Higher Health Care Premiums Could Cause ObamaCare To Death Spiral

Doctor Using Stethoscope to Examine Toddler

This weekend, the New York Times reported on a development that’s completely unsurprising to critics of President Obama’s national health care law: “Health insurance companies across the country are seeking and winning double-digit increases in premiums for some customers, even though one of the biggest objectives of the Obama administration’s health care law was to stem the rapid rise in insurance costs for consumers.” The Times story heavily suggests that the problem is that Obamacare didn’t give federal regulators enough power to outright reject rate increases deemed too high. But Reason‘s Peter Suderman makes that case that the real culprit could be Obamacare itself — particularly its requirement that all insurance policies pay out at least 80 percent of what it collects in premiums on medical expenses. Known as the “medical loss ratio” (MLR) rule, this requirement creates an incentive for insurers to hike premiums by reducing their profit margins on any given policy.

Whatever the cause of the higher premiums, however, this trend presents a key structural challenge to Obamacare. The health care law aims to prevent insurers from discriminating against those with pre-existing conditions, to make sure that policies cover a specified package of benefits, and to limit how much extra money insurers can charge older and sicker patients. All of these provisions increase costs and decrease insurance industry profits. But through the mandate forcing individuals to purchase insurance, the law hopes to push enough younger and healthier Americans into the insurance pool to offset theses cost increases. This is where the problem with rising premiums comes in.

The Times story notes that, “Particularly vulnerable to the high rates are small businesses and people who do not have employer-provided insurance and must buy it on their own.” This is precisely the population that the federal government hopes to induce to purchase insurance through the mandate. But as the Obama administration argued before the Supreme Court, those who choose not to purchase insurance would still be in compliance with the law so long as they paid the tax penalty for not purchasing insurance. Should premiums continue to rise, more and more uninsured Americans are going to choose to pay the penalty rather than purchase expensive insurance. And those who go without insurance are more likely to be the ones who can afford to do so — young and healthy Americans with limited medical expenses. Should this occur, insurers would have to raise premiums even more to subsidize the expenses of the sicker beneficiaries they must cover under the law. This, in turn, would cause additional people to forgo insurance and pay the fine. And so on. This is known in the health care policy community as the “death spiral” and it’s one of the biggest threats to the structure of Obamacare.

With most of the major provisions of the health care law going into effect in 2014, this will be an important trend to keep an eye on.

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