Everything You Need to Know About Obamacare and 'Death Spirals'

Healthcare.gov's awful website probably won't doom health-care reform. Why? Here's your super-explainer.
Reuters

Are you 30 years old or younger and in good health?

If you answered yes, congratulations, the future of Obamacare depends on you. If you buy insurance, premiums shouldn't rise too much overall, and the system should work. But if you don't, premiums could spike and create a "death spiral." That would be bad. 

How bad? Well, bad enough to destroy the individual insurance market—which would destroy reform. See, our healthcare system is really four different systems that range from efficient, to not-efficient, to non-existent. There's a government system for the old, poor, military, veterans, and some children. Or, as you might know them better, Medicare, Medicaid, Tricare, the Veteran's Health Administration, and the Children's Health Insurance Program. A subsidized system for people who get insurance through work. An individual system for young, healthy people who don't get government or employer-provided insurance. And effectively no system for sick or older people on the individual market. Taken together, this patchwork system is a mess that costs us more as a share of GDP than any other rich country, without even covering everybody like they do. The question then is how we can stop paying more for less.

The answer, both sides agree, is ending the inefficient employer-based system. In a perfect liberal world, we would eliminate the subsidized system and move everyone to a government one—single-payer health care. And in a perfect conservative world, we would eliminate the employer-based subsidized system and move to an individual-based subsidized system that would compete with the government one. But, of course, we don't live in anybody's perfect world. So, even though conservatives refused to negotiate back in 2009, we got a compromise—Obamacare.

How Does the Obamacare Labyrinth Work?

Here's Obamacare in three steps. First, it expands the government system to include people making up to 138 percent of the federal poverty line ($15,850 for singles and $21,400 for couples). Second, it reforms the individual system, and subsidizes it for people making between 100 and 400 percent of the federal poverty line (from $11,490 to $45,960 for singles and $15,510 to $62,040 for couples). Third, it gradually taxes the subsidized employer-based system to slow its growth and help pay for the law's new subsidies.

Now it's the individual system where Obamacare will either either succeed or fail. About two-thirds of the law's expanded coverage is supposed to come from the individual system, since so many states are rejecting the Medicaid expansion. But that will require turning the individual market into something other than the horribly dysfunctional system it is today. As Consumer Reports put it in 2009, individual insurance is "unaffordable at best and unavailable at worst" for all but the youngest and healthiest of people. In other words, insurers price out the old and turn down the sick.

So How Can We Fix the Individual Market?

Well, Obamacare uses a three-legged stoolFirst, insurers are banned from discriminating against people with preexisting conditions. They have to offer everyone the same policies at the same prices regardless of health status (though not age)—and they have to offer policies that meet minimum standards. But there's a problem here. If people know they can't get turned away when they're sick, some might wait till they're sick to buy insurance. And that "some" could then turn into more. It's what healthcare economists call an insurance "death spiral." Suppose some healthy people decide to wait till they need insurance to buy it. Then the overall insurance pool would have a higher percentage of sick people in it, and premiums might rise. Those higher premiums might make more healthy people decide to drop their insurance until they need it—which would make the insurance pool sicker still. Premiums would rise again, and more healthy people would drop their coverage again, until eventually only sick people had insurance. That's why, second, there's an individual mandate that penalizes people who don't have insurance. The idea being, of course, that healthy people would rather pay for insurance than pay a tax. But it's not fair to penalize people for not buying insurance if they can't afford it. So, third, there are subsidies to help people afford coverage.

But Will It Turn Into a Death Spiral?

This brings us back to healthy twentysomethings. As we mentioned before, if they sign up for insurance, there won't be a death spiral. But if they don't, there might be. So why wouldn't they buy insurance? Well, there are two possible reasons. First, the website might not let them sign up. And second, the individual mandate might not really force them to sign up. Let's think about both.

(1) Why the website (probably) won't doom Obamacare... But the website is important. It's the exchange where people can buy individual policies—if, you know, it actually worked. But it doesn't, mostly. See, people can buy coverage on Healthcare.gov, but only if they're willing to try over and over and over again. And who's willing to try over and over and over again to buy insurance? The people who need it most. As Yuval Levin points out, this "difficult but not impossible" sign-up is almost perfectly designed to set off a death spiral. Indeed, insurers are already reporting that early buyers are older than expected.

How worried should we be?

Not too much. At least not yet. As Ezra Klein and Jonathan Cohn explain, Obamacare has fail-safes built in to prevent any one insurer from gaming the system that should save the system. There really isn't much risk of a death spiral in the law's first few years, which should give Healthcare.gov the time to fix things before there's irreparable damage. Here's how these fail-safes work.

Presented by

Matthew O'Brien

Matthew O'Brien is a former senior associate editor at The Atlantic.

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