Tag: adverse selection

RomneyCare Unleashed Adverse Selection, As Will ObamaCare

The Massachusetts health care law that Gov. Mitt Romney signed in 2006, and the nearly identical federal law that President Obama signed this year, create perverse incentives that are causing health insurance costs to rise and could eventually cause health insurance markets to collapse. A report released yesterday by the Massachusetts Division of Insurance shows that process is well underway.

Massachusetts requires health insurance companies to sell to all applicants, and imposes price controls that require insurers to charge all applicants the same premium, regardless of their health status.  ObamaCare would do the same.

Those price controls have two principal effects on healthy people.  First, they increase the premiums that insurers charge healthy people (the additional premium goes to reduce premiums for sick people).  Second, they enable healthy people to wait until they are sick to purchase coverage.  Since insurers must take all applicants, and charge them the same premium, there is little or no downside to waiting until one gets sick to purchase coverage.

Those price controls also guarantee that when healthy people drop out of insurance pools, premiums rise for everyone who remains, which causes more healthy people to drop out, and do on.  Economists and actuaries call this an “adverse selection death spiral.”

The Boston Globe reports that the Massachusetts Division of Insurance found that in the wake of RomneyCare, many more healthy residents are purchasing coverage only when they need it:

The number of people who appear to be gaming the state’s health insurance system by purchasing coverage only when they are sick quadrupled from 2006 to 2008, according to a long-awaited report released yesterday from the Massachusetts Division of Insurance.

The result is that insured residents of Massachusetts wind up paying more for health care…

The number of people engaging in this phenomenon — dumping their coverage within six months — jumped from 3,508 in 2006, when the law was passed, to 17,177 in 2008, the most recent year for which data are available.

In the hope of preventing this sort of gaming behavior, RomneyCare requires Massachusetts residents to purchase health insurance.  Yet that “individual mandate” appears not to be working, probably because the penalties for non-compliance are far less than the cost of the mandatory coverage.  Thus many residents decline to purchase health insurance, pay the penalty (or misrepresent their coverage status), and purchase health insurance only when they need medical care.

ObamaCare contains similar price controls and requires nearly all Americans to purchase health insurance by 2014.  Yet ObamaCare’s penalties for non-compliance are also far less than the cost of the required coverage for most people.

As goes Massachusetts, so goes the nation.

ObamaCare’s Price Controls Threaten HSAs

John Goodman is correct that ObamaCare’s individual mandate – and Kathleen Sebelius’s power to make the mandate more burdensome at whim – threaten the continued existence of health savings accounts (HSAs).  But ObamaCare’s price controls are no less a threat.

The new law requires insurers to charge enrollees of the same age the same average premium, regardless of health status.  That’s a price control, and it will cause premiums for healthy people to rise dramatically and thus lead to massive adverse selection.  Healthy people will gravitate to less-comprehensive insurance – in particular, HSA-compatible high-deductible plans – where the implicit tax is smaller.

As premiums for comprehensive plans spiral upward (ultimately causing comprehensive plans to disappear) and as ObamaCare proves more costly than projected, supporters will be desperate for new revenue.  They will call for the elimination of both HSAs and high-deductible health plans on the grounds that those products – not the price controls, mind you – are causing the market to unravel.

HSAs allow young and healthy consumers to avoid the raw deal that ObamaCare offers them. And that’s precisely why ObamaCare’s supporters will try to kill HSAs. We will end up repealing one or the other.