The “Death Spiral”
Simply stated, politicians want insurance companies to ignore risk when selling insurance. They want artificially low premiums for old people, so they restrict differences in premiums based on age (i.e., a community rating, enforced by a guaranteed‐issue mandate), even though older people are statistically far more likely to incur health‐related expenses.
They also want artificially low premiums for sick people, so the crowd in Washington requires that they pay the same or similar premiums as healthy people (i.e., a pre‐existing conditions mandate), even though they are statistically far more likely to incur health‐related expenses.
Set aside that the entire purpose of insurance is to guard against risk. Instead, let’s focus on what happens when these types of price controls are imposed.
For all intents and purposes, insurance companies are in a position where they have to over‐charge young and healthy people in order to subsidize the premiums of old and sick people. That’s sounds great if you’re old and sick, but young and healthy people respond by choosing not to purchase insurance. And as fewer and fewer young and healthy people are in the system, that forces premiums ever higher. This is what is meant by a “death spiral.”
The pro‐intervention crowd has a supposed solution to this problem. Just impose a mandate that requires the young and healthy people to buy insurance.
Which is part of Obamacare, so there is a method to that bit of madness. But since the penalties are not sufficiently punitive (and also because the government simply isn’t very competent), the system hasn’t worked.
And to make matters worse, Obamacare exacerbated the third‐party payer problem, thus leading to higher costs, which ultimately leads to higher premiums, which further discourages people from buying health insurance.
So how do we solve this problem?
Race to the Bottom
One of my colleagues at the Cato Institute, Michael Cannon, is a leading expert on these issues. And he’s also a leading pessimist. Here’s some of what he wrote a week ago as part of a column on the Senate bill to modify Obamacare.