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Anatomy of a Slow-Motion Health Insurance Death Spiral

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  • H. E. Frech
  • Michael P. Smith

Abstract

Adverse selection death spirals in health insurance are dramatic and, so far, exotic economic events. The possibility of death spirals has garnered recent policy and popular attention because the pricing regulations in the Affordable Care Act (ACA) of 2010 make health plans more vulnerable to them (though some other aspects of the ACA limit them). Most death spirals tracked in the literature have involved selection against a group health plan that was dropped quickly by the employer. In this article, we empirically document a death spiral in individual health insurance that was apparently triggered by a block closure in 1981 and developed slowly because the insurer partially subsidized the block. We show that premiums rose dramatically from around the time of the block closure to at least 2009 (the last year of available data). By 2009, some, but very few, policyholders remained in the block, and premiums were roughly seven times that of a yardstick we developed. The history of this slow-moving event is directly relevant to current policy discussions because of both adverse selection in general and the particular problems induced by closing a block.

Suggested Citation

  • H. E. Frech & Michael P. Smith, 2015. "Anatomy of a Slow-Motion Health Insurance Death Spiral," North American Actuarial Journal, Taylor & Francis Journals, vol. 19(1), pages 60-72, January.
  • Handle: RePEc:taf:uaajxx:v:19:y:2015:i:1:p:60-72
    DOI: 10.1080/10920277.2014.982871
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    References listed on IDEAS

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    1. Frech, H E, III & Ginsburg, Paul B, 1975. "Imposed Health Insurance in Monopolistic Markets: A Theoretical Analysis," Economic Inquiry, Western Economic Association International, vol. 13(1), pages 55-70, March.
    2. Harry Sutton & Roger Feldman & Bryan Dowd, 2004. "Disruption of a Managed Competition Environment by Low-Ball Premium Bids," North American Actuarial Journal, Taylor & Francis Journals, vol. 8(2), pages 45-55.
    3. Leemore Dafny & Kate Ho & Mauricio Varela, 2013. "Let Them Have Choice: Gains from Shifting Away from Employer-Sponsored Health Insurance and toward an Individual Exchange," American Economic Journal: Economic Policy, American Economic Association, vol. 5(1), pages 32-58, February.
    4. M. Kate Bundorf & Jonathan Levin & Neale Mahoney, 2012. "Pricing and Welfare in Health Plan Choice," American Economic Review, American Economic Association, vol. 102(7), pages 3214-3248, December.
    5. Altman, Daniel & Cutler, David M & Zeckhauser, Richard J, 1998. "Adverse Selection and Adverse Retention," American Economic Review, American Economic Association, vol. 88(2), pages 122-126, May.
    6. Benjamin R. Handel, 2013. "Adverse Selection and Inertia in Health Insurance Markets: When Nudging Hurts," American Economic Review, American Economic Association, vol. 103(7), pages 2643-2682, December.
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    Cited by:

    1. H. E. Frech & Peter Zweifel, 2017. "Market Socialism and Community Rating in Health Insurance," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 59(3), pages 405-427, September.
    2. Peter Zweifel & H. E. Frech, 2016. "Why ‘Optimal’ Payment for Healthcare Providers Can Never be Optimal Under Community Rating," Applied Health Economics and Health Policy, Springer, vol. 14(1), pages 9-20, February.

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