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From the onset, Obamacare skeptics have predicted the Affordable Care Act’s inevitable demise for a number of reasons. As each open enrollment period comes and goes, and health insurance rates increase, it seems speculation of failure intensifies.
With 2017 open enrollment approaching, large insurers including Aetna, UnitedHealth and Humana have announced exits from some or all ACA exchanges; premium rates have been estimated to increase 25.5 percent; some areas are predicted to have one or no exchange carrier options; and politicians have introduced legislation aimed at protecting their states from Obamacare’s collapse.
As media types and policy wonks seem to be using the term Obamacare death spiral more abundantly in recent weeks, we felt it was time to really explain what a death spiral is and how it works.
Death spiral. It sounds bad, and kind of scary, but what exactly does it mean? At healthinsurance.org, contributor Wendell Potter describes it as follows:
“In a death spiral, the number of young and healthy people in a given market continues to diminish, causing insurers to raise the rates even more. You get the picture. Eventually, the pool of customers willing and able to buy coverage becomes tiny.”
You can probably see how this leads to problems, but let’s look at an example to illustrate.
Let’s say a healthy, non-smoking, young adult named Susan purchases the lowest-cost bronze plan available on her state’s exchange for 2014 open enrollment – the first year plans were sold on state-based and federally facilitated exchanges and subsidies were available to help lower costs.
She works part time in a coffee shop and started her own digital marketing business in 2013. Her current income is within 100–400 percent of the federal poverty level, which makes her eligible for a subsidy that reduces her monthly premium payments.
In 2014, however, her business takes off and her income increases – she continues working part time at the coffee shop. By the time 2015 open enrollment begins, she is no longer eligible for financial assistance when she buys a plan from her state’s health insurance exchange.
Furthermore, the rate of the lowest-cost bronze plan available on her state’s exchange increases. Since she no longer qualifies for an advanced premium tax credit, she feels the impact even more.
Here’s how her situation looks using real health insurance data:
Demographic: 30-year-old, single, nonsmoker
2014 income: $23,000
Lowest-cost bronze plan 2014 – exchange
Subsidy (given income of $23,000): $72
Net cost: $79
Total annual premium: $948
2015 income: $49,000
Lowest-cost bronze plan 2015 – exchange
Net cost: $145 – Without a subsidy, she will pay $66 more per month than she did in 2015. That’s an 83 percent increase over her 2014 premium. It works out to $792 more per year.
Total annual premium: $1,740
Healthcare costs: This young woman went to the doctor twice in 2014: once for an annual well-woman visit and once for a bladder infection. The first visit cost her nothing since it was among the ACA’s no-cost preventive services and the second visit totaled $191, which she paid out of pocket toward her plan deductible.,
2015 tax penalty (i.e., individual shared responsibility payment) – 2 percent of income above the 2015 filing threshold ($10,300) or $325 per adult, whichever is greater: $774*
*2 percent of income above filing threshold ($49,000 - $10,300 = $38,700 x .02 = $774)
Given the cost of health insurance compared with her average healthcare expenses, she decides not to purchase an Obamacare plan in 2015. She is not exempt from the individual shared responsibility provision, so she will pay the penalty for going without minimum essential coverage. She will also pay for all of her healthcare entirely out of pocket.
Putting it in the context of her business, let’s look at a death spiral as it pertains to a coffee shop.
Now, let’s say Susan’s healthy peers make the same decision. They decide they would rather owe the tax penalty and pay their medical bills (if they have any) out of pocket.
These individuals reallocate the funds they would use to pay for insurance to chip away at student loans, put a down payment on a home, travel, etc.
In turn, health insurance companies see their enrollment demographics (i.e., risk pool) shift to a higher percentage of older enrollees and enrollees with health problems who typically incur higher claims.
To set premiums, actuaries use projected medical claims and administrative costs for a pool of individuals or groups with insurance. The size and composition of this risk pool impacts whether or not premiums remain predictable and stable or increase. Insurers depend on enrollees with few or low claims (typically healthy, young adults) to help offset the cost of those with higher claims.
In theory, rates then increase in the years to follow. More individuals decide they won’t or can’t pay such premiums. Enrollment decreases and enrollees continue to be disproportionately unhealthy. Rates go up. The cycle continues.
Some believe it has, especially with the big insurers announcing in recent months their plans to reduce Obamacare participation. But depending on whom you ask or what you read, it possibly started a while ago.
One thing is certain: The health insurance landscape continues to change. The 2017 open enrollment period and 2016 presidential election will weigh heavily on the ACA’s future.
 Perticone, Joe. “Paul Ryan Claims Top BlueCross BlueShield Actuary Told Him Obamacare Is in a ‘Death Spiral.’” September 19, 2016. Independent Journal Review. http://ijr.com/2016/09/696427-paul-ryan-claims-top-bluecross-blueshield-actuary-told-him-obamacare-is-in-a-death-spiral/
 Get Covered Illinois. “2016 Analysis of Illinois Exchange Rates.” Accessed Sept. 13, 2016. https://getcovered.illinois.gov/en/news/Documents/Illinois%20Rate%20and%20Plan%20Analysis%20FINAL%202016.pdf
 Healthcare Bluebook. “Bladder infection: total fee if treated in a physician’s office.” Sept. 13, 2016. https://healthcarebluebook.com/page_ProcedureDetails.aspx?id=1&dataset=CC&g=Bladder+Infection
 Internal Revenue Service. “Individual Shared Responsibility Provision – Reporting and Calculating the Payment.” Last updated Aug. 2, 2016. Accessed Sept. 13, 2016. https://www.irs.gov/affordable-care-act/individuals-and-families/aca-individual-shared-responsibility-provision-calculating-the-payment
 American Academy of Actuaries. “Issue Brief: Drivers of 2016 Health Insurance Premium Changes.” August 2015. http://www.actuary.org/files/Drivers_2016_Premiums_080515.pdf
This document is for general informational purposes only. While we have attempted to provide current and accurate information, this information is provided "as is" and we makes no representations or warranties regarding its accuracy or completeness. The information provided should not be construed as legal or tax advice or as a recommendation of any kind. External users should seek professional advice from their own attorneys and tax and benefit plan advisers with respect to their individual circumstances and needs.
About The IHC Group
Independence Holding Company (NYSE: IHC) is a holding company that is principally engaged in underwriting, administering and/or distributing group and individual disability, specialty and supplemental health, pet, and life insurance through its subsidiaries since 1980. The IHC Group owns three insurance companies (Standard Security Life Insurance Company of New York, Madison National Life Insurance Company, Inc. and Independence American Insurance Company) and IHC Specialty Benefits, Inc., which is a technology-driven insurance sales and marketing company that creates value for insurance producers, carriers and consumers (both individuals and small businesses) through a suite of proprietary tools and products (including ACA plans and small group medical stop-loss). All products are placed with highly rated carriers.
IHC Specialty Benefits, Inc.
IHC Specialty Benefits, Inc., doing business as Health eDeals Insurance Solutions is a full-service marketing and distribution company that focuses on small employer, individual and consumer products. Health eDeals markets products via general agents online, telebrokerage, advisor centers, private label and directly to consumers. For more information about Health eDeals visit http://www.HealtheDeals.com.