13 Jun 2013 California Health Insurance Exchange Headed for a Death Spiral
“Covered California” Will Not Attract Enough Young and Healthy People To Keep Rates Low
California’s Will Be Just One Of Many ObamaCare Exchanges To Fail
Washington, D.C. – “Covered California,” the ObamaCare exchange in the Golden State, is headed for a death spiral in which insurance rates become virtually unaffordable, says a just-released paper, “California’s Coming Health Insurance Death Spiral,” by David Hogberg, Ph.D., senior fellow for health care policy at the National Center for Public Policy Research.
“If the exchanges are to have any chance at keeping rates low, they must attract young and healthy people,” says Hogberg. “But the young and healthy will have big incentive in California to forgo insurance.”
Under ObamaCare, people who do not have access to employer-based coverage are supposed to be able to find affordable coverage on the “exchanges” — virtual marketplaces to shop for health insurance.
As Hogberg explains in his new National Policy Analysis paper, insurance on the exchanges must conform to two regulations that drive away the young and healthy: “community rating” and “guaranteed issue.”
Community rating means insurer must charge everyone the same rate. For young people it means they pay rates about the market price, thereby reducing their incentive to purchase coverage.
Guaranteed issue requires insurers to sell anyone a policy at any time. This gives the young and healthy even less incentive to buy insurance while they are healthy because when they get sick an insurer will have to sell them a policy. To try to avoid this, ObamaCare makes tax credits available on the exchanges to help subsidize insurance for those making less than 400% of the federal poverty level. It also imposes a fine for failure to purchase coverage.
Covered California recently released some of its insurance rates. Much of the press overhyped them as “affordable.”
“The fact is that even with the tax credits, many young and healthy people will pay more in premiums that they would pay in a fine,” says Hogberg. “A 25-year-old with a low-cost policy on the exchange could easily pay $500 more than he’d pay for the fine for forgoing insurance.”
If the young and healthy do not purchase health insurance on Covered California, then those left in the insurance “pools” will be older and sicker. This will cause insurance rates to rise, after which more young and healthy insurance consumers will drop out, leaving the pools even older and sicker. As insurance rates continually rise, insurers will drop out of the exchanges.
This phenomenon is known as a “death spiral.”
“History shows that a death spiral is the result of these types of regulations,” said Hogberg. “A few states found that out in the early 1990s. ObamaCare is about to repeat history, this time as tragedy.”
David Hogberg, Ph.D., is a health care policy analyst for the National Center for Public Policy Research. Previously, Dr. Hogberg was a Washington Correspondent for Investor’s Business Daily, specializing in health care and Medicare. Prior to his employment at IBD, he worked as a policy analyst studying health care and other issues for various think-tanks, including the National Center for Public Policy Research, and for the office of Representative Jeff Fortenberry. Dr. Hogberg holds a Ph.D. in political science from the University of Iowa. He is currently working on a book entitled “Medicare’s Victims: How The U.S. Government’s Largest Health Care System Harms Patients And Impairs Physicians.”
The National Center for Public Policy Research, founded in 1982, is a non-partisan, free-market, independent conservative think-tank. Ninety-four percent of its support comes from individuals, less than 4 percent from foundations, and less than 2 percent from corporations. It receives over 350,000 individual contributions a year from over 96,000 active recent contributors.
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