ObamaCare’s First Adverse-Selection Death Spiral

Posted by Michael F. Cannon

This is what happens when government price controls limit insurance companies’ ability to set premiums according to risk:

Note that this adverse-selection death spiral happened before ObamaCare‘s price controls on child-only coverage even took effect.  (Of course, President Obama never calls them price controls.  He calls them “consumer protections.”  Some protection.)

ObamaCare supporters are in full-blown denial:

“We’re just days away from a new era when insurance companies must stop denying coverage to kids just because they are sick, and now some of the biggest changed their minds,” Ethan Rome, executive director of Health Care for America Now, an advocacy group, said in a statement. “[It] is immoral, and to blame their appalling behavior on the new law is patently dishonest.”

I’d say that brave new world is already here.

ObamaCare supporters can take comfort in this: since it might take healthy people a while to figure out that they’re better off financially if they drop their coverage and pay the individual-mandate penalty, ObamaCare’s health insurance exchanges might not collapse before their January 1, 2014, launch date.  They could last until January 2.

Krugman Don’t Know Health Insurance

Posted by Michael F. Cannon

When I debated Nobel Prize-winning economist Paul Krugman on health care reform, I asked him if he was familiar with the work of University of Pennsylvania economist Mark Pauly.  Pauly is a leader in the economics of health insurance.  He and his coauthors have shown that health insurance markets are way ahead of politicians — and way ahead of economists — in solving the problems that bedevil health insurance markets. I already knew the answer: only someone completely oblivious of Pauly’s work could have debated as Krugman did.  (As Krugman himself demonstrated in that debate, you never want to ask a question to which you don’t already know the answer.)

Krugman’s column in today’s New York Times tells me that he still has not read Pauly.

Krugman addresses the 39-percent premium increases that insurer Wellpoint planned to impose on its California customers:

WellPoint claims … that it has been forced to raise premiums because of “challenging economic times”: cash-strapped Californians have been dropping their policies or shifting into less-comprehensive plans. Those retaining coverage tend to be people with high current medical expenses. And the result, says the company, is a drastically worsening risk pool: in effect, a death spiral.

Krugman then argues that if Wellpoint’s explanation is accurate, then that demonstrates that free-market reforms would cause private insurance markets to collapse, and demonstrates further the need for government to impose price controls on health insurance and to force healthy people to purchase it.

Yet there are at least two major problems with Wellpoint’s story.

  1. Healthy people dropping coverage would not lead to across-the-board premium increases in California, because California allows markets to set premiums.  Only when the government imposes the kind of price controls that Krugman wants does an “adverse selection death spiral” follow.
  2. Krugman may be thinking, “Even with market prices, once the healthy people drop out, insurers must raise premiums to cover the future costs of the sick people who remain.” Yet Pauly and his colleagues show that insurers collect the money they need to cover those costs in advance by “front-loading” premiums.

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