The recessionary death spiral in health insurance

Anthem (the name adopted by California Blue Cross/Blue Shield when it converted from a non-profit to a for-profit) just raised individual and small-business rates in California by up to 34%. But lest you think that this is a mere case of executives gouging captive customers so they can pay themselves outrageous bonuses, Anthem and its parent company WellPoint have an explanation:

In statements and letters, Anthem and WellPoint have explained what the industry calls a recessionary death spiral: as unemployment and declining wages prompt healthy people to drop their insurance, the remaining risk pool becomes sicker and more expensive to insure, which in turn forces up prices and pushes more people out of the market.

Correct.

And it’s worse than that. Uninsured people cost insured people money through providers’ unpaid care accounts. So the death spiral in the individual market will raise rates in the group market, causing some companies to dump coverage, further increasing the number of uninsured, thus jacking rates up one more notch.

That’s why we need a system in which everyone is insured. And to get to such a system we’re going to have to subsidize those who can’t pay the full freight on their own. All the people trying to stop reform ought to be asked to explain, in words of one syllable, what they plan to do about the problem. They can’t. Which is why the Republican Congressional leadership is trying to weasel out of the proposed health care summit.

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact: Markarkleiman-at-gmail.com

20 thoughts on “The recessionary death spiral in health insurance”

  1. A vision of a TV event with a large table, the President at it's head, Democratic leaders seated on one side and empty chairs with large name plates of the nonattending Repblican leaders on the table in front of those chairs, floats in my head. Great political theatre but probably a bit over the top for our oh so polite Democrats and our oh so diplomatic President. No doubt Mr. Obama has a more subtle way of hammering home the reality but I fear that he and the party are going to sink in a quicksand of subtlety.

    It's time to go loud. The best defense is a good offense and it's hard to take the offense without being a bit…well offenseive. It's OK. The audience loves it when the good guy starts to kick butt. Even get a little mean.

  2. The "uninsured people cost insured people money" line has been pretty thoroughly discredited, at least if the suggestion is that the effect is material.

    If the amount received for one patient's care affects the price for others, well, that suggests that the Democratic proposals to reduce Medicare reimbursements will raise rates in the group market, right?

    "Mandate" has two syllables, which is presumably why Obama didn't include it in his plan when he ran for president and why Mark left it out of this post.

  3. Mark:

    If I read you right, the insured pay more because of the uninsured… so we give everybody insurance and charge those with insurance more in taxes to cover the subsidies? yeah, my insurance costs go down, my taxes go up and my level of care goes down as a result of the newly insured increasing their usage, so I benefit how?

    And I'm not looking to bash the insurance company, but I don't buy their letter. The remaining risk pool hasn't become more expensive to cover, the less healthy have always cost more to cover, their coverage has been subsidized by the healthy. With the healthy dropping out, the unhealthy are finally having to pay their own freight. Seems like the way it ought to work.

    So long as there are people who incur more in health care costs than they're willing or able to pay, and as long as society is unwilling to say "we're sorry you're sick, but we're not going to pay for the health care you aren't willing to pay for yourself", there is going to be a conflict… and none of the proposals on the table really do anything to address this conflict.

  4. The problem with the argument of making the unhealthy pay more is multilayered. The first is, we are all healthy until we aren't. I am perfectly healthy sitting here — but then, tomorrow, I might be diagnosed with cancer.

    Furthermore, loss of health is generally disributed along a fairly predictable curve related to age. Yes, there are people who have truly unforeseen and bizarre diseases at a young age — but these people will not pay more because they have been risk stratified as healthy. In any event, as I understand the bills, there is stratification by age, so people who are likely to be unhealthy will pay more. But the whole point of insurance is to protect against risk — there is no perfect or fair way to make the unhealthy pay more in this system.

    Finally, right now, the individual insurance market doesn't just require the likely unhealthy to pay more — they frequently refuse coverage altogether, and in cases like the stratospheric rise in premiums are essentially allowing them evade the one rule that does protect the unhealthy in their access to insurance, which is guaranteed renewability (can't be dropped entirely due to health factors).

    Further, the unhealthy will always pay more in some fashion, until copays go away entirely, and in other ways — lost wages, primarily, whether through lost opportunities or inability to work.

