A Private Health Insurance Death Spiral Will Begin on September 23

ObamaCare will have a very long roll-out. While some provisions have already come into effect, others will take many years. When will individuals and businesses first see a consequential impact on their health benefits? I believe that it will be the “slacker mandate,” which commands that health plans cover “children” up to 26 years of age on their parents’ health benefits; and comes into force six months after enactment.

September 23 will mark the beginning of the “death spiral” of private health insurance. Most people correctly anticipate the full force of the death spiral in 2014, when insurers will no longer be able to charge actuarially accurate premiums for applicants with pre-existing conditions. Applicants can wait until they become sick, and then apply for coverage which insurers must offer at a premium which is initially artificially low. This causes healthy people to drop out; and the cycle continues until the risk pool collapses. Insurers must then raise premiums to cover the guaranteed losses and avoid insolvency.

The only way to stop this is to punish healthy people who choose not to buy insurance, via a tax, fine, mandatory payroll deduction of premium, or whatever you want to call the money that the government seizes from you to hand over to Aetna, CIGNA, or whichever health plan the future Health Czar (“Health Choices Commissioner”) deems acceptable. One of the elements of ObamaCare that guarantees its instability is that the financial penalties for not complying with the mandate to carry insurance are too low to ensure that people actually maintain coverage. In 2016, the penalty will be $695 per individual [H.R. 4872§ 1002(a)(2)(c)].

Firms with over 50 employees face a fine of $2,000 per employee if they don’t offer benefits, or have low-income employees who are receiving “premium tax credits” [H.R. 4872 § 1003].  However, the fine is reduced by the first thirty employees. So, if an employer has 55 employees and offers no coverage, the assessment will be $2,000 times 25, which is $50,000. Allocated over the entire workforce of 55, the fine per employee is only $909. (The fine for employers who offer coverage but also employ workers who receive premium tax credits is a little more complicated, but the consequences are similar.) Businesses which employ 50 workers or less are exempt from these penalties. And even these penalties only take full effect in 2016, two years after the rules that require insurers to accept all applicants, regardless of health status. It is therefore likely that small and medium-sized employers will bail out of health benefits, once the government has established the ”exchanges” into which they can dump their employees, often for highly subsidized coverage. (This is what Factcheck.org means, when it claims to debunk the Republican conclusion that ObamaCare requires 16,500 new IRS agents by arguing that they will actually be doling out money, rather than taking it in.)

But we don’t have to wait until 2014 for the collapse to begin. The first phase of the death spiral will occur as early as the end of September, when very sick young adults present themselves to their parents’ employers, seeking coverage. The Senate Democratic caucus has unwittingly demonstrated this via a promotional video trumpeting the “reform.” The video’s subject is Freddie Effington, who enjoyed coverage on his parents’ employer-based plan until he turned 21 in 2005. He then went without coverage for two years “hoping to get to the job position” whereby he would get his own employer-based benefits. Tragically, Mr. Effington was diagnosed with Hodgkin’s Lymphoma in 2007.

Now, it is important to understand that Mr. Effington (and his parents) had choices. He could have applied for individual health insurance when he turned 21. As a healthy young man, he would likely have been able to buy it at a reasonable premium in Alabama, his state of residence. Or, he could have taken advantage of provisions of the Health Insurance Portability & Accountability Act (HIPAA), by which he could have applied for coverage without underwriting [45 CFR § 148.120]. HIPAA has significant flaws (which partially explain why the call for “reform” continued after it was passed in 1996). However, it required that individuals maintain continuous creditable coverage to benefit from inclusion of coverage for pre-existing conditions. The requirement to maintain continuous creditable coverage reduced the risk of a death spiral by relying on individual responsibility rather than government power.

The new “reform” blows away that fundamental protection. As of September 23, young adults who are seriously ill and under 26 will immediately present themselves to their parents’ employers, seeking coverage. However, the majority who are healthy will not. Imagine, for example, that you are a plumbing contractor with a dozen or so employees, who offers health benefits. On September 23, you will face this unpredictable liability. One of your workers might show up seeking coverage for his 23-year old son with Hodgkin’s Lymphoma; and perhaps another one with a 25-year old daughter recently diagnosed with an equally dreadful illness. You simply cannot predict how many such cases will present themselves. As a consequence, you will seriously consider dropping health benefits as September 23 approaches.

