Oregon's Coming Health Insurance Death Spiral
by David Hogberg, Ph.D.
Oregon's ObamaCare health insurance exchange, "Cover Oregon," has received fawning media coverage similar to that initially given to California's now controversial exchange, "Covered California."
For example, when Cover Oregon released its proposed insurance premiums in late May, the Huffington Post called them "surprisingly competitive."1 An article in Medical Daily began, "Officials in Oregon and Washington expressed pleasant surprise at lower-than-expected health rates offered by insurers as part of the new federal law known as 'Obamacare.'"2
Sarah Kliff of the Washington Post's Wonkblog noted that after the Oregon premiums were released, two insurers contemplated lowering their rates. "Oregon may be the White House's favorite health exchange," was the headline of Kliff's blog post.3 And Wendell Potter, everybody's favorite former-insurance-executive-turned-left-wing-crusader, said the rates "are evidence 'rate shock is a crock.'"4
Oregon's health insurance exchange has not received the same level of skeptical examination as has California's, which is odd and unfortunate because the rates on Oregon's exchange aren't much better than those in the Golden State.
One reason California generated so much controversy is that it was difficult to compare the rates on California's exchange to current rates. No one, it seems, had come up with an "average" rate in California's individual market. Oregon does not have that problem. In July 2012, Wakely Consulting Group conducted an analysis of the effect ObamaCare would have on Oregon's insurance market for Governor John Kitzhaber. Wakely estimated that, in 2011, the average monthly premium in Oregon's individual market was $202.5
To determine what rates are today, for the sake of argument, let's assume that premiums in Oregon's individual market rose an average of 10% annually in the last two years, so that the average premium in Oregon's individual market in 2013 would be about $244. Examining the rates released by Cover Oregon reveals that average monthly premium for 2014 will be $405.6 That’s a 66 percent increase! If the comparison is limited to the cheaper Bronze plans, the results aren't much better. The average of the Bronze plan premiums is $347, an increase of 42 percent. That should be a rate shock even by Potter's standards.
One can also argue that these numbers don't reflect the premium subsidies people who earn between 133 percent and 400 percent of the federal poverty level (FPL) will be getting on the exchange. Presumably when those are taken into account and applied to the cheaper Bronze plans, people will pay lower rates.
To see the problem with that thinking, it is important to look at Portland, Oregon's largest city where over 15 percent of the population resides. It's also where a disproportionate number of the "young invincibles" live in Oregon. Those ages 20-39 comprise 27 percent of the population of Oregon but over 34 percent of the population of Portland.7 Thus, if getting the young and healthy population to buy coverage is crucial to making the ObamaCare exchange work in Oregon, then Cover Oregon must attract much of that population in Portland.
Yet for most young invincibles in Portland, the incomes for qualifying for premium subsidies top out pretty fast. For example, any 25-year-old in Portland earning $27,553 or greater will not qualify for a subsidy. Neither will any 30-year-old earning $29,271 or more.8 Those incomes are 242 percent and 255 percent of FPL, respectively.
As to why this happens, it helps to understand the formula used to determine premium subsidies. (It's a bit technical.)
The formula is the price of the second lowest-cost Silver plan on the exchange minus the "applicable percentage." Under ObamaCare, the applicable percentage is the percentage of your income that you must pay toward your insurance before you qualify for a premium subsidy on an exchange. The applicable percentage is based on a sliding scale, starting at 2 percent for those with incomes at 133 percent FPL and rising to 9.5 percent for those with incomes at 400 percent FPL. So, if the second lowest-cost Silver plan is $2,500 and an individual's applicable percentage is $1,000, he or she qualifies for a premium subsidy of $1,500. However, no premium subsidy is offered if the applicable percentage equals or exceeds the cost of the Silver plan.
This is exactly the problem facing many Portland residents. For the 25-year-old earning $27,553, the applicable percentage and the second lowest-cost Silver plan are the same, about $2,120 annually. For the 30-year-old, they are both $2,397. Even for someone age 39, the applicable percentage equals the cost of the Silver plan, $2,665, when he or she reaches an income of $30,946, or 269 percent FPL.
So, even if those 25, 30 and 39 year-old Portlanders pick the cheapest Bronze plan on the exchange -- $1,590, $1,797, and $1,999, respectively -- they will still do much better financially next year if they forgo purchasing a Cover Oregon plan and instead pay the $95 fine for not buying insurance at all. Even in 2016, when the fine rises to $695, they will still have considerable financial incentive to go without insurance.