    A market that does not serve those who are most in need of its services is just not a functioning market.

  5. Of course, regardless of actuarial performance, it is unthinkable that losses generated by an insurance company's policy base and investments would be reflected in a reduction in executive compensation, or a decrease in the price of the stock.

    That would be too much like accountability.

  6. I agree Barbara. And I think it is just wrong to think of health insurance as a proper market anyway. How could anything like a market exist when some people are going to have life experiences that make them 100x more costly than others? If we compared HC to auto, life, house, or other forms of insurance, it would be like certain people living in houses on fire, or driving cars with broken steering wheels that continually crash into other vehicles!

    The reason we get around this today seems to be that there are structural systems that manage risk. The first would be employee pools, next pre-existing conditions, and finally just really high insurance costs. But such a system depends on a high degree of callousness. Those in fields where no employee pool exists, or the where wages don't support it are kicked out. Then those with a pre-existing condition are left out. Finally those who can't afford it are left out. And here we arrive at the high level of uninsured, those who don't get medical treatment, and those who simply die.

    To me this comes down to basic morality. We as a society can afford to cover everyone. Maybe more clumsily, but adequately. Our taxes will be higher, but our economic system won't collapse. It hasn't in every other Western country that guarantees some form of universal HC. Yet we choose not to. Throughout history societies have chosen different levels of compassion, having decided on different moral standards. Our American system of health care right now depends upon on tolerating a certain level of human suffering.

    This is a moral determination. All sorts of fancy economic or philosophical reasoning is put forth. But in the end it seems a simple matter of morality. Yet one that also seems to depend (as limited compassion usually does), on a failure to empathize because of a failure to witness. Few people would argue that we deny people access to emergency rooms, should they not be able to pay. Yet having no insurance isn't much different. Yet the situation is less clear-cut. It happens on calm afternoons, when medications are not picked up from pharmacies, when problems go undiagnosed, when bills pile up and homes are quietly foreclosed. The story becomes part of that elusive tapestry of unacknowledged, unwitnessed poverty.

    It is here that the sweeping philosophical and economic rationalizations for our current system reside. Here in this emotional vacuum the specifics and details crumple into dust beneath grand gestures. The human lives that hang in the balance are absent. They cannot enter, for they would immediately disrupt the natural symmetry between our present system and a most basic level of human sympathy. In this way it is not that opponents of HCR are without compassion, but that they must actively disengage from the reality of their position's consequence.

  7. "How could anything like a market exist when some people are going to have life experiences that make them 100x more costly than others?"

    Well, you buy the insurance before you have the life expericence, obviously. And then don't switch companies. The problem is that the health insurance market is currently set up so as to make that a practical impossibility, what with insurance being linked to employment by tax laws, and not being portable across state lines by laws against interstate health insurance marketing.

    Neither problem, of course, was going to be fixed by the Democratic proposal.

    But, yes, insurance is a model for paying for health costs which makes less and less sense as time goes by, because it relies on a degree of ignorance concerning particular people's future health prospects which is less and less true as diagnosis improves. We're at that akward place where prediction is outrunning prevention. That won't always be the case, and insurance will continue to be a valid way of paying for medical costs due to reasonably random events.

  8. Brett, there is no problem with switching companies so long as companies are prevented from engaging in health factor arbitrage. Everyone will get their share of bad risks and will have the same incentive to manage them.

  9. A minor nit, Brett, but I think you mean prognosis (via genetic markers) rather than diagnosis.

    So, if you really believe that the insurance model is going to remain valid, what's a sufficiently random event? Accidents? Probably yes, although we ought to charge higher premiums to people who engage in high-risk sports like SCUBA diving, skydiving and snowboarding. How about diseases with both environmental and genetic components, like lupus? Are those random enough? Or do we tier those unfortunates by risk? What about diseases with an exclusively genetic component, like Huntington's disease?

    The only humane solution is government-funded, universal health care. There are plenty of models out there that provide better outcomes than our system at much lower cost.

