Trumpcare vocab lesson: ‘Death spiral’

Trumpcare threatens to collapse many insurance markets.

CREDIT: AP Photo/J. Scott Applewhite
CREDIT: AP Photo/J. Scott Applewhite

Let’s talk about “death spirals.”

That’s not a political term that Democratic operatives made up to scare you. “Death spiral” is actually the economic term of art for what Trumpcare will do to health insurance markets.

A death spiral is a kind of feedback loop where higher premiums cause healthy, paying customers to drop their health plans, which in turn leads to higher premiums, which in turn drives more people out of the insurance market. It’s called a “death spiral” because it often ends in the collapse of that market.

And, because we are talking about health care, it will also end in the deaths of many Americans who will no longer be able to afford care.

What is a death spiral?

One of the most challenging problems solved by Obamacare is how to insure people with pre-existing conditions. Before Obamacare, insurers were free to deny coverage to such individuals — and this wasn’t something they did simply because they were being cruel.

The whole point of health insurance is that everyone pays into an insurance pool that they only take money out of when they need medical care. Pre-existing conditions can be quite expensive to cover — indeed, they can be more expensive than the insurer can reasonably charge in premiums.

If you load up an insurance pool with too many sick people, they start taking more money out of the pool than the health consumers are paying into it — until the whole thing collapses.

One possible solution is to simply require insurers to eat these costs, and pass a law requiring them to cover people with pre-existing conditions even if these individuals take out more money than they pay in. But such a law creates its own problem. If people can wait until they are sick to buy health coverage, people will wait until they are sick to buy health coverage. And that will leave insurers with too few healthy customers to cover the costs of their sick consumers.

The death spiral begins after an insurer raises premiums to meet this funding shortfall. Higher premiums drive out more healthy customers, which forces the insurer to jack up premiums even more, which drives out even more healthy customers, which forces the insurer to jack up premiums again.

As Justice Ruth Bader Ginsburg explained in the first Obamacare case to reach the Supreme Court, “in the 1990’s, several States — including New York, New Jersey, Washington, Kentucky, Maine, New Hampshire, and Vermont,” enacted laws prohibiting discrimination against people with preexisting conditions, and “the results were disastrous. ‘All seven states suffered from skyrocketing insurance premium costs, reductions in individuals with coverage, and reductions in insurance products and providers.’”

The Obamacare solution

Obamacare solves this problem with an unpopular, but quite effective provision: the law’s so-called individual mandate. This mandate imposes higher taxes on most people who are uninsured, giving healthy people a financial incentive to buy health insurance that wards off a death spiral.

The Senate Trumpcare bill would repeal this mandate and replace it with, well, nothing.

That’s a huge problem because, while the Senate bill does weaken the law’s insurance regulations and allow states to waive some of them, it leaves in place Obamacare’s provisions prohibiting insurers from charging more to people with preexisting conditions. That’s a recipe for a death spiral.

Once the death spiral begins, things can get pretty grim, pretty quickly. When Kentucky tried protecting people with pre-existing conditions without also enacting an individual mandate, for example, nearly all insurers left its individual insurance market. In New Jersey, some premiums rose by 350 percent. In Washington, some counties had no private individual insurance coverage available at any price.

And, if the Senate Trumpcare bill becomes law, this fate could await all 50 states.