Thus, the Oregon exchange will likely suffer the same fate as California's, a death spiral.9 As the younger and healthier people realize that the price of insurance is more than the fine and that guaranteed issue rules force insurers to sell them a policy even when they get sick, they'll have substantial incentives to forgo insurance until they actually need it. That generally means that those who remain in the insurance pools are, generally, older and sicker, which means insurance prices will rise. Then even more young and healthy people drop their insurance, leaving the pools even older and sicker than before, and so on. Eventually all but a few insurers will drop out because they can no longer make a profit on the exchange.
We've seen this happen before, as documented by the late health-care scholar Conrad Meier.10 As he noted, eight states in the early 1990s "reformed" their individual markets with community rating and guaranteed issue regulation and saw those markets enter a death spiral.
But, instead of learning from this lesson of history, the social engineers who gave us ObamaCare gambled that they could avoid a death spiral with subsidies and an individual mandate. But like most social engineers, they got to gamble with other people's money and other people's lives. It will be largely other people who suffer when their grand plans turn out to be wrong yet again.
David Hogberg, Ph.D., is a health care policy analyst for the National Center for Public Policy Research.
1 Linda Bergthold, “Yes Virginia, Obamacare Still Exists,” The Huffington Post, May, 20, 2013, at http://www.huffingtonpost.com/linda-bergthold/yes-virginia-obamacare-st_b_3307108.html (June 11, 2013)
2 Matthee Mientka, May 18, 2013, "'Obamacare' Insurance Premiums Lower Than Expected, Two States Announce," Medical Daily, at http://www.medicaldaily.com/articles/15682/20130518/obamacare-insurance-premiums-lower-expected-two-states.htm (June 11, 2013).
3 Sarah Kliff, "Oregon may be the White House's favorite health exchange," The Washington Post, Wonkblog, at http://www.washingtonpost.com/blogs/wonkblog/wp/2013/05/20/oregon-may-be-the-white-houses-favorite-health-exchange/ (June 11, 2013)
4 Wendell Potter, "Projections are evidence 'rate shock is a crock,'" healthinsurance.org, May 28, 2013, at http://www.healthinsurance.org/blog/2013/05/28/projections-are-evidence-rate-shock-is-a-crock/ (June 11, 2013).
5 "Actuarial Analysis: Impact of the Affordable Care Act (ACA) on Small Group and Individual Market Premiums in Oregon," Wakely Consulting Group, July 31, 2012, p. 19, at http://www.cbs.state.or.us/ins/consumer/federal-health-reform/wakely-aca-actuarialanalysis-20120731.pdf (May 28, 2013).
6 "Proposed Rates for 2014 Health Plans," Oregon Insurance Division, Health Insurance Rate Review, at http://www.oregonhealthrates.org/?pg=proposed_rates.html (June 7, 2013).
7 "Oregon," U.S. Census Bureau, Profile of General Population and Housing Characteristics: 2010, at http://factfinder2.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=DEC_10_113_113DP1&prodType=table (June 17, 2013); and "Portland, Oregon," U.S. Census Bureau, Profile of General Population and Housing Characteristics: 2010, at http://factfinder2.census.gov/faces/tableservices/jsf/pages/productview.xhtml?pid=DEC_10_DP_DPDP1&prodType=table (June 17, 2013)..
8 Calculations based on "Portland Area Proposed Rate Examples," Oregon Insurance Division, Department of Consumer and Business Services, at http://www.oregonhealthrates.org/files/portland_individual.pdf (May 28, 2013); and "Subsidy Calculator. Premium Assistance for Coverage in Exchanges," The Henry J. Kaiser Family Foundation, at http://kff.org/interactive/subsidy-calculator/ (May 28, 2013).
9 David Hogberg, "California's Coming Health Insurance Death Spiral," National Center for Public Policy Research, National Policy Analysis, No. 649, June 2013, at http://www.nationalcenter.org/NPA649.html (June 17, 2013).
10 Conrad F. Meier, "Destroying Insurance Markets," Council for Affordable Health Insurance and The Heartland Institute, 2005, at http://www.cahi.org/cahi_contents/resources/pdf/destroyinginsmrkts05.pdf (June 4, 2013).