Princeton economist Uwe Reinhardt supports ObamaCare. He also thinks the law’s health-insurance Exchanges are doomed. An exodus of insurers—lots of Exchanges are down to one carrier; Pinal County, Arizona is down to zero carriers—has taken supporters and the media by surprise. It shouldn’t. Similar laws and even ObamaCare itself have caused multiple insurance markets to collapse.
Reinhardt jokes ObamaCare’s Exchanges look like they were designed by “a bunch of Princeton undergrads.” Those Exchanges are now experiencing “a mild version” of “the death spiral that actuaries worry about.” The extreme version has happened before. “We’ve had two actual death spirals: in New Jersey and in New York,” Reinhardt explains. “New Jersey passed a law that had community rating but no mandate, so that market shrank quickly and premiums were off the wall. You look at New York and the same thing happened; they had premiums above $6,000 per month. The death spiral killed those markets.” Community rating is a system of government price controls that supposedly prohibit insurers from discriminating against people with preexisting conditions.
And it’s not just New York and New Jersey where ObamaCare-like laws have caused health insurance markets to collapse. It also happened in Kentucky, New Hampshire, and Washington State.
In fact, the death spiral Reinhardt sees in the Exchanges would itself be the fourth death spiral ObamaCare itself has caused:
- Before they even took effect, ObamaCare’s preexisting conditions provisions began driving insurers out of the market for child-only health insurance. Insurers ultimately exited that market in 39 states, causing the markets in 17 states to collapse.
- ObamaCare’s long-term care insurance program – the CLASS Act – failed to launch when the administration could not make it financially sustainable. President Obama and Congress repealed it.
- Exchanges effectively collapsed in every U.S. territory, again prior to launch.
- Now, a nationwide exodus of insurers has left one third of counties, one in six residents and seven states with only one carrier. In Pinal County, Arizona, every insurer has exited the Exchange. The exodus goes beyond greedy, for-profit insurers. It includes more than a dozen government-chartered nonprofit “co-op” plans.
Each of these crashes shares the same root cause: ObamaCare’s preexisting-conditions provisions create adverse selection. (Adverse selection is when sick people enroll in a plan and healthy people don’t.) To put it more plainly, ObamaCare required insurers to cover so many people with preexisting conditions that they ultimately could not cover anyone.
In the child-only market and the CLASS Act, the preexisting conditions provisions took effect with no mandate to purchase insurance, or premium subsidies, or anything to mitigate the resulting adverse selection.
In the territories, the preexisting conditions provisions were to take effect with no mandate and relatively weak premium subsidies. “These regulations had screwed up territorial insurance markets so badly that health insurance plans bolted; it's currently impossible to purchase an individual market insurance plan in the Northern Marinas Islands,” wrote Vox’s Sarah Kliff. It got so bad, the Obama administration reinterpreted the law to say its preexisting conditions provisions and other costly regulations don’t apply in the territories.
In Pinal County, ObamaCare had everything. It had the pre-existing conditions provisions. It had a mandate. It had premium subsidies. Thanks to the Supreme Court, it even had subsidies and a mandate that the ACA doesn’t authorize (because Arizona didn’t establish its own Exchange). The Exchange still collapsed.
ObamaCare’s authors knew they were playing with fire, but thought their handiwork could contain it. If it can’t, even more Exchanges will collapse, leaving people who had relatively secure coverage before ObamaCare with no coverage at all.
But hey, we’ll always have Massachusetts.