  10. Although the death-spiral model is attractive and convincing, without access to Anthem's book we have no evidence it actually applies in this case. When health insurance is $1k a month and up, it's not at all clear that it will be putatively healthy people who drop their individual coverage, as opposed, say, to people who just got laid off or just saw all their contracting work dry up. If I had a chronic illness in the current economy, I might well drop my insurance to preserve cash flow, knowing that bankruptcy was coming either way…

    But this is still clearly why we need both massive reorganization and near-universal coverage. Any system where people spend any significant amount of their time (as buyers or sellers) gaming entry or exit is a automatically a failure.

  11. "Anthem (the name adopted by California Blue Cross/Blue Shield when it converted from a non-profit to a for-profit).."

    Anthem: such godly connotations! I suppose the one they were thinking of was Prokofiev's "Peregrinus, expectavi" in Eisenstein's Alexander Nevsky.

    The one the storm-trooper visored Teutonic Knights chant as they throw Russian babies into the flames.

  12. > Anthem: such godly connotations!

    > I suppose the one they were thinking of was Prokofiev’s “Peregrinus, expectavi”

    > in Eisenstein’s Alexander Nevsky.

    > The one the storm-trooper visored Teutonic Knights chant

    > as they throw Russian babies into the flames

    Of course. And here all along I've been supposing that they took the name

    from the only novel that Ayn Rand intentionally wrote for a juvenile audience.

  13. "That’s why we need a system in which everyone is insured."

    Uhhh. Well sure, if by insured you mean "has access to healthcare". But I see no evidence whatsoever that this implies a need for a system based on PRIVATE insurers, ala Anthem. I see no evidence for why it needs the paraphernalia of insurance — contracts and deductibles and arguments about what is covered and what isn't, and fifteen bills for a single procedure, all sent out on different days.

    The primary problem with health spending in the US is that US society (including, as far as I can tell, our host and most Dem politicians) is so enthralled by the idea that economic competition solves all problems optimally that it simply cannot accept all the evidence in the world that it does not solve the healthcare problem optimally. No matter how many examples are provided of cases where the market consequences are not what most people would consider socially optimal, they continue to cling to this fantasy. No matter how often they are told this is a fantasy using the very language of economics (externalities, asymmetric information etc) they still imagine these are minor perturbations. Instead we get this weird schizophrenic dialog where we are constantly told that people respond to incentives, but not doctors they always do what is right so of course their ownership of medical facilities will have no consequences on their diagnoses, practices, and recommendations, and of course hospital administrators and pharma companies are driven purely by their love of humanity.

    Until the US chattering classes are willing to get over their religious belief that market incentives will deliver socially optimal outcomes, the rest of this discussion is a waste of time: you can't have a useful discussion of geography with someone whose starting point is that the earth is flat.

  14. "Well, you buy the insurance before you have the life expericence, obviously. And then don’t switch companies. The problem is that the health insurance market is currently set up so as to make that a practical impossibility, what with insurance being linked to employment by tax laws, and not being portable across state lines by laws against interstate health insurance marketing."

    How would changing tax laws get around the fact that insurers currently pool risk via the workplace? And why would an insurance company in another state be any more interested in insuring my pre-existing condition ass?

    The problem is that by making health insurance a business you are relying on the profit-model. Yet making sure that everyone gets medical services is one of the many area of life that is often times very unprofitable. Health insurance companies can't be asked to do "common good" policy any more than any other business. Hence the argument for government intervention.

    Libertarian and conservative alternate fantasy universes aside.

  15. Don't forget that Medicare can be seen as a massive subsidy for insurers. If elderly people had to rely on private insurers, they would take to the streets, as the rest of us should be doing. With their expenses safely off the books, insurers can pretend to be legitimate businesspeople.

    It's hard to know where to march though. Even California's two senators haven't seemed very interested in this issue (I guess there's some theory that California would lose money from some aspect of reform?)

    I don't get it. Here Congress has (had?) a chance to do something historic, and we get … this? It's like that saying, Republicans are evil, Demorcrats are incompetent. It's hard to know sometimes which is worse.

