Back in the Day – Lessons from Pre-reform Days: Death to the Death Spirals

Imagine that it’s 2006 and you’re a 50-year-old, self-employed individual who purchased a health insurance policy directly from your insurer (an individual market policy) when you first when into business for yourself at age 42.  And, imagine that you had a heart attack at age 46.   You just received your renewal letter for 2007 and your rates are increasing 28%.  That’s on top of a 19% increase last year.  Your 2007 monthly premium will be $1,520.

So, you decide it’s time to shop around for a more affordable policy.  Good luck.  On the rare chance that an insurer will sell you a policy in 2006, it would probably include a rider that would exclude coverage for anything related to your heart and circulatory system – which, as you can guess, would be just about everything.  But, it’s highly unlikely any other insurer would even want to cover you — and they don’t have to.

If there’s a high risk pool in your state, you might qualify for one of those policies.  However, since you already have coverage you wouldn’t be eligible in most states, but you might qualify in states that allow you to apply if your premiums are higher than they would be in the high risk pool.  But, because of the HIPAA provision that guarantees renewal in the individual market as long as you pay your premiums, your best bet would be to stay with your current policy if you want to remain covered.

How did you end up in this situation – trapped in a policy with spiraling premiums and no viable alternatives?   You, my friend, are covered by a policy that’s in a death spiral – one of the most pernicious realities of the pre-Affordable Care Act (ACA) health insurance world.   You see, when you purchased your policy you had no preexisting conditions and – given the fact that insurers won’t cover people with pre-existing conditions – it’s likely that the other people covered by your policy had similar health statuses whey they bought their policies.

Then, time passed and, like you, some of your fellow policyholders became sick or injured.  As that happened, the policy’s claims costs grew and premiums, which are partially based on year-to-year claims experience, gradually increased.  Those policyholders who remained healthy and could purchase less expensive coverage elsewhere have moved on, while those, like you, whom no other insurer wants to cover, are stuck.  And, your insurer stopped selling your policy when premiums got too high to be marketable, which has caused the upward spiral of premiums to accelerate.

Now, let’s fast forward to December of 2013.  You’re still stuck in the same policy, but you’re about to be unstuck.  What’s the difference?  You now have alternatives.  The 2014 ACA-compliant policies are available and insurers can neither reject you nor base your premium rate on your health status.  You can enroll in (for example) a Gold level HMO with a $700 deductible for $592.95 a month — or a Bronze level PPO with a $5,000 deductible for $378.63 a month, or any number of additional choices.

This scenario is not hypothetical.  Aside from the frequent and horribly frustrating incidences where, as an insurance regulator, I had to tell people there were simply no affordable options for them, the most heart-wrenching stories I heard before the ACA were about people in death spiral policies.

The term “death spiral” in relation to individuals should not be confused with the use of the term in relation to the initial open enrollment period for the federal and state marketplaces.  That interpretation – used mostly by those betting (or hoping) that the ACA reforms would fail – refer to the pessimistic projection that there won’t be enough young and healthy people buying policies to make the risk pools viable and premiums would spiral out of affordability.  Like so many other “chicken little” ACA predictions, the projections turned out to be false for a number of reasons.

The primary reason is that the risk pools no longer include only the people who bought one type of individual policy.  Instead, the ACA requires insurers to pool all of their individual policies in each state into one risk pool.  That includes policies sold within and outside the marketplaces (with the exception of grandfathered policies and whatever non-ACA-compliant policies were allowed to be renewed in the state).   And, now that open enrollment is over, the consensus seems to be that a sufficient number of young people purchased policies to keep the state risk pools healthy.

So, as long as policies are being sold, it is highly unlikely that anything even approaching the notion of a “death spiral” will occur in the new, statewide risk pools.  And, if a grandfathered or non-ACA-compliant policy went into a death spiral – or if an insurer stops marketing in a state — no one is stuck because individuals are free to shop on and off the marketplaces for a better deal.   This is huge — a truth that may only be obvious and celebrated by those who were previously stuck in death spiral policies – or those, like me, who shared in the frustration because they were not able to help those individuals secure affordable coverage.

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