Why Obamacare won’t spiral into fiery, actuarial doom

December 17, 2013

The rumors of an Obamacare death spiral have been greatly exaggerated.

So say Larry Levitt, Gary Claxton and Anthony Damico, experts at the Kaiser Family Foundation who have put together a new brief analyzing what would happen if young adults snubbed the Affordable Care Act. Even if young people sign up at half the rate the administration hopes for, it would nudge premiums up only by a few percentage points, their report says.

"When you do the math, it matters, but not nearly as much as the conventional wisdom suggests," Levitt says

The worry tends to go something like this: If young adults don't sign up for insurance coverage through the exchange, then the market loses a wide swath of very healthy enrollees -- and wouldn't have enough people to help pay the claims of the sicker, older subscribers. Without enough young people to subsidize the costs of older enrollees, insurers would instead raise premiums to cover the higher costs. And that would make coverage less desirable to young shoppers in 2015.

Or, if you prefer a bit more hand-wringing: If enough young people don't sign up for Obamacare, premiums spike, the market goes into a "death spiral" and the health law is doomed.

Levitt has already warned that fears of this alleged death spiral are likely overblown. Now, he, Claxton and Damico put a few numbers to the argument. First, they start with an analysis of who is actually in the market of people eligible to buy coverage on the exchange. These include those currently in the individual market and the uninsured who earn too much to qualify for the Medicaid program.

That's where you get the breakdown of the market shown below, where 40 percent of potential subscribers are under age 35.

kaiser death spiral

"Your ideal, as an insurer, is to get a proportional mix of enrollees," says Levitt.

That's what the White House has aimed for: Officials there have estimated that, if 7 million people enroll in 2014 (as the Congressional Budget Office has projected), 2.7 million of them, or 40 percent, need to be under age 35.

Levitt and his colleagues then modeled what would happen if these people didn't show up. There's already some evidence that insurance plans are getting enrollees that skew older; in California, for example, only about a quarter of their sign-ups are under 35. Most health policy experts expected the first wave of enrollees to skew older, with the younger population to follow.

But to see what would happen if this trend continued, the trio used data on typical health care costs for older and younger people to figure out how bad that would be for the exchange.

If young adults (those under 35) were 25 percent less likely than the rest of the population to sign up for Obamacare, they would represent 33 percent of exchange enrollees -- rather than 40 percent. This means there would be fewer young people to subsidize older insurance subscribers. To make up that difference, the experts estimated, insurers would need to increase premiums by a terrifying ... 1 percent. Yes, exactly 1 percent.

Levitt, Claxton and Damico also tested a scenario where young adults are half as likely as older shoppers to enroll. In that case, the younger enrollees would make up only a quarter of the exchange market. Premiums would fall 2.5 percent short of covering subscribers

"I had a general sense it wouldn't be giant, but this was even smaller than we expected," Levitt says. "It's not a terrifying number."

So, given that this review found such small effects, do young people really matter that much at all to Obamacare's survival?

"I think it shows age is important, but not super important," Levitt says. "And that also depends a lot on your perspective. An increase of 2.5 percent isn't going to precipitate a death spiral. When premiums are going up pretty slowly though, you ideally wouldn't want to add another 2.5 percent increase in 2015."

For insurers, Levitt argues, a situation where medical spending is 2.5 percent higher than premiums paid in could be noticeably detrimental, given that insurers typically run profit margins around 3 percent to 4 percent.

"When you're talking about profit margins around there, they might not lose money, but they might not make that much, either," Levitt says.

As for a death spiral, Levitt and his colleagues' research suggests that's a very unlikely outcome -- no matter what the doomsayers might be predicting.

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