Health Insurance Death Spiral

The most startling implication of Anthem/Blue Cross of California’s announcement last week that it is going to raise individual health insurance rates by up to 39 percent this year is not that insurance companies are arrogant and untouchable. That was already well known.

What has to be more alarming for the 800,000 Californians who are covered by Blue Cross individual health insurance policies is that their insurance rates appear to have entered what insurance industry underwriters call a death spiral.

In response to the announcement, President Barack Obama told CBS News, “That’s a portrait of the future if we don’t do something now.” Everyone from Health and Human Services Secretary Kathleen Sebelius to Congressional committee chairman to California Insurance Commissioner Steve Poizner, a Republican gubernatorial candidate, weighed in, promising investigations and asking Blue Cross for delays in implementation.

Their castigations of Blue Cross feel satisfying because part of the reason for the rate increase is an overreach by Blue Cross, as they pursue their endless quest for greater profits even in a time of extreme economic hardship. But they miss the more technical, scarier point: even Blue Cross doesn’t like to raise rates this much. They’d much rather get their slow and steady increases and keep the game going longer.

No, Blue Cross was forced into a huge increase because of the accelerating breakdown of the finance structure of the for-profit insurance industry. With this magnitude of increase, the day will come much sooner when real change in the industry is unavoidable.

A death spiral is no better than it sounds. A death spiral occurs when rising rates cause healthy people to leave the coverage pool (dropping coverage altogether). This exodus of the healthy is a feedback loop that causes rates to rise even faster as fewer and less healthy people are left paying premiums to cover all the cost of their claims without the cost dilution effect of premiums paid in by those who file fewer claims. The higher the rates go, the more people leave, the greater the rate increase must be in the next cycle, causing more people to leave, etc.

As Blue Cross itself explained in a statement issued late Monday, “Therefore, as medical costs increase across our member population, premium increases to the entire membership pool result. Unfortunately, in the weak economy many people who do not have health conditions are foregoing buying insurance. This leaves fewer people, often with significantly greater medical needs, in the insured pool.”

This is not good news for individual policy holders anywhere in the nation, some 13 million people in 2008. As costs continue to rise, the death spiral will gather steam in individual state pools.

The health care reform bills pending in Congress attempt to address this problem by forcing all the healthy people back into the pool by mandating that they purchase coverage. Congress recognizes that the cost of this coverage is already unaffordable, so the bills provide subsidies to help pay the premiums. By the time the bill would go into effect in 2014, rate increases will have greatly outpaced increases in the subsidy amount, which is tied to increases in the poverty level. This will leave big premiums for people to pay, even with subsidies.

The insurance companies already are arguing that the penalties proposed in the bills for not purchasing insurance are too low to be effective, so by 2014 people who can’t afford ever more onerous premiums will be more likely to elect not to purchase coverage and pay the lesser penalties instead.

The answer to the problem: eliminate all these distinct pools and replace them with one, big nationwide pool, with everybody in and nobody out, as would be provided by a single-payer system. Multiple pools, multiple insurance carriers, multiple marketing systems, and all the other redundant layers of bureaucracy required in the for-profit insurance scheme simply add unnecessary cost – and no value – to the delivery of health care.

Jeff Sher lives in the Bay Area. He can be reached at:

Jeff Sher is a journalist specializing in the health care industry. He lives in San Francisco.