  16. Maynard,

    Until the US chattering classes are willing to get over their religious belief that market incentives will deliver socially optimal outcomes, the rest of this discussion is a waste of time …

    This is exactly our cultural problem. The left needs to articulate the case for government based on clear and intelligible distinctions between problems the market solves well and those it does not. The public is readily mislead into thinking that a government role in managing health risks (eg the 'public option') is equally sensible as the idea that the government should run all the shoe stores. Innovation in medical therapies, pharmaceuticals, equipment, or management of medical facilities generally do in fact benefit from the "market forces" we are conditioned to worship. It does not follow that health insurance does. The health insurance industry 'innovates' by finding ways to avoid covering people, whether by not writing them a policy in the first place, nickel-and-diming them to death while they are covered, or rescinding the policy when it gets expensive.

    "Market forces" in health insurance generate MORE of what the industry 'produces': premiums without coverage.

  17. The point about Medicare is a really important one. If Medicare did not exist it would be obvious to people that it was essential — because they would be expected to forego inheritance and dip into their own savings to fund the health care needs of their parents. Right now, people in the insurance market really face the same problems of the elderly, but because, on average, their health needs are not as obvious or predictable, it does not engender quite the same level of crisis. Maybe when the only hospital with an ER within 50 miles of your house closes because it can no longer afford to take care of the uninsured, you might look up and notice. Really and honestly, I don't know what it will take, which is why Congress should pass the damn bill and fix it if it can later.

  18. "How would changing tax laws get around the fact that insurers currently pool risk via the workplace? And why would an insurance company in another state be any more interested in insuring my pre-existing condition ass?".

    Changing tax laws would allow people to buy their own insurance, instead of having it provided to them as a benefit of employment. This way you'd continue your relationship with the insurer through changes of employment. Allowing insurance across state lines would let you take that insurance with you even when you moved to another state, and increase the size of the market, reducing the degree of oligopoly.

    The reason pre-existing conditions are a big deal is that people are continually changing insurers. And markets work better the more directly the consumer and purchaser of a product are related.

    Of course, if your goal is to get rid of insurance, rather than make it work, you're not going to want to do anything that would make a market in insurance function better.

  19. I am experiencing the health death spiral first hand and all you "healthy" readers take heed. I bought an individual health policy 8 years ago as I became self employed and needed a policy after retiring from law enforcement and lost my employer based insurance. found a great "individual" policy for $137.00/month in april of 2002. the premiums began rising 20-30%/year thru time and currently are $1300.00/month and I am "unisurable" because: In fall of 2004, I was diagnosed with severe rheumatoid arthritis which affected my joints, lungs,skin,heart, gut,nerves, bones, muscles, and tendons, and a handful of other autoimmune diseases, all chronic progressive, treatable, but non curable. my life changed severely with disability, pain, trips to docs and ER, and forced early retirement due to chronic disease. My meds are over $2500.00/month which allow me to function as well as I am able, but still unable to hold down any employment (or an employer based insurance policy). I applied for SS disability as my doc wanted me to get on medicare/aid and was turned down as I am not yet wheelchair bound. I never received my denial letter ???? and they only send you one letter via US mail (non certified) so I missed th 30 day window to appeal the decision. I spoke with the Attourney Generals Office in my state regarding the "bait and switch" premium increases and found out that the insurance companys are allowed to discriminate against me and jack my premium according to how much I cost them as a result of my medical care. I have also been defrauded of about $50,000.00 in meds and care that the insurance company has refused to pay meds and for "usual, customary and reasonable" costs. Google "Ingenix fraud/scams" to see how United Health Care just settled with the new york attorney general for $350 million to offset an estimated $5.7 billion which was defrauded from new york citizens just as I have been defrauded for the "UCR costs". I will have to sell my home within a year and am expecting my next premium increase to be near $2000/month and/or they will just cancel my policy by eliminating my entire group as they are allowed to do. It is all a scam, I have always had insurance, but now I am thinking I will end up bankrupt if I continue to pay out these crazy rates and am considering having to either leave the country to find health care or live as best I can without meds and suffer. for the record, I have always been an athlete, non smoker, healthy lifesyle choices, but I now suffer with chronic illness which originated from a combination of genetics and currently unknown environmental triggers. The insurance companies are all about making their profits from the backs of people who are losing their health livelyhood and these practices are immoral and unethical. Welcome to 21st century "health care". buyer beware health insurance is a scam as when you need it, it will not be there to protect your interests.

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