McCain’s Health Care Death Spiral: Higher Premiums For Sicker People

Earlier this month, Cato’s Michael Cannon argued that healthy individuals who purchase health insurance using Sen. John McCain’s (R-AZ) proposed health care tax credit, could buy “more secure coverage of high-cost conditions than the current job-based system” allows:

Researchers such as Mark Pauly of the University of Pennsylvania and Susan Marquis of the RAND Corporation have found that the individual market covers lots of people with high-cost medical conditions — so long as they purchased the insurance when they were healthy… Over the long term, then, McCain’s plan would provide more secure coverage of high-cost conditions than the current job-based system does.

Cannon is mistaken. In what is known as ‘the death spiral,‘ health insurance companies entice healthy candidates into cheap plans and then increase prices for sicker patients. Consumer Reports explains the tactic like this:

[Companies] stop accepting new customers in a plan, which kicks off a process known as a “death spiral.” Even if everyone in an insurance plan starts out relatively healthy, as time goes on, people get sick, and the cost to insure them rises. Once the pool is closed, costs for the remaining members rise inexorably. Healthier members find cheaper plans, but sicker ones are effectively forced out because they can’t afford coverage.

While healthy patients who pass another round of medical underwriting can switch to a cheaper plan, patients who develop a disease after purchasing their coverage, fail their underwriting, and are stuck paying higher prices:

“Jesse Paul, 59, an Indianapolis lawyer, paid $25.50 a month for his individual, $100- deductible Prudential major medical policy when he took it out in 1980. Premiums rose steadily for years but at a pace that Paul deemed “rational in terms of medical costs.” In 2003 the premium shot up from about $1,200 to about $1,900 a month at renewal.

When Paul complained to the state insurance department, he learned that the policy had been closed to new entrants for years, that he was one of only 400 to 600 customers left in the state, and that the premium increase was permissible under Indiana law. Paul reached his breaking point when he got his latest renewal notice in August; the monthly premium was now $4,284.

Cannon claims that allowing anyone with pre-existing conditions to purchase insurance would “invite irresponsible behavior.” It’s curious that Cannon thinks the current behavior of private insurance companies, who would be further unregulated by McCain’s plan, isn’t “irresponsible.”