Where are the Death Spirals?

Everyone seems to have a different idea about why health insurance is so expensive, and why costs grow so quickly. Maybe it’s because people wait to purchase plans until they get very sick, leading insurers to jack up premiums to account for things like chemotherapy and open-heart surgery. Many policymakers have argued that this must be the main cause of America’s health-care crisis, and only a mandate forcing healthy and sick citizens alike to buy insurance can create a “common pool” where prices are stable. Fortunately, with new evidence emerging after changing policies we can put these claims to the test and determine which are supported, and which are spurious—and the data doesn’t bode well for supporters of President Obama’s individual mandate.

Ever since the Affordable Care Act (“Obamacare”) was signed into law in 2010, the law’s supporters have attributed falling uninsurance rates and a decline in price increases to the all-powerful mandate. The problem, though, is data showing that the mandate isn’t as important as Obamacare backers hoped it would be. At the end of 2017, President Trump signed into law a repeal of the individual mandate, allowing millions of Americans the ability to forgo bank-breaking plans without incurring hundreds of dollars of fines from the Internal Revenue Service.

While technically the law doesn’t come off the books until 2019, the mandate is as good as gone. If you don’t want a health insurance plan and don’t want to be penalized, all you need to do (via tax software or an accountant) is claim the hardship exemption, which has been considerably loosened post-repeal and now doesn’t require any “documentary evidence or written explanation” unlike previous years. These are but the latest iterations of the Administration’s anti-mandate enforcement philosophy, which started with the White House first telling citizens last February it wouldn’t really be enforcing the penalties.

As a result of this, if proponents of the mandate were correct, we would see young, healthy twenty-somethings saying “Adios” to their insurance plans after the President gave them the green-light. So, are large numbers of people dumping their health insurance plans? With the data now starting to come in, we can test these claims, and while the final numbers are yet to be confirmed, the answer appears to be no. Preliminary health insurance data from National Health Interview Survey for the first three months of 2018 show that “the percentage of persons of all ages who were uninsured…was 8.8% (28.3 million). There was no significant change from the 2017 uninsured rate of 9.1% (29.3 million).”

If you check out the Survey graphs (Figure 3 in particular), you can see that while there might be a slight uptick in the uninsured rate in 2017, driven by a small percentage decrease in Obamacare exchange enrollment (4 percent to 3.6 percent of the under 65 population), in the words of the study’s authors, this is “not significant.” If you wanted to spin this blip into the Trump Administration saying it would stop enforcing the mandate even before repeal, you can…although the evidence won’t back you up.

To make this case, some have claimed that weakening and/or nixing the mandate causes something known as a “death spiral,” in which high insurance prices prompt healthy people to drop out of insurance markets. That increases prices, as the “pool” of insurance holders gets sicker. This increase in turn forces semi-healthy people to drop out, causing an endless spiral with no government force to stop it.

But Gallup data shows that exchange dropouts are heavily concentrated in the population eligible for ACA subsidies, who are effectively shielded against premium increases. For the majority of folks who dropped out of ACA exchanges in 2017, health insurance premiums are capped as a percentage of income, with the federal government (or, more accurately, the taxpayer) paying the difference between that capped amount and the actual price of the health plan.

If exchange dropouts were disproportionately healthy, ACA exchanges across the country would suddenly start to look a whole lot sicker. But this simply isn’t happening. According to a recent Kaiser survey of individual insurance marketplaces across the country, increases in the average claim per enrollee actually declined in 2017, and average hospital attendance for enrollees hasn’t ticked up.

This is further confirmed by new data from the Centers for Medicare and Medicaid Services (CMS) which shows that individuals on exchanges are actually slated to pay 1.5 percent less on their plans than they did this year. You can quibble all you’d like with the report’s attribution of this change to “looser regulations” or the like, but it’s hard to jive this change with the offing of the individual mandate and the predicted doomsday “death spiral” story.

Which is good news for liberty and all of those lofty ideas held by the Founding Fathers. The data shows that we simply don’t need something like the individual mandate—we don’t need to trade our freedoms for some semblance of market stability. Instead of looking where the government needs to be more involved, lawmakers should be looking to dial back the federal footprint on health-care in order to lower costs.

[pullquote]The data shows that we simply don’t need something like the individual mandate—we don’t need to trade our freedoms for some semblance of market stability.[/pullquote]

The third-party-payer nature of the system, enforced by unfixed tax code provisions and ACA coverage requirements, results in horror stories like the $629 band-aid. By focusing on these problems, instead of adverse-selection, America can actually make headway in reducing runaway costs. Clearly, the mandate didn’t work, so let’s not pursue similarly-heavy handed rules and restrictions.