During the recent oral argument in King v. Burwell — the Supreme Court case deciding if providing subsidies to buy health insurance in the 36 states utilizing federal health care exchanges is allowed under the Affordable Care Act (ACA) — Justice Kennedy suggested that disallowing subsidies might be unconstitutionally coercive because “states are being told either create your own exchange, or we’ll send your insurance market into a death spiral.” Are “death spirals” real, or just a way to frighten the public?
The death spiral will purportedly happen like this: disallowing federal exchange subsidies will make insurance less affordable for the 87% of federal exchange enrollees currently receiving subsidies. These people will no longer be required to buy insurance since the ACA’s individual mandate only applies to individuals who have access to affordable insurance. Since the ACA imposes community rating, requiring roughly the same premium for all individuals in a given plan with only small adjustments for their risk characteristics, and guaranteed issue of insurance regardless of the enrollee’s health, the old and unhealthy will continue to buy coverage but the young and healthy will forego coverage. The resulting higher risk pool of enrollees will increase the average cost of individuals remaining in the non-group insurance market, both on and off the exchanges, resulting in increased premiums that will drive out more low cost, healthy patients eventually destroying the market.
Two economic simulations predict that “adverse selection,” where healthier people leave the insurance market and sicker people stay in causing premiums to rise, will occur if the King plaintiffs prevail. The Urban Institute predicted discontinuing federal exchange subsidies would result in premium increases of 35% and enrollment declines of 69% in the individual health insurance market. The Rand Corporation made similar predictions.
But it is hard to reconcile these forecasts with studies of earlier state insurance market “reforms” that created market conditions similar to those that would result if federal exchange subsidies are disallowed. These studies suggest adverse selection would be minimal and would not lead to a “death spiral,” that is, it would not lead to a self-reinforcing cycle of adverse selection in which each time premiums rise, more people exit, leading to a sicker, more expensive risk pool and market collapse.