Econoclasm Chapter Two, continued: The Death Spiral

It's been a few days since the last post in this series, so I'll remind you that last time, we posed the question, "What would happen if insurers were simply required to cover people for pre-existing conditions?" Problem solved, right?

 

No. Problem made worse. Imagine what would happen. All of a sudden a whole lot of people with serious chronic diseases, who couldn’t get health insurance before, will buy it now. They’re expensive to cover, so the premiums will go up for everybody. At that point some number of people who don’t need it quite as badly will drop their coverage, leaving only sicker people in the “pool,” and the price will go up more, whereupon even more not-so-sick people will drop their coverage and eventually the premium would have to cover the full cost of treating people with expensive chronic conditions, which means the insurance would be worthless, and nobody could afford it. This is called the Death Spiral.

 

Since the ACA requires insurers to offer coverage for pre-existing conditions, it was because of this concern that it originally included an individual mandate – people who didn’t have insurance through their employers, Medicare, Medicaid or some other source were required to purchase insurance or pay a penalty. So why wasn’t there a death spiral when congress eliminated the individual mandate effective in 2019? It turns out that the subsidies for low and moderate income people in the ACA are sufficiently generous that relatively healthy people signed up anyway. Note that there is also a modest premium for Medicare Part B, that covers outpatient care, but just about everybody pays it because it’s such a good deal. But this would not work in an imaginary free market – some form of government intervention is needed, in these cases a subsidy rather than a mandate.

 

Note, again, that medical insurance is fundamentally unlike homeowner's insurance. You know the replacement value of your home and all your crap, and that's the amount of insurance you buy, and that's the maximum the insurance company will have to pay. The insurance company has an estimate of the chances that a house will burn down in a given period, which maybe isn't completely accurate for every house but close enough that they can set the premium with reasonable confidence and make a profit. If you choose not to buy homeowner's insurance, it's not because you know that your house is much less likely to burn down than other people's -- you might think that, but you'll be wrong. The real reason is that you're an idiot. But in the case of medical insurance, if insurers had to cover pre-existing conditions, you wouldn't be an idiot, you'd be smart to wait until you knew you needed it.

So this is just one more reason why people who talk about a Free Market™ for health care or medical insurance are full of crap. It just doesn't work that way.