Is Obamacare Headed for Death Spiral?

By Megan McArdle | October 23, 2013

Another week has passed, which apparently means that it’s time for another terrifying article from Sharon LaFraniere, Ian Austen and Robert Pear on the federal health-care exchanges.

Federal contractors have identified most of the main problems crippling President Obama’s online health insurance marketplace, but the administration has been slow to issue orders for fixing those flaws, and some contractors worry that the system may be weeks away from operating smoothly, people close to the project say.

Administration officials approached the contractors last week to see if they could perform the necessary repairs and reboot the system by Nov. 1. However, that goal struck many contractors as unrealistic, at least for major components of the system. Some specialists working on the project said the online system required such extensive repairs that it might not operate smoothly until after the Dec. 15 deadline for people to sign up for coverage starting in January, although that view is not universally shared.

Time to panic? No. But it’s time to prepare to panic. It sounds like the earliest anyone is projecting fixes is sometime in the middle of November. That’s the time when it absolutely has to work — and if it doesn’t, we should panic. Maybe not “Get in the shelter, Homer!” panic, but I’d definitely think about rebalancing the 401(k) and maybe voting in some politicians who will treat this with the gravity it deserves, rather than giving Rose Garden speeches saying that everything’s basically A-OK if you don’t look at the parts that don’t work! Because make no mistake: If this piece doesn’t work, then most of the Patient Protection and Affordable Care Act doesn’t work.

Am I exaggerating? I know it sounds apocalyptic, but really, I’m not. As Yuval Levin has pointed out, what we’re experiencing now is the worst-case scenario for the insurance markets: It is not impossible to buy insurance, but merely very difficult. If it were impossible, then we could all just agree to move to Plan B. And if it were as easy as everyone expected, well, we’d see if the whole thing worked. But what we have now is a situation where only the extremely persistent can successfully complete an application. And who is likely to be extremely persistent?

Very sick people. People between 55 and 65, the age band at which insurance is quite expensive. (I was surprised to find out that turning 40 doesn’t increase your premiums that much; the big boosts are in the 50s and 60s.)

Very poor people, who will be shunted to Medicaid (if their state has expanded it) or will probably go without insurance.

Insurance that is only sold to these groups is going to be very, very expensive. Not the first year — President Barack Obama was in the Rose Garden just this morning, touting the fantastic cost savings available to the old and sick people whom Obamacare was already helping. But if those are the only people who sign up, insurers will lose a bunch of money on these policies. And then next year, they’ll ask for a lot more money.

What happens next — as we’ve seen in states such as New York that have guaranteed issue, no ability to price to the customer’s health, and a generous mandated-benefits package — is that when the price increases hit, some of those who did buy insurance the first year reluctantly decide to drop it. Usually, those are the healthiest people. Which means that the average cost of treatment for the people remaining in the pool rises, because the average person in that pool is now sicker. So premiums go up again . . . until it’s so expensive to buy insurance that almost no one does.

For folks who make less than 400 percent of the federal poverty line, that won’t matter much; the price of a “silver” plan (which covers about 70 percent of expected expenditures) is capped as a percentage of their income. For those who make more than 400 percent of the poverty line (a little over $40,000 for a single person), however, that will be a big problem. And, of course, the federal government will also have a big problem if the cost of subsidized policies starts marching rapidly northward.

About 5 percent of the U.S. population bought individual insurance on the private market pre-Obamacare, and about half of the law’s coverage expansion was slated to come from people buying policies in the individual exchanges. Moreover, the states’ high-risk pools, which covered a bunch of very sick people, are coming to an end, dumping those people into the normal private market. And some employers, whose policies did not meet the minimums set by the health-care act, are expected to dump their employees into the private market rather than buy more expensive insurance. If this segment of the market breaks, it’s a Big Deal.

The line taken by the president’s speech this morning, and by the White House more generally, is that while these problems are unfortunate, they’re just not that big a deal. “It’s important to remember the website alone is not the Affordable Care Act,” Jay Carney said last week.

This seems to be the administration’s line every time anything goes wrong with this system. In July, we learned that the employer mandate was being delayed, but don’t worry, because that’s not really essential. Now we learn that the much-touted exchanges aren’t really essential, either — in his speech this morning, Obama helpfully pointed out that you could also sign up by phone. One begins to wonder if Obamacare consists of any actual thing, such that one could ever definitively say that it had happened or not happened . . . that it was working or not working. Perhaps Obamacare is just a dream that lives on in the hearts of the men and women who designed it. As long as they draw breath, Obamacare did happen, and it is working.

Perhaps. But that is not the impression that I was given when those daring dreamers were working to pass it. Back then, Obamacare’s architects frequently spoke of the “three-legged stool”: guaranteed issue, community rating and the individual mandate. Guaranteed issue meant that no one could be turned away. Community rating meant that insurers couldn’t effectively deny insurance to sick people by quoting them policies that cost a squintillion dollars. And the individual mandate prevented the pricing death spiral (known to economists as an “adverse selection problem”). Take away any one of the legs, and the stool would tip over.

But there was also a fourth leg, always acknowledged but not always numbered: the subsidies. Without them, the mandate wouldn’t work, either politically or practically, because you can’t order someone to buy insurance that costs 50 percent of their take-home pay. And the wonks, and the journalists covering them, tacitly understood that there was a fifth leg: the exchanges. You can’t order people to get insurance if they don’t know where to buy it, or if the only quote they got from the one company they called cost more than they could afford.

The exchanges were also broadly understood to be needed to get young, healthy people into the system. Somewhat naturally, almost every story you’ve seen about a new enrollee — including those told by the president this morning — has focused on someone who couldn’t buy insurance before, or who had very expensive insurance. But it’s not surprising that those people are fighting through the system to get coverage; they would pull themselves to the top of Mount Rushmore using only their teeth if that’s what it took to get a cheap insurance policy. What we need to know is what is happening among the people who didn’t need Obamacare to help them buy insurance, because insurers would be perfectly happy to sell them a policy without it. Those are the folks whose premiums will cover treatment for the rest.

As Yuval Levin says, “The healthy young man who sees an ad for his state exchange during a baseball game and loads up the site to get coverage — the dream consumer so essential to the design of the exchange system — will not keep trying 25 times over a week if the site is not working. The person with high health costs and no insurance will.” One might add that he’s probably not going to call into the call center, wait three weeks to get his PDF application mailed to him, review it and send it in, wait another week or two for notification about his subsidy eligibility, and then (finally!) call back yet again to check out his policy options. Some will, of course. But at every tedious step, you will lose people.

In other words, whatever the administration says, the exchange is Obamacare — at least, the Obamacare I was told about during the debate over health-care reform. The one that didn’t destroy the individual insurance market, or cause costs to spiral out of control.

Judging from President Obama’s speech, the administration has decided to triple down on the “burn the boats” strategy pioneered by Hernan Cortes in his conquest of Mexico: Make a total commitment in the hopes that this will somehow enable you to overcome impossible odds. There was no sign of a Plan B (other than call centers), no hint that they might consider a full or partial delay if they couldn’t get the systems working on time. Presumably they think (correctly) that the longer this goes on, the harder it will be to implement a delay, because so many people will have lost their existing insurance and/or bought new policies through the exchanges. But as I pointed out last week, while the “burn the boats” strategy sometimes ends with an improbable victory, the problem is that the other way it ends is in . . . well, a death spiral.

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