Is a Death Spiral Inevitable If There is No Mandate?

If the Supreme Court acts within the next couple of weeks to overturn the individual mandate in the Affordable Care Act (ACA) while leaving the rest of the law intact, expect to hear a lot about how the individual insurance market will be destined for a “death spiral.”

When compared with implementing the ACA in full as planned, there’s a consensus that eliminating the mandate would increase premiums and mean that far fewer of the currently uninsured would become covered. But, it is by no means inevitable that the individual insurance market will enter a spiral of death. In fact, there are some good reasons to believe that may not happen.

What is a death spiral and why do some people believe it could happen?

If the individual mandate were overturned by the court with the rest of the ACA untouched, we would be left with an individual insurance market beginning in 2014 where everyone would be guaranteed access to insurance, even if they have pre-existing health conditions requiring expensive medical care. Insurers could not turn people down based on health status, restrict their coverage, or surcharge their premiums. People who are healthy could choose to forego insurance, knowing that they could start buying it if they get sick (although they’d have to wait until the next open enrollment period).

It’s pretty clear that in a system like that, sicker people would be more likely to buy insurance, and premiums would rise as a result. This is known as “adverse selection.” As premiums rise, insurance would look like even less of a good deal for people who are healthy, leading some of them to drop coverage and forcing premiums even higher. And so on. A mandate can prevent such a spiral by requiring that healthy people buy insurance, even if they don’t perceive it to be in their financial interest.

States that have implemented insurance market reforms without an individual mandate – such as New York, New Jersey, and Washington – have seen premiums rise substantially and coverage in the individual market fall. Whether or not the insurance markets in these states have truly spiraled out of control is probably of more semantic interest than anything else. There’s no question premiums rose quite significantly for the average person shopping for coverage.

So, why would invalidating the individual mandate not lead inevitably to a death spiral under the ACA? Two reasons:

First, and most importantly, the ACA includes federal tax credits to make insurance more affordable for people buying on their own in the new health insurance exchanges. This means that for many people, health insurance will be a very good deal, even if they are healthy. The primary reason that people remain uninsured is because they believe they cannot afford to buy insurance, and the subsidies address that directly. Our analysis of Congressional Budget Office (CBO) estimates suggests that over half of people in the individual insurance market beginning in 2014 will be receiving a tax credit towards their premiums.

An example might illustrate this best, using our subsidy calculator:

Consider a healthy 30-year old with an income of 225% of the poverty level (expected to be a little under $26,000 in 2014). Under the ACA, she could face an estimated unsubsidized annual premium of $3,440 for a silver plan. But, she would be eligible for government tax credit of $1,583, leaving her to pay just $1,857. Because her premium cost has been lowered by 46%, there’s a good chance she would choose to buy coverage even if not required to do so.

These subsidies – totaling over $50 billion a year by 2017, according to CBO estimates – won’t eliminate the potential for adverse selection and higher premiums. That’s in part due to the fact that they phase out as income rises, disappearing entirely for people with incomes over four times the poverty level. But they should mitigate it enough to avoid a full on death spiral.

Second, the ACA allows significant variation in premiums due to age. Young people generally have less need for health care services, and they will pay lower than average premiums as a result. This was not true under insurance reforms in New York and (originally) in New Jersey, where insurers were required to charge “pure” community rates, meaning the same premium to everyone, irrespective of age. Predictably, younger people fled the market and older people remained. This should not generally happen under the ACA. (Note that the ACA does limit the variation in premiums due to age, requiring an insurer to charge its oldest enrollee no more than three times the premium for its youngest enrollee for equivalent coverage. In the current market, age-based premiums can vary by a factor of five to one or more. This could lead to some adverse selection based on age, but the effect should be relatively modest because there will still be significant variation in premiums allowed for age.)

There’s tremendous uncertainty involved in how predicting how individuals would react to a complex combination of guaranteed access to insurance, limited age rating, premium tax credits, and no requirement to buy insurance. And not surprisingly, there are a wide range of estimates of what it would mean for premiums and the number of people who gain insurance under the health reform law. CBO’s estimate is instructive, in part because it’s roughly in the middle of the range of projections produced by think tanks and consulting firms, but also because it carries far more weight than others in federal policy debates.

CBO estimates that 16 million fewer people would gain insurance under the ACA without an individual mandate, cutting the reduction in the number of Americans uninsured as a result of the law roughly in half. CBO estimates that premiums in the individual insurance market would be 15-20% higher than if the ACA were implemented in full. A 15-20% increase is non-trivial. But few would consider it to be a death spiral. And, it’s not uncommon to see insurers increase premiums by that magnitude in any given year. In fact, it was a 39% premium increase imposed by Anthem Blue Cross in 2010 on some enrollees in California that may have helped galvanize political support for the ACA.

It’s also important to keep in mind that CBO’s estimate reflects their projection of how much premiums will rise on average if there is no individual mandate, based on changes in the mix of people who buy insurance by health status and age. But, because insurers are permitted to vary premiums by age under the ACA, this average premium increase overstates how much more someone at any given age would pay without a mandate. For example, RAND estimates that average premiums without a mandate would rise by 9.3%, but the premium for any given individual would be just 2.4% higher than if the ACA were implemented in full because of the effects of age rating.

No one, of course, knows yet what the Supreme Court will do. Or, more precisely, the few people who do know aren’t talking. If the court invalidates the individual mandate, it may also invalidate the insurance market reforms as inextricably linked, rendering any fears of a death spiral entirely moot (though also rendering the individual insurance market inaccessible to people with pre-existing health conditions). But even if the mandate alone goes, the consequences may not be as dire as some will undoubtedly claim. And, in addition to the subsidies and age-based premiums already included in the ACA, there are other mechanisms being discussed that the federal government and states could pursue to even out the risk pool in the absence of a mandate (which we plan to address in a future post).

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