When the Affordable Care Act (ACA) was first instituted, we heard dire warnings in conservative media outlets about an impending “death spiral.” These warnings were promptly refuted by higher-than-expected enrollments. However, it now appears that they were merely premature: Many insurers are either pulling out of the individual ACA marketplaces or planning drastic rate increases. What’s going on?
Obamacare was based on two main principles. The first was that insurers could no longer deny coverage for preexisting conditions. This was popular with American households. The second was that individuals would have to purchase coverage or pay a tax penalty. This individual mandate was unpopular with young and healthy people, but it provided insurance companies with the revenue they needed in order to pay for the care of the sick and elderly whom they were no longer able to turn away.
In order to address opposition to the individual mandate, the sign-up process was modified to make it more flexible. Special enrollment periods were added for households in exceptional circumstances. A grace period was instituted, during which folks could continue to get care for three months each year without paying premiums.
These changes were politically expedient. But according to a recent article by Paul Demko in Politico, they also opened the door to gamesmanship. In particular, insurance companies report that people who sign up during special enrollment periods tend to consume lots of medical care and then stop paying premiums in order to enjoy the three-month grace period.
As a result of such behaviors, we are now seeing the beginnings of an ACA death spiral. This is partly because Republicans in Congress have not been willing to fix problems with Obamacare along the way. And now, with their dire predictions about the ACA finally coming true, they are unlikely to stray from this course. This leads the ACA’s supporters to hope for a Democratic landslide in November. Indeed, President Obama’s energetic campaigning with Hillary Clinton may be due in part to his belief that such a landslide is needed in order to save the program that bears his name.
What will happen if the death spiral is unchecked? Rising premiums will cause more healthy people to drop coverage, which will lead to even higher premiums for those who remain. Then more healthy people will drop coverage. And so on. Eventually we will have sky-high premiums and only a tiny population of very sick folks with coverage. It will be politically infeasible to impose fines on so many Americans for the “crime” of choosing not to buy vastly overpriced insurance. Thus, pressure will build to either fix Obamacare or to scrap it. And as the situation continues to deteriorate, the damage to public confidence in the ACA will become progressively harder to reverse.
What needs to be done? One idea is to strengthen the individual mandate. Raise the fines for noncoverage and let the IRS enforce them with liens. Eliminate the three-month grace period and the special enrollment periods. Such unpopular changes would probably require a Democratic landslide. They seem unlikely to occur if the government remains divided. (With Donald Trump the nominee, we can safely rule out a Republican landslide.)
An easier alternative might be simply to delay some coverage for new enrollees. For instance, preventive care and emergencies could be covered right away, but specialist visits and most hospitalizations might be covered only after a delay of six months to a year. People who flit in and out of the system would then never receive the more expensive coverages. This mild reform ought to be acceptable to members of both parties.
Fixing the ACA is urgent and important. Continuing on our current course will severely lower the living standards of the sizable population of Americans who cannot get coverage elsewhere. Hopefully, the 2016 election will lead to the selection of pragmatic and serious-minded leaders who can work together — across the aisle if needed — to fix this rapidly deteriorating situation.
David M. Frankel is an associate professor of economics at Iowa State University.