Princeton professor says Obamacare marketplaces in a 'death spiral'

A Princeton Univeristy health economist told the liberal website Vox that the Obamacare state exchanges were in a "death sprial" and nothing could be done to save them.

Sarah Kliff: Give me your assessment of where the Obamacare marketplaces are right now, and where you expect them to head in the future.

Uwe Reinhardt: I always joke about it like this: If you got a bunch of Princeton undergrads to design a health care system, maybe they would come up with an arrangement like the marketplaces.

The natural business model of a private commercial insurer is to price on health status and have the flexibility to raise prices year after year. What we’ve tried to do, instead, is do community rating [where insurers can’t price on how sick or healthy an enrollee is] and couple it with a mandate.

When you do this as the Swiss or Germans do, you brutally enforce the mandate. You make young people sign up and pay. But we are too chicken to do that, so we allow people to stay out by doing two things: We give them a mandate penalty that is lower than the premium. And we tell them, If you’re really sick, we’ll take care of you anyhow. [A federal law called EMTALA requires hospitals to treat all patients with life-threatening conditions regardless of their ability to pay.]

SK: So what happens in a system like this? Does it eventually right itself, or does it fall apart?

UR: Liberals think this will settle itself. Eventually, though, we all know about the death spiral that actuaries worry about, and I think what you’re seeing now is a mild version of that. These things accelerate, as premiums keep rising.

We’ve had two actual death spirals: in New Jersey and in New York. New Jersey passed a law that had community rating but no mandate, so that market shrank quickly and premiums were off the wall. You look at New York and the same thing happened; they had premiums above $6,000 per month. The death spiral killed those markets.

What we do have in the Affordable Care Act is the mandate, so it will be a slower process. If the premium increases go through for 2017, some are 8 or 9 percent, and that is stiff. If those rates get improved, those are big enough that a lot of people will drop out.

It isn't just the premium increases that is killing the exchanges. As we've reported previously,  many areas of the US will be down to one insurance carrier operating in the exchanges. At least one state will be without any coverage at all. 

A public option will probably not be enough to curb costs and premiums. The key will be giving the individual mandate bite so that the pool of insureds becomes a lot healthier. This will be political poison and the GOP would do well to oppose it fiercely.

The exchanges may close but the federal marketplace will remain open for business. The only sure thing about Obamacare in the future is that insurance is going to get more expensive - a lot more.

A Princeton Univeristy health economist told the liberal website Vox that the Obamacare state exchanges were in a "death sprial" and nothing could be done to save them.

Sarah Kliff: Give me your assessment of where the Obamacare marketplaces are right now, and where you expect them to head in the future.

Uwe Reinhardt: I always joke about it like this: If you got a bunch of Princeton undergrads to design a health care system, maybe they would come up with an arrangement like the marketplaces.

The natural business model of a private commercial insurer is to price on health status and have the flexibility to raise prices year after year. What we’ve tried to do, instead, is do community rating [where insurers can’t price on how sick or healthy an enrollee is] and couple it with a mandate.

When you do this as the Swiss or Germans do, you brutally enforce the mandate. You make young people sign up and pay. But we are too chicken to do that, so we allow people to stay out by doing two things: We give them a mandate penalty that is lower than the premium. And we tell them, If you’re really sick, we’ll take care of you anyhow. [A federal law called EMTALA requires hospitals to treat all patients with life-threatening conditions regardless of their ability to pay.]

SK: So what happens in a system like this? Does it eventually right itself, or does it fall apart?

UR: Liberals think this will settle itself. Eventually, though, we all know about the death spiral that actuaries worry about, and I think what you’re seeing now is a mild version of that. These things accelerate, as premiums keep rising.

We’ve had two actual death spirals: in New Jersey and in New York. New Jersey passed a law that had community rating but no mandate, so that market shrank quickly and premiums were off the wall. You look at New York and the same thing happened; they had premiums above $6,000 per month. The death spiral killed those markets.

What we do have in the Affordable Care Act is the mandate, so it will be a slower process. If the premium increases go through for 2017, some are 8 or 9 percent, and that is stiff. If those rates get improved, those are big enough that a lot of people will drop out.

It isn't just the premium increases that is killing the exchanges. As we've reported previously,  many areas of the US will be down to one insurance carrier operating in the exchanges. At least one state will be without any coverage at all. 

A public option will probably not be enough to curb costs and premiums. The key will be giving the individual mandate bite so that the pool of insureds becomes a lot healthier. This will be political poison and the GOP would do well to oppose it fiercely.

The exchanges may close but the federal marketplace will remain open for business. The only sure thing about Obamacare in the future is that insurance is going to get more expensive - a lot more.