NCPA - National Center for Policy Analysis

THE BAUCUS DEATH SPIRAL

October 19, 2009

The plan sponsored by Finance Committee Chairman Max Baucus would almost certainly lead to a death spiral in many private health insurance markets, says National Review.

Insurance death spirals occur when regulators force insurers to offer coverage ("guaranteed issue") at premiums below the known risk of those they are insuring, without any assurance that the shortfall can be made up elsewhere:

  • When insurers comply with these rules and offer relatively low cost health insurance policies to all comers, quite predictably, many sick people step forward to sign up.
  • When the insurers then try to turn around and charge higher premiums to the relatively healthy to cover their costs, the healthy, also quite predictably, are more reluctant to enroll because they can see the premiums they would have to pay would very likely exceed their health care costs.
  • So they often say "no thanks" to the insurance and decide to take their chances by going without coverage instead.
  • As more and more healthy people exit the marketplace, insurers are then forced to raise premiums for everyone who remains, which only further encourages the lower risks to opt out.

This vicious cycle of rising premiums and an increasingly unhealthy risk pool is called a "death spiral" because it eventually forces the insurer to terminate the plan, says the National Review.

This is not a hypothetical, textbook scenario of what might happen to a poorly run insurance market. It has happened before -- many times and in many places.  See, for instance, the experience in Kentucky, and in Washington state, and in Maine too.  There's no reason it couldn't happen nationwide, says National Review.

What Democrats should be doing is working with Republicans on a sensible plan to gradually introduce reforms that would inject more market discipline into the health sector, thus making coverage more affordable for everybody.  If, however, they insist on trying to pass something like the Baucus plan instead, they should be informed of the consequences, whether they like them or not.  As matters stand now, if the Baucus bill were to become law, in a couple of years Congress would be forced to take up the issue again to clean up the mess the bill will have created, says National Review.

Source: James C. Capretta, "The Baucus Death Spiral," National Review, October 14, 2009.

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