The anatomy of a death spiral

We are still waiting for the D.C. Circuit Court of Appeals’ decision in the Obamacare subsidy case Halbig v. Sebelius. I’ve written before (here and here) on a significant glaring flaw in the challengers’ case. In short, their theory that Congress threatened states that refused to create exchanges with an inactive individual mandate (due to lost insurance subsidies) and an active ban on preexisting condition exclusions raises constitutional issues regarding improper coercion upon the states. This is because such a regulatory regime would plunge state insurance markets into adverse selection death spirals. Because the challengers’ theory raises constitutional problems, basic statutory interpretation principles will guide courts toward the government’s reading of the statute – a reading that permits subsidies to be offered on all exchanges. Therefore, the plaintiffs’ challenge to Obamacare will fail.

I’ve explained the contours of this argument, and I’ve justified why the government’s interpretation of the relevant Affordable Care Act provisions is reasonable. But I haven’t yet walked through the anatomy of an insurance market death spiral in much depth. Indeed, this is the linchpin of the theory of why the Halbig plaintiffs’ argument fails on its face.

An amicus brief filed by a group of health economists in Halbig provides a succinct outline of how a death spiral occurs:

Without premium subsidies, millions of people will be exempt from the mandate altogether or will choose to pay the tax penalty rather than purchase unaffordable insurance. Yet the sickest people will continue to sign up for insurance and insurers will have to cover them. The resulting higher premiums will threaten an adverse selection “death spiral”: as premiums increase, more and more healthy people will be exempt from the mandate or will choose to pay the tax penalty rather than buy insurance, leaving sicker people an ever greater portion of the risk pool, leading to escalating premiums, and even fewer enrollees.

The economists explain the death spirals of this kind have occurred in Massachusetts, New York, New Jersey, and the U.S. Virgin Islands.

Looking at two pertinent case studies is instructive. First, the individual insurance market in New York. New York experienced some of the sharpest post-Obamacare premium declines in the country. New Yorkers who were previously paying over $1,000 a month for individual insurance plans are now barely paying $300 – and that was even before Obamacare’s subsidies kicked in.

This rapid price decline was due to the fact that, prior to national health reform, New York had one of the most expensive and severely broken individual markets in the country. The reason, according to Sarah Kliff, was “a law passed in 1993, which required insurance plans to accept all applicants, regardless of how sick or healthy they were. That law did not, however, require everyone to sign up, as the Affordable Care Act does. [ ] New York has, for 20 years now, been a long-running experiment in what happens to universal coverage without an individual mandate.”

The result of the experiment was the highest health premiums in the nation. Insurers had to accept all comers, but there was no reciprocal obligation on all New Yorkers – both healthy and sick – to carry health coverage. This led to a sicker risk pool, leading to higher prices, leading healthier people to drop out of the risk pool in greater numbers, leading to a still sicker and more expensive risk pool. In short, a death spiral.

Second, consider the case of child-only insurance plans. In 2010, insurance companies started dropping child-only insurance plans. The reason? The Affordable Care Act was imposing a ban on preexisting conditions but no individual mandate (until 2014). A spokesman for America’s Health Insurance Plans explained the danger of this regulatory structure, fearing that it “provides a very powerful incentive for a parent to wait until their child becomes very sick before purchasing coverage.” Rather than face a market meltdown, many insurers simply stopped offering child-only policies under the new rules.

The meltdown in the child-only markets has not gone unnoticed, including by Halbig architect Michael Cannon. Importantly, Cannon concedes that the deliberate imposition of insurance market death spirals by Congress is on par with the coercive “gun to the head” threat of losing Medicaid funds in NFIB v. Sebelius:

Congress enacted even worse policy (community-rating price controls with zero protections against adverse selection) in both the CLASS Act and the markets for child-only health insurance, and enacted similarly bad policy (community rating with weak protections against adverse selection) in the non-Exchange individual market and in U.S. territories. Moreover, the potential adverse-selection effects amici describe are not out of character for a Congress that was trying to put “a gun to the head” of uncooperative states, which is what the Supreme Court found this Congress was trying to do.

Cannon fails to appreciate how this accusation of congressional coercion – the logical endpoint of the plaintiffs’ argument – undermines the anti-Obamacare case. If the plaintiffs’ theory depends on coercion by Congress, constitutional avoidance doctrine commands courts to adopt the government’s theory that the hastily-drafted Affordable Care Act sections at issue can be plausibly read to make subsidies available on all health exchanges.

The experiences of New York and the child-only insurance market shares the same characteristics as the Halbig plaintiffs’ understanding of congressional intent in Obamacare: the absence of an individual mandate, coupled with a requirement that insurers accept all customers regardless of their preexisting conditions. Under the Court’s coercion doctrine, Congress could not have constitutionally threatened states with becoming New York if they didn’t create health exchanges. It would have devastated their insurance markets.

So on the threshold question of how exactly we are to interpret the statute, and how Congress meant Obamacare’s subsidies to work, courts can’t buy what the plaintiffs are selling. In their quest to kill Obamacare and escape the individual mandate, the Halbig challengers prove too much by bringing on a death spiral.

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5 thoughts on “The anatomy of a death spiral

  1. Pingback: “Such” a mess | J.DODGE blog

  2. Pingback: Halbig’s hellscape | J.DODGE blog

  3. Pingback: The looming constitutional icebergs in King v. Burwell | J.DODGE blog

  4. Pingback: King v. Burwell’s shadow constitutional avoidance | J.DODGE blog

  5. Pingback: Donald Trump wants to scrap Obamacare but keep its most popular provisions. Too bad that's logistically impossible — Quartz

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