Some number of innocent employees will be victimized by losing health benefits because of this “slacker mandate,” and compelled to navigate a health-insurance environment that is preparing for chaos. This will present an interesting opportunity for ObamaCare’s political opponents, as the country slides into the mid-term elections.

Comments (9)

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  1. Devon Herrick says:

    ObamaCare will only last for a limited duration before it collapses under the weight of inappropriate incentives. A decade from now history will repeat itself when pundits (again) begin to clamor for reform. Next time the “public plan option” (e.g. a single-payer plan such as Medicare for All) could get more traction after liberals claim they tried private coverage options but it didn’t work.

    The government current funds about half of health expenditure (60% if you include the tax expenditure from employee health plans). New public subsidies will put government health care spending care on par with countries that are recognized as having socialized medicine.

    Assertions that the reform legislation amounts to a government takeover of health care is not rhetoric. ObamaCare is another step towards a system like they have in Britain where the wealthy have private coverage and everyone else makes due with a substandard public plan.

  2. Joe S. says:

    One thing you may be overlooking, John. Will insurers be able to ration care, under cover of comparative effectivenees or with really low provider payment rates?

    If so, they may try to stop the death spiral that way.

  3. Tom H. says:

    The IRS claimed yesterday that they are not really planning to enforce the mandate. That will virtually guarantee a death spiral.

  4. Elsie says:

    Obama Care is complicated and unworkable. It is going to have an avalanch of unintended consequences that will create choas. Repeal it now. Our present system has flaws. Let the companies get together and take care of the truly just health care features requested in Obama care…but let the companies do it….not the government. Then have a Commission supported by all the health care companies to which anyone with a problem with any of the companies can go to get an unbiased and fair solution to the problem. Sometimes it is the error of companies not taking responsibility and sometimes it is the error of individual not being responsible that causes the problem. With open competiton, the private sector will meet the needs of its customers….if not….they go out of business!!

    There was no need to destroy a good system to which 80% of the people were satisfied. Medicaid was working fine as the safety net for those who could not afford health insurance. The government must stop using the “emotional element” to replace rational clear solutions to peoples problems when dealing with the health insurance companies and responsibility issues. Government, get out of the way and let private industry attract customers by the services they offer for a price. Competition will determine which are good for the people and which are not.

  5. Bart Ingles says:

    Correct me if I’m wrong, but it was my understanding that to be eligible for HIPAA coverage, the creditable coverage must be with a qualified group plan. If young Mr. Effington(?) had been on an individual plan, he wouldn’t have qualified for HIPAA coverage but presumably could have stayed with his existing individual plan.

    A couple of alternatives to reality-by-fiat might have been to extend the existing child mandate limit one year at a time until it equals 26. Or, failing that, to at least set an enrollment window, say from September 23 to November 23, after which creditable coverage requirements begin to apply.

  6. paul says:

    Will employers be able to charge for adult dependents on the plan?

    says ‘The legislation leaves it to the U.S. Health and Human Services Department to define what “dependent” means, as well as whether and how employers can charge extra for the benefit, Abbott said.’

    Have they defined this yet?

  7. Virginia says:

    I agree with Devon. In ten years, we’ll be rallying to “fix the system” again.

  8. John R. Graham says:

    Joe S.:

    Insurers have accepted the proposal of government-dictated comparative effectiveness because it will allow them to escape responsibility of deciding what treatments to pay for and all the hassle of appeals and other mechanisms of consumer protection. Much easier to simply process claims according to a government template and avoid any liability. So, I think you are right.

    Whether this will protect them a few years down the road when the single-payer extremists point out that they are adding no value in exchange for skimming their percentage off the top of ObamaCare, I highly doubt. Look at the evolution of the government’s student-loan take-over.

    Bart Ingles:

    The video didn’t tell us a lot about Mr. Effington, but it was clear that he was a dependent on his parents’ employer-based group coverage. Therefore he had HIPAA protection.

    Paul:

    The Secretary will have the power to fix premiums. If she decides to drive all insurers out of business she can do it with the stroke of a pen, using her entirely arbitrary and unaccountable power under this law.

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