Avoiding the Death Spiral: New Federal Health Care Law and Insurance Regulation

The new federal health care legislation helps American consumers generally by equalizing our rights and responsibilities. By requiring insurance coverage for all, it will spread risk and provide a safety net for consumers.

States like Massachusetts and New York, known for their outstanding medical care, and driven by broader social concerns of non-profit advancement of health care and protecting those suffering from wide-spread illnesses like cancer and AIDS (as well as the reality of high costs of medical care), have been trailblazers in taking closer steps toward universal health insurance coverage for their citizens, including those with pre-existing conditions. By doing so, they’ve begun to address the problem of the “death spiral,” where costs of insurance get so high that healthier people opt out of insurance, leaving a smaller pool of sick, more desperate people who must keep their insurance, but are forced to pay ever-increasing, often prohibitive premiums. The healthier people don’t want to pay high premiums to subsidize the sicker people, so they drop their coverage. The insurance companies in turn lose premium revenue from these healthier consumers, and hike up the premiums to those left in the customer pool. See “New York Offers Costly Lessons on Insurance,” http://www.nytimes.com/2010/04/18/nyregion/18insure.html?src=mv.

Recognizing the successes in Massachusetts and New York, the Federal government’s new health law widens the consumer pool and requires everyone to get insurance coverage. If people refuse, they’ll be fined. Though we won’t see this penalty phased in until 2014-16, the threat of a fine (ranging from $695 for an individual to over $2000 for a family), will nudge people into obtaining insurance coverage. The more people who purchase health insurance, the more diverse the pool of insureds, making for a broader, generally healthier pool, with shared risk, lower incidences of sickness, and lower overall costs (per head).

States and the federal government are also considering the need for governmental regulation of premium rates insurers set. This regulation would likely enforce limits on rate increases, based on profits and administrative costs. (For example, any increase must reflect only a 25% profit increase, the other 75% must be due to true health costs). The insurance industry is vehemently opposed to such regulation, which in the end benefits consumers. Even though traditionally insurers may issue refunds to insureds based on larger-than-expected end-of year profits, the likelihood of great surplusage may be nipped in the bud by governmental regulations limiting rates/profits earlier on – a true benefit to consumers. See “Democrats Seek More Control Over Health Insurance Rates,” http://www.ctnow.com/health/sns-health-reform-democrats-premiums,0,60356.story.
— ND

Contact Information