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What happens if just some states enter the death spiral?

The Affordable Care Act does not establish a uniform national pool for persons purchasing Bronze, Silver, Gold and Platinum policies on the Exchanges. Rather, it creates at least one such pool for each of the states involved in the program .  And that is true even if multiple states use the same “Exchange” — the one in Washington D.C. — to establish coverage.

This fracturing of the pool and of the administrative apparatus creates an architectural problem: what happens if, as may well be the case, insurers in the Exchanges muddle through in a few states but suffer massive losses in many others? Most likely, insurers in the problem states will exit from the Exchanges or require significant premium hikes on top of rates that already give many potential customers sticker shock. But this reaction by profit-motivated insurance companies could lead more Americans to complain that imposition of a uniform individual mandate tax under 26 U.S.C. § 5000A throughout the nation is unfair. And, if the increases are large enough and a large enough number of people stick with the Exchanges — because they don’t see another choice — this  could increase the cost of premium subsidies to the federal government and its taxpayers beyond the substantial numbers already projected.

The key point I want to make here is that even the best and brightest people often fall into the trap of thinking that the Affordable Care Act Exchange-based system for reducing the number of uninsureds will either succeed or fail.  Either the system will fall into an adverse selection death spiral or it will not. Perhaps that is the case. But this binary thinking probably is not right.  It’s kind of like quantum physics: the Exchanges could both succeed and fail at the same time.  It just depends what state you’re in. (Physics pun intended).

Here’s how. Although it is too early to tell for sure — and the persistent failure of healthcare.gov and many of the state exchange sites such as Maryland and Oregon hinders augury — it looks as though the Affordable Care Act is having somewhat more success in some states than others. Proponents of the ACA like to point to California experience where it is claimed that 70,000 people have made it through at least some more advanced state of the enrollment process.  The gloomy point to Oregon where apparently no one has successfully enrolled or Texas, which, despite having the largest number of uninsureds, had only 2,991 enrolled in a plan last time anyone counted. (Here’s the handy chart in the Washington Post.) Both the optimistic and pessimistic point to Kentucky where the number of enrollees is proportionately higher than in many states but in which the population of insureds seems disproportionately old.

So, in a few months it could be that Exchange insurance in some states such as California where the technology has worked better and the political environment is more sympathetic to the ACA is able to persist into 2015 without major rate hikes or insurer withdrawals. In those states, there remains some considerable logic to imposing a tax of what will be 2% of household income or roughly $325 per household member (kids count as half) for failure to buy health insurance.  But what might we do in states such as Texas or Mississippi or West Virginia or perhaps many others where the insurers experience severe adverse selection that even Risk Corridors (42 U.S.C. § 18062) is unable to cure adequately? If the result is, as one would expect, a reduction in the number of insurers continuing to participate in the Exchange and an increase in rates, the Affordable Care Act is likely to become even less popular in those jurisdictions.  This would be all the more true for those people — a small group, but still people nonetheless — whose income is such that the rates remain less than the 8% of household income level that would otherwise excuse them under 26 U.S.C. § 5000A(e)(1) from having to buy the expensive policies.

Fixing such a problem will be extraordinarily difficult. If Congress remains in gridlock with some finding the ACA so abhorrent that reform of even its worst excesses is unacceptable and others divided on the merits of any particular reform, Congress will have little ability to address the genuine problems of those in the failure states.  And would Congress be willing to write a statute that excused people in some states from paying an individual mandate tax while insisting that it continue in others? What criterion would be used to distinguish the tax paying from the tax exempt states?  If Congress tries, expect some heavy duty litigation on the constitutionality of such a non-uniform tax: “all Duties, Imposts and Excises shall be uniform throughout the United States.” (U.S. Constitution, Article I, Section 8, clause 1). Would Congress be willing to adjust “Risk Corridors” or “Risk Adjustment” (section 1343 of the ACA) to give special preference to insurers in states whose Exchanges have effectively failed? If Congress can not relieve the difficulties of the death spiral states, expect pressure to grow yet further for repeal of the entire law.

Again, we are left with a design problem in the Affordable Care Act.  Blinded by the dream of reducing the number of uninsureds and providing healthcare to a broader segment of American society, it creates a system in which, conceivably, under just the right circumstances it might work, but in which even small departures from desired assumptions risk plunging that system into a “basin of attraction” aptly known as “the death spiral.” We end up torn asunder in a black hole of insurance market failure from which there is no escape. Worse, it is constructed in a way such that state-by-state adjustments, even with a less dysfunctional Congress, will prove difficult indeed.

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