Caught in a death spiral

President Obama’s annihilation of the children’s health insurance market is foreboding

When the Patient Protection and Affordable Care Act (the moniker that D.C’s word doctors chose for the health care reform bill) was debated in Congress, many of its proponents described the main components of the bill — an individual insurance mandate, guaranteed issue provisions that prevent exclusion based on pre-existing conditions, and subsidies for poorer citizens — as a three-legged stool. Remove just one of the legs, they explained to colleagues looking to reduce the scope of reform, and the whole thing would fall down.

The logic of this argument is fairly straightforward (and, by and large, is what won George Akerloff ’66 his Nobel Prize in 2001): if Congress were to simply forbid the charging of higher prices to individuals that have a higher likelihood of incurring medical costs (notably those with pre-existing conditions), insurance companies would be forced to raise their rates, including the rates on healthy individuals. Many healthy people facing these actuarially unfair rates would choose to not purchase insurance, which would further worsen the statistics of the average insuree, and trigger another rate increase. This rate increase would chase even more healthy people out of the market, and the cycle would continue, resulting in what economists call a “death spiral.” In the final equilibrium of a death spiral, if any insurance is issued at all, it is issued at very high prices and is purchased only by the very sick.

To prevent this death spiral, guaranteed issue must be paired with a combination of subsidies that incentivize individuals to purchase insurance, and insurance mandates that penalize those who refuse. The balance between subsidies and penalties is mostly a values judgment about who should bear the costs of providing insurance to the sick — if one were perfectly indifferent to the plight of the healthy poor being forced to buy health insurance, penalties alone would suffice, and if one completely ignored the nation’s fiscal well-being, using only subsidies would manage — but holistically, for reform to work, the two need to be large enough to compel the healthy to purchase insurance despite being forced to cross-subsidize the unhealthy.

One can disagree with how Congress struck the balance between subsidies and penalties, but on the net, the health care reform was a success: in 2014, all three legs of the stool will simultaneously come into being, and the stool will be sturdy enough to support a large expansion of insurance coverage...

...with one hitch: last week, virtually every major insurance company in America stopped writing children’s insurance policies in the non-group market. The reason is simple: when it comes to children, the Obama administration decided it needed to enact one leg of the stool — guaranteed issue — now, rather than wait until all three kick in in 2014.

Not all children are affected. Where children are only a small part of the total insured pool and purchase is already semi-mandatory (for example, in employer-based plans that extend insurance to employee children), insurance will continue much as it ever did. But for the million or so kids that seek insurance from the individual market, the outlook is grim.

What is most tragic about this death spiral is that it was completely unnecessary. The crafters of the Affordable Care Act understood the three-legged stool and never intended to spatchcock a guaranteed issue provision so early in the act’s timeline. For that bit of masochism, we have Kathleen Sebelius, the Secretary of Health and Human Services, and her boss, President Obama, to blame. Defying the very economic theory that provided the impetus for health care reform in the first place, Mrs. Sebelius and Mr. Obama decided to creatively interpret some loose language in the bill and enforce a guaranteed issue provision three years before it was set to commence.

One has to wonder what the motivation behind this is. It could, perhaps, be an electoral ploy — the White House has certainly tried to leverage this move as a victory for children against insurance companies — but if it is a ploy, it’s a truly depraved one. It takes a very hardhearted cynic to sacrifice the health care of a million children in exchange for a political soundbite (especially one of such questionable value).

I have no special insight into the inner-workings of the president’s mind. However, I can’t help but remember that when Barack Obama was fighting to win the Democratic primaries two years ago, he campaigned against exactly the reforms that were subsequently pushed through Congress.

Perhaps Candidate Obama was unserious in his opposition to insurance mandates. More likely, I think, is that President Obama, upon assuming office, skeptically yielded his judgment to his economic betters.

Seen in this context, the disaster unfolding in children’s health insurance is not a callous political maneuver, but simply President Obama returning to his roots and governing from his gut. And if this is the case, then in the same stroke, the recent high profile defections from President Obama’s economic advisory team can be understood as the breakdown of his brain trust as the president increasingly subordinates his experts’ advice to his own, flawed, economic ideas.

The Obama administration may be, in a sense, trapped in its own death spiral. The more the president shrugs off the pleas of his experts, the greater the exodus of those experts will be, and without resistance from learned men, the president will find it easier to substitute his own shaky command of economic theory for that of professionals. At the end of this death spiral, we will likely find the full manifestation of a mind that conceives of the world as a zero-sum game: that which is bad for insurance companies must be good for their customers, that which is bad for the rich must be good for the poor, that which is bad for business must be good for labor, that which is bad for foreign companies must be good for domestic ones, and so on.

Today, a million children are left to dangle over an abyss. Tomorrow, things may be worse.