When Democrats passed the Affordable Care Act in March 2010 — known universally as ObamaCare — they largely ignored every basic actuarial principle of insurance. As a result, ObamaCare was always going to collapse in what health insurers refer to as the “death spiral.”
The only reason it hasn’t already collapsed is Democrats passed additional taxpayer subsidies that insulated the insured from rising costs. This, in turn, explains why Democrats are now so determined to keep those subsidies.
In a normal insurance market, when someone applies for coverage, actuaries assess how much risk that applicant brings to the insurance pool. In life insurance, an older person generally brings more risk than a younger person. A home on a Florida beach brings more risk than a home in Nebraska. And a young male driver brings more risk than a middle-aged driver.
In all of these cases, actuaries would normally impose a higher premium or refuse coverage to the risker applicants.
That decision is based on the risk of some unforeseen event happening, not an event that has already occurred. Individuals can’t buy a homeowners’ policy when their house is burning down or auto insurance to cover a recent accident.
Yet Democrats wanted uninsured individuals — note that ObamaCare coverage is for individuals, not those with employer coverage — to obtain health insurance regardless of how sick they were, which is known as “guaranteed issue.” And they also wanted everyone to pay the same premium, again, regardless of their health, which is known as “community rating.”
When everyone is charged the same health insurance premium, older people who tend to have more medical issues pay an artificially lower premium. Younger, healthier people pay a higher premium. The young and healthy subsidize older adults.
The result is that younger, healthier people begin to drop their coverage because they are paying too much, leaving the insurance pool smaller and sicker. Health insurance premiums go higher, driving even more healthy people to drop their coverage. Eventually the pool gets very small and very expensive. That’s the death spiral.
To be sure, during the effort to pass ObamaCare, Democrats were persuaded to mitigate some of their worst actuarial abuses. They were going to require that seniors could only be charged twice as much as young people. They at least changed this to a three-to-one ratio (It should really be five-to-one or six-to-one), but the premiums are still too high for younger people.
Democrats were also persuaded to limit the time an uninsured person could sign up, called “open enrollment” — which is Nov. 1-Dec. 15 this year — to discourage people from gaming the system by waiting until they were sick to enroll. But Presidents Biden and Obama frequently extended the enrollment period and made other exceptions, which helped undermine the restrictions.
Finally, Democrats tried to limit such gaming of the system and young people dropping out by mandating that individuals have insurance coverage. But, again, there were lots of exceptions to the rules.
These actuarial violations meant that ObamaCare premiums would be going up. They weren’t the only factors. Health care prices are rising, like prices in the rest of the economy. There are new, innovative procedures and medicines that add to costs. And importantly, when people are insulated from the cost of anything — which is what health insurance does — they tend to spend more driving up utilization and costs.
ObamaCare premiums and deductibles have both gone up significantly over the years, which would normally force healthier and lower-income people to drop out. But the enhanced subsidies minimize the cost to the insured even as they maximize the cost to taxpayers. Why would someone care how expensive premiums are if taxpayers are covering 80 or 90 or even 100 percent of the cost?
Many people tell me they think Democrats knew ObamaCare would fail but passed it anyway so that when it did fail, they could push for a government-run health care system. I don’t agree. Progressives and most liberals have long believed they could ignore the laws of economics. Hence Democrats’ growing embrace of socialism.
Democrats are misrepresenting what will happen if Republicans refuse to extend the enhanced subsidies. Millions won’t “lose their coverage” — they will simply choose not to pay the higher premiums because they correctly think the price is too high, given their risk.
The solution to this problem is to repeal some of the Democrat-imposed regulations that are prohibiting health insurers from offering more affordable coverage. There were such options available before ObamaCare passed, and there could be again. But Democrats thought they could remake the health insurance system to work the way they wanted. It was a very costly mistake.
Merrill Matthews is a co-author of “On the Edge: America Faces the Entitlements Cliff.”