Obamacare Is Not in a Death Spiral

But There Are Problems with Insurance
Paul Ryan / CNS photo
U.S. House Speaker Paul Ryan talks about the Republican bill to repeal and replace the Affordable Care Act, during a March 8 news conference / CNS photo

“Death spiral” is an actual technical term in the insurance industry, used by actuaries to describe a rare sequence of events that leave a once profitable insurance product a heap of smoldering metal. Whenever I heard it brought up, it was done so in a hushed voice, because once a product went into a real death spiral, all that was left was to lead it out into the woods, tie it to a tree, and shoot it in the head.

Paul Ryan likes to talk about death spirals when he talks about Obamacare, not because he is actually describing one but because “death spiral” sounds real scary, maybe even to him. Death spirals are very rare insurance events that require something to happen that causes relatively well people to withdraw from an insurance plan, leaving most of the truly sick behind. The spiral comes when the insurance company raises prices in order to pay for this greater proportion of sick people, and this price pressure causes even more of the healthier people to leave the plan, which then causes another sharp price increase, followed by more attrition, and on and on until it’s time to lead old Rover out into the woods for that last walk.

This is simply not happening with Obamacare. There is no attrition of healthier people going someplace else. There is no increase in the proportion of the sick in the covered population as a whole. Obamacare has been expensive, but then what would one expect if one starts to suddenly insure millions of people who had not had insurance (and treatment) for years or decades? And while the price of Obamacare policies did increase, a lot, over the course of several years for a number of reasons, the main one was that the original policies were not priced high enough to begin with, because no one had any way of knowing how sick these people would prove to be. That anyone would still be breathless in astonishment about any of this, that sick people used doctors and hospitals and this turned out not to be free, is rather astonishing behavior for adults.

So the technical requirements of a death spiral are not there for the ACA. But the current Republican plan to defund Obamacare will definitely lead to one. And when it does, we can then blame Ryan and his pals for making it happen.

If you have read this far, you already know the details about how the rich Obamacare subsidy will be replaced by a very poor “tax credit.” Young healthy people will get a minimum of $2,000 a year and older, sicker people will get a maximum of $4,000 a year. The maximum subsidy is about a third of what the current subsidy is for older people, but in the meantime they will see their premiums rise to a massive degree, since the multiplier for their premiums (the ratio of what older people can be charged relative to younger people) will shoot up from 3:1 to 5:1. The much higher premiums, coupled with the much lower subsidy, will chase most people from the market, unless they are already so sick that it still makes sense for them to buy insurance at any cost.

As for younger people, the mandate requiring them to buy insurance in the first place will be eliminated and replaced with a pretend penalty that will require them to pay a 30 percent surcharge to any insurance premium should they become ill and suddenly decide that they need insurance. Since they would have to be quite ill for this to happen, this 30 percent is going to be a drop in the bucket of the expenses they will incur. So between pushing out the relatively healthy and keeping the relatively sick, Ryan and his buddies will be creating a death spiral where there isn’t one now.

Ryan has been pushing all sorts of fantasies about how the “market” is going to somehow create new, much cheaper products that will replace the Obamacare that people have now, but frankly, he’s simply lying. There may be more “choice” in the sense that rotten coverage will again be available as it was before the ACA. But the choice of being able to buy something like Obamacare will be lost for most of the people who have it now. This is how the middle class is going to be screwed. For the poor on Medicaid, there isn’t even the need for Ryan to lie, since the poor by definition have to take what they can get. And the Republicans are going to cap Medicaid in such a way that it is going to roll back current enrollments or cut current levels of benefits. Things are going to get worse for the poor, just when we saw some things starting to get better for them.

The ACA is not in a death spiral, but the Republican plan to defund Obamacare will lead to one

I have to admit that between the gutting of Obamacare policies for the middle class and the gutting of Medicaid, I am rather surprised, since the whole thrust of the Trump campaign was that the working and middle classes had been ravaged by the economic policies of the past thirty years and had either seen their jobs degraded or eliminated altogether. One would think that such a president would want to keep this particular safety net at least until the economy got going again.

