The return of the ‘death spiral’

Just when you thought it was safe to get back in the health care pool, Biden’s ACA would take a bite out of affordability.

The implementation of the Affordable Care Act (ACA), commonly known as Obamacare, threw the individual health insurance market in crisis. The Trump administration took strong administrative actions to help the market stabilize premiums and bring health insurers back into the market. Unfortunately, the Biden administration now threatens to reverse that success and spin up Obamacare “death spirals” that could kill the market for anyone who earns too much to qualify for federal premium subsidies.

Trump administration inherited a crisis

After the law’s main provisions took effect in 2014, skyrocketing premiums soon made health insurance unaffordable as average monthly premiums jumped by 93 percent from 2013 to 2017. Narrowing provider networks made the best doctors and hospitals inaccessible. Rising deductibles and cost sharing only worsened these affordability and accessibility problems. In this environment, insurance companies began to flee. Seventy insurers left the market in 2016 — a 30 percent drop.

All of this pushed healthier people who earn too much to qualify for subsidies to drop out of the market. From 2015 to 2016, according to a Centers for Medicare & Medicaid Services (CMS) report, 23 states experienced a drop in unsubsidized enrollment. Minnesota experienced a far steeper decline than most states. From 2015 to 2016, unsubsidized enrollment dropped by 22 percent in Minnesota and then dropped another 53 percent in 2017, the third largest drop in the country.

As healthier people left the market, the risk pool got sicker making premiums even more expensive the next year. Enough cycles of premium hikes pushing healthier people to leave the market can make the risk pool too expensive to survive. This cycle is called a death spiral.

While the subsidized portion of the insurance market is protected from a death spiral thanks to federal deficit spending, the Trump administration inherited an affordability and enrollment crisis among the unsubsidized.

Obama-era decisions created the crisis

The ACA led the insurance market down this damaging path, but Obama-era regulatory decisions on how to implement the law guaranteed the law would push state insurance markets into crisis mode.

Prior to 2014, actuaries consistently warned that the ACA would boost premiums citing the closure of state high risk pools, premium rating requirements, health benefit mandates, health insurance taxes, and the Exchange user fee — all key insurance principles the Obama administration ignored that led to even higher premiums.

Obama’s famous promise “if you like your health plan you can keep it” unraveled in 2013 with the embarrassing news that insurers were canceling plans to align with Obamacare. In response, Obama decided to allow people to keep non-compliant “transitional” plans. This helped Obama politically, but it also gave healthier people the choice to stay in transitional plans and out of the regular market, which undermined the risk pool.

To boost enrollment, the Obama administration also loosened enrollment rules that allowed people to wait until they were sick to enroll. This made adverse selection — people selecting insurance based on their health status — a much bigger, ongoing problem for the market.

Trump policies helped stabilize the market

Met with an insurance market in crisis, the Trump administration quickly implemented policies to stabilize it.

Enrollment periods play an important role in the overall structure of the ACA to mitigate adverse selection and protect the risk pool. The ACA requires insurers to guarantee coverage to everyone without charging more to sicker people. Without any other rules, these guarantees would allow people to wait until they’re sick to enroll. The ACA established an annual open enrollment period (OEP) that limits enrollment to a short window to ensure people enroll at the beginning of the year and stay enrolled. The ACA also includes special enrollment periods (SEP) that allow people to enroll at any time of the year if they experience a special life event, like losing job-based coverage, getting married, having a baby, or moving.

Obama rules established an extended three-month OEP, far longer than OEPs established for employer health plans and Medicare. More problematic, Obama’s SEP rules basically allowed people to self-attest to experiencing a qualifying life event, leaving SEPs wide open to fraud and abuse. The Trump administration locked down these enrollment rules as best they could by shortening the OEP to six weeks and instituting pre-enrollment verification for enrollment in certain SEPs. The Trump administration advanced other policies to improve the market by lowering fees and enabling states to deal with ACA on their own terms.

Altogether, these strategies stabilized the individual market. Beginning in 2019, premiums for the average benchmark plan on declined for three consecutive years, enabling insurers to return to the market. Despite these improvements, premiums remained out of reach for too many, but the market was moving in the right direction.

Biden agenda threatens the risk pool

Despite this success, the Biden administration wants to roll back Trump administration policies and adopt the same failed Obama-era approach. In short, it wants to spin up Obamacare’s death spiral.

Biden has already extended the OEP from six to 10 weeks, raised the Exchange user fee, repealed an option for states to use enhanced direct enrollment in place of, and removed regulations that gave states more flexibility to waive ACA requirements. In addition, the rule finalized a new SEP that allows anyone earning less than 150 percent of the federal poverty level (FPL) to enroll at any time of the year.

Now it wants to loosen enrollment rules even more by repealing pre-enrollment verification for all but one SEP and requiring insurers to re-enroll people even if they still owe past-due premiums. This wrongheaded approach clearly reflects a troubling misunderstanding of health insurance and a willful effort to ignore the facts.

On top of this, Biden’s Build Back Better agenda would permanently expand the ACA’s premium tax credits to people above 400 percent of FPL. Increasing subsidies to reduce premiums might sound like an easy way to make premiums more affordable, but these subsidies increase dollar-for-dollar with premium increases. It stabilizes premiums for subsidized enrollees but gives insurance companies a blank check to keep increasing costs and insurers get rewarded by raising premiums.

Permanently expanding premium subsidies will virtually eliminate the portion of price-sensitive, unsubsidized consumers who would otherwise demand lower premiums.

A better path forward

Looking forward, premium affordability remains a critical issue for the individual health insurance market. Trump-era rules helped but did not solve the affordability problem and now Biden is moving to adopt the same failed approach as the Obama administration. The truth is, Congress needs to address key problems with the ACA that cannot be fixed administratively.

To start, shift from the ACA’s inflationary premium-linked subsidy to a fixed subsidy. Instead of giving issuers a blank check, this will drive competition and innovation. Next, a federal reinsurance program will bring immediate premium relief by directly funding a portion of high-cost claims while keeping issuers motivated to control costs. Finally, amend ACA requirements to allow issuers to compete to provide higher quality, more tailored coverage for people with pre-existing conditions rather than current incentives for narrow networks and high deductibles.

These strategies will use competition to drive down premiums versus boosting inflationary premium subsidies, transforming the individual market to become part of a long-term solution to help lower the cost of care across America’s entire health care system.

Nelson served as a Senior Advisor to the Administrator at the Centers for Medicare & Medicaid Services in the Trump Administration.