The Little Death Spiral That Couldn’t

The Little Death Spiral That Couldn’t
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Following an exceedingly unfavorable report from the Congressional Budget Office, prospects of the House Obamacare repeal-and-replace bill becoming law in its original form have become bleak. In its wake comes talk of significant changes to the bill, and even the renewal of an old strategy: letting the Affordable Care Act implode on its own accord, then picking up the pieces anew. There’s only one problem. The predicted “death spiral” hasn’t happened yet, and there’s a reason it won’t.

As it does with all major legislation, the CBO recently estimated the impacts of House Republicans’ American Health Care Act. The report was something of a sopping wet blanket for Paul Ryan and Congressional leaders. The bill is estimated to generate some budgetary savings – $337 billion over ten years – but at the staggering cost of 24 million more uninsured Americans by 2026.

While these numbers are estimates – which some criticize as too high – the CBO report fundamentally altered health care reform efforts in Washington.

In response, an old talking point has reemerged. Sen. Lindsay Graham, among others, has suggested letting the ACA insurance exchanges die from their own inflicted “death spiral,” and Trump has hinted at a similar way out of the GOP’s repeal-and-replace deathtrap. The idea is that an ACA collapse would teach Americans the fatal flaws of Obamacare, Democrats would be blamed for their socialist schemes, and Republicans will, at long last, get the chance to implement patient-centered health care policy, whatever that might mean in practice. Until then, perhaps the best medicine is none at all!

If only that was actually possible.

For better or for worse, it is nearly impossible for the ACA’s insurance exchanges to implode to the extent that its detractors have long predicted. To understand why, it is important to understand how the subsidies and regulations in the ACA work. The ACA employs “price-linked subsidies.” That is, the premium subsidy consumers receive is based on the actual prices for insurance on the exchanges. In addition, the ACA’s regulatory framework caps the out-of-pocket expenses faced by consumers.

This works as follows. For those who purchase insurance on the exchange and have incomes below 400 percent of the poverty level (nearly $100,000 for a family of four), the ACA limits how much of your income you can spend on premiums. This amount ranges from 2 percent to 9.5 percent of income depending on the level of said income, under the assumption that you are purchasing the second-cheapest silver plan. Once you contribute this portion of your income towards premiums, the federal government picks up the rest of the tab. That means that even if premiums rise, once you have hit the contribution cap, you do not have to contribute more. Critically, a full 83 percent of exchange enrollees receive these subsidies. All of those enrollees are effectively shielded from future premium increases.

A true death spiral – one that leaves a market bereft of sellers and buyers – relies on increasing prices driving more and more consumers from a market. But what if consumers don’t actually pay those higher prices?

Consider what happened last year when average premiums for the benchmark plan increased by 22 percent. Despite the headline-grabbing increase, the Obama administration correctly predicted that most consumers wouldn’t be affected. Unsurprisingly, this year’s enrollment numbers held relatively steady, even with efforts by the current administration to curb enrollment (sign-ups in the final two weeks of this year’s open enrollment were over 300,000 lower than the last week of 2016 alone). 

One can reasonably argue against this type of subsidization – indeed some would suggest the federal government shouldn’t commit to absorbing price increases indeterminately. Moreover, even the individuals on the receiving end of these government transfers might wish they took a form other than indefinite subsidies for comprehensive health insurance. This notwithstanding, the ACA’s current subsidy structure prevents the market from unraveling very far.

The only other avenue for “spiraling” in the insurance marketplaces is not through prices, but rather insurance plan designs. If insurers move to control costs through increasingly high deductibles and patient cost sharing, even some subsidized individuals could find the resulting plans not worth buying. Yet it is difficult to imagine this mechanism truly unravelling the market. All exchange plans are subject to out-of-pocket expenditure limits, and those limits are quite strict for low-income consumers. Those individuals with incomes between 100 percent and 200 percent of the poverty line, for example, are on the hook for at most $2,350 in out-of-pocket spending (that is, deductibles and copayments combined) in a given year.

Even without a true death spiral, the ACA would continue to experience serious problems. Insurers that offer plans with more expensive provider networks will likely continue to exit the exchanges, and some low-population markets will be left with very few or even zero options. For the subset of non-subsidized individuals on the exchanges, price increases will be felt acutely and their presence in the market could diminish further. But will this reality really sell as a “death spiral?” It is hard to imagine so, as millions of people will continue to use the exchanges.

Inaction will neither solve real problems facing the insurance market, nor trigger a true failure from which Republicans can arise as saviors. Republicans will have betrayed their base by not repealing the ACA after almost a decade of promising to do so, while not addressing any of the law’s flaws and weaknesses.

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