy covered population; which drives premiums further upward; that results in an even less-healthy covered population; which drives premiums further upward . . . etc.   That's the death spiral.

Under ObamaCare, everyone will have choices to buy insurance (1) thru the exchanges; (2) in the remaining private market if any; or (3) not to buy insurance at all and pay the "tax" or "penalty" (or whatever the administration is calling it today).

Many of the presently-uninsured middle class are young & healthy and have chosen not to buy insurance because of its cost; many of the presently-uninsured poor have not even enrolled in Medicaid.  Will the ObamaCare premium subsidies significantly change those decisions?  At this time, no one really knows, but the underwriter in me says:

(1) Yes, many of the very poor will enroll in an ObamaCare option.  That’s because their premiums will be heavily subsidized.  But on average the poor are less healthy than the general population.  Becoming insured is a good thing for them, and is also likely to drive up the cost of the insurance for everyone in the ObamaCare pool.

(2) No, many who are middle class and on average healthier than the general population will not enroll in an ObamaCare option.  They will choose as they do today – i.e.,the lowest-cost non-ObamaCare option they can find, or remain uninsured and pay the tax or penalty, because that will cost them much less than the ObamaCare insurance premium.  There's little risk in not buying insurance until they need it, because coverage thru the ObamaCare Exchanges will be guaranteed-issue, and must cover all pre-existing conditions.   Covering them only when they have medical expenses also likely to drive up the cost of the insurance for everyone in the ObamaCare pool.
So ObamaCare stands to experience adverse selection either way.  For that reason, "pricing at a premium" is an invitation to the death spiral.

In designing ObamaCare, the administration consulted competent actuaries.  These actuaries fully understand the dynamics of adverse selection.  Why would the feds design a scheme so clearly vulnerable to adverse selection?  I think that question suggests a couple of better questions:  was it the administration’s ultimate aim from the beginning to adopt a scheme that must fail, thereby discrediting the private market and ushering in the remaining alternative – a national, single-payer plan?  Does the administration expect ObamaCare to live?
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