Now, it is true that one could raise moral questions about turning health care into a commodity like any other and made unavailable to those who have low-paying jobs if they have a job at all. But the moral issue is not enough to prevent a disaster like the one the Republicans are cooking up, because they have a moral position of their own. They believe that government support of any social service creates an incentive for people to use it and to become dependent on government when in fact they can and should (for their own moral well-being) be depending on themselves. They believe that anything that supports the poor by taxing those who are not poor is an immoral redistribution of resources from those who obtained them through just desserts to those who have not done the work to procure them and are rightly suffering for their immorality. They believe that there is no such thing as a market failure and that the “free market,” if unregulated, will solve all problems. And they believe (since it is clear that the whole Republican proposal is designed to eliminate taxes) that if taxes can be eliminated for most things, this money will be retained by the taxpayer and will be reinvested in the economy, causing greater economic growth, which will then lift the poor and everyone else and enable them to buy their own insurance, provided that they have not succumb to their earlier habits of laziness that made them poor in the first place.

These “moral” arguments have always appeared to me to be people crowing about being winners and claiming that their moral qualities made them so while the losers fell because they lack the same great attributes. I don’t believe those who generally identify as left will win a moral argument with the right on this issue. But I also think, in the case of health care, that it is not even necessary to make the moral argument in the first place.

Health care is a different animal from any other commodity. First, it isn’t based on one’s desires, no matter how much the Republicans talk about the “freedom of choice.” The human body is a fact that all share. Some humans are healthier than others, but no human stays healthy forever. And a human body is exactly the same whether that body lives in New York or Mississippi. There is no need to have “flexibility” between states on how the body is treated. Second, health care is one of the few things about which left and right agree enough to say that we think that people, whoever and wherever they are, should not be allowed to die in the streets. 

Between the starting point of each of us having a human body and the ending point where we don’t want to see corpses in the gutter, there is, I agree, a vast space that contains both sick people with cancer who everyone agrees need to be treated—but also people getting things that actually do work like commodities, such as birth control or even taking the kids to the doctor because they might have the flu. But on the whole, except for a few really brave and deluded libertarians, we think the sick should get to see a doctor. And sooner or later they do. For the uninsured, this often comes far too late, and when it does come, it’s far more expensive than it could have been had they gotten health care sooner. But the whole structure of our health system is designed to hide what is being paid for and who is paying for what.

The United States pays more for health care, on a per capita basis, than any other country. Yet our outcomes are about the worst in the industrialized world. There is more than enough money floating around the system to provide good care for everyone. There is a significant number of people who don’t want this care provided for the poor and paid for by taxes. And yet such care that the poor get is paid for by these very same people, who are paying about 30 percent or higher costs for their own medical care than they would in a country that paid a small percentage over costs (as is done in every other industrialized country). For every dollar of cost for medical care received by someone with commercial insurance, they are paying $1.30 or more. This is factored into the price of insurance for everyone who has it. It is the secret subsidy that the poor and uninsured now get and we tolerate it because it technically is not a tax. In a country where so many see taxes as some kind of evil, it becomes very easy to install secret charges like this.

This secret subsidy covers the unpaid costs of Medicaid, Medicare, and charity costs. When some uninsured person staggers into the ER, this is the subsidy that allows them to get free care. When some homeless person is clawed out of his frozen sleeping bed and rushed to the hospital, this secret subsidy is what allows him to get the treatment he needs so that the hospital can toss him back out in the street. When someone says that they “choose” not to have insurance, what they are doing is opting out of the payment side of this equation and simply free-riding on everyone else who is paying into it.

The subsidy and our unwillingness to face what it is and what it means accounts for both the richness of the system and why it is so dysfunctional. A subsidy means that there is not much incentive for providers to cut costs. A subsidy means that people who don’t want to provide an organized approach for medical care for the poor can both fool themselves into thinking that they are paying low taxes and that the ER provides a safety net. The subsidy means that our providers can stay fat and do their buyouts, but that the uninsured will still die, albeit discreetly just as we as a society wishes. The subsidy means that there is not and will not be a real market in the sense of a market where the producer has to cut prices relative to costs in order to compete. The subsidy is the reason that there will never really be any kind of price transparency in the United States, because no one wants to reveal the subsidy. We live in a clown’s paradise, where morality can make no headway because people won’t even admit what’s going on.

unagidon is a contributing editor to Commonweal.

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