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Thursday, November 7, 2013

"Seven Reasons Obamacare Isn't In A Death Spiral," Ezra Klein

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1) Tax subsidies. Obamacare pumps more than a trillion dollars to subsidize lower-income people in the insurance exchanges. That's a lot of money. And, crucially, the subsidies are tied to the cost of the insurance plans. As premiums rise, so too do the subsidies.
"The tax credits are a huge piece of death spiral prevention here," Levitt says. "At least half, probably 60 percent, of the people in the exchanges will get tax credits. The risk of higher premiums is more on the federal government then it is on people."

That's particularly true for the young people the law so desperately needs. Put simply, the younger you are, the more likely you are to be poor. "The tax credit premium subsidies are disproportionately going to be helpful for the young adult population," says Ron Pollack, head of Families USA. "They'll get the largest tax credit subsidies of any age group."

The result is that a lot of the young people needed to keep premiums down will be paying a fraction of the premium's cost -- or none of it at all. That's one brake on the dreaded death spiral.

2) The insurers. The theory of the "death spiral" goes like this: Insurers see that the people signing up for insurance are older and sicker than they thought. So they sharply raise premiums in 2014 to make sure they don't lose money. Those higher premiums drive young people out. And so the spiral begins.

The problem here? The theory relies on insurers to sharply raise rates in 2015 because the Web site wasn't working well in 2013 and 2014. But they might not cooperate.
"There's this assumption that if the wrong people enroll in the plan then insurers will just automatically jack up premiums in the second year," Levitt says. "But there's nothing automatic about it."

Over the long run, insurers price their plans at the expected average cost of the enrollees plus a bit for administration, profits, etc. But in the short-run, insurers badly want to grab market share in the early days of Obamacare. The reason is insurance is sticky: People don't like to change their provider. So if an insurer gets a customer now they're likely to keep them for a long time. So long as insurers believe the young and healthy people will sign up for Obamacare -- even if they don't think it'll happen until year two -- they have a huge incentive to price their plans low enough to get those customers.

"If you have this worst case scenario where year one is bad and a lot of sick people enroll then the last thing you want to do is raise your premiums a lot and miss out on the healthier people who want to come in in year two," says Levitt. "That's the worst of all worlds for you: You got the sick people in year one and you didn't price competitively to get the healthy ones in year two."

Of course, insurers don't want to lose a ton of money in the interim. But there's a failsafe for that, too.

3) Risk corridors. One of the least-well known failsafes in Obamacare are the subsidies to insurers who underprice their insurance. The way this works is that if the insurer's actual costs are more than three percent above their "target" costs, the government gives them 50 percent of the difference. If they're more than eight percent above their target costs, the government pays 80 percent of the difference. (The program goes in reverse, too: If an insurer overprices their insurance, they have to pay part of the excess to the government.)
The program only exists for the first three years of the law. But it basically gives insurers a huge incentive to price their insurance low. They don't want to go too low because the program ends in 2016 and they'll lose their customers if they need to raise rates by 500 percent. But for an insurer who's just trying to wait out a bad 2014, the risk corridors are a real buffer. As Adrianna McIntyre wrote, they help plans "weather 2014?s uncertainty and probably keep the following year's premiums relatively unchanged as the risk pool normalizes."

4) Reinsurance. This is the little brother of the risk corridors. For the first three years of Obamacare, the government basically subsidizes particularly expensive enrollees. So if someone buys insurance and their claims break $50,000 in 2014, the federal government picks up part of the cost. The result is that, for the first few years, really sick people cost insurers less than they normally would, and so can be expected to have less of an effect on premiums than would typically be expected.

5) The individual mandate. The reason the Obama administration is so dead-set against delaying the individual mandate is it's a key failsafe against a death spiral.
There's a lot of confusion over the actual costs of the individual mandate, so here's a reminder: In 2014, it's $95 or 1% of adjusted income (which is income minus the tax filing threshold, which is $10,000 for individuals and $20,000 for families), whichever is greater. In 2015, it's $325, or 2% of adjusted income, whichever is greater. In 2016, it's $695 or 2.5% of adjusted income, whichever is greater.

The reason I keep italicizing "whichever is greater" is because it's the part that really matters. A lot of people believe the mandate's penalty in year one is $95. It isn't. Almost everyone who faces the mandate makes more than $9,500. So imagine someone making $53,000. For them, the mandate's cost in year one is $430. By year three, it's $1,075. That's a lot of money.

In Massachusetts, sign-up only accelerated when the mandate loomed and people realized they either needed to buy insurance or give the government money in exchange for nothing. Something similar might happen with Obamacare.
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6) 51 death spirals? There's no such thing as "Obamacare." Instead, there are 50 state exchanges (and one for D.C.). It's possible that risk pools in some of those could go awry. But to say "Obamacare will enter a death spiral" is to say that 51 exchanges, with 51 different risk pools, will all go totally off the rails. Much more likely is that some of the exchanges end up with strong risk pools and some end up more troubled.

Bonus 7) Web literacy, or Drew Altman's crazy theory. "This is a crazy theory, and almost no one but me believes it," prefaces Drew Altman, president of the Kaiser Family Foundation. I think it makes sense, though, so I'm including it here.
"We have a web first, web-driven enrollment system," Altman says. "So it's possible that what we'll get are people who are web savvy. Young people are web savvy. They're the ones who know how to work their way through web sites. What we won't get are the long-term uninsured who require other forms of outreach. So it's not at all clear to me that the conventional wisdom that young people will stay disproportionately stay away is right. I think they might disproportionately show up."

Bottom line: Obamacare's problems are real and severe. But assuming the web architecture eventually gets fixed -- and it likely will -- there's little chance the law will collapse in on itself. Premiums might rise, Democrats might lose more seats than they hoped in 2014, and it might take some time -- even years -- until all the marketplaces are working smoothly, but a "death spiral" is hard to imagine.


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