Is Obamacare spiraling downward?

It has been a while since I read an “Obamacare death spiral” article, and this article by Akash Chougule of Americans for Prosperity stops short of claiming that Obamacare is in one now. However, it does contend that with co-ops failing and enrollment in non-co-op programs slowing, President Obama’s signature program is in a “downward spiral.”

Let’s look first at the co-ops. They were inserted into Obamacare as a kind of quasi-public option. The co-ops are non-profit organizations governed by boards controlled by policyholders. In other words, as Merrill Mathews of Forbes puts it:

[T]he co-ops would get rid of those greedy, self-interested actuaries and insurers who were profiteering on the backs of the sick. Not full-blown socialized medicine, but a good start.

Actually, not so good as things are turning out. According to Chougule, as of this week nine of the law’s 23 state co-ops have collapsed. Consequently, more than 600,000 people who enrolled in co-op health plans will lose their insurance at the end of this year.

Ironically, many of them were forced into the co-ops to begin with when Obamacare caused the cancellation of their private insurance policies in 2013. In other words, they will have lost their health insurance twice because of the law.

To make matters worse, nearly all of the remaining co-ops are in trouble. Chougule says that 22 of the 23 co-ops lost money in 2014 despite receiving $2.4 billion in taxpayer support. (The nine that have already failed received more than $1 billion combined). Many of those that haven’t yet failed received letters from the feds demanding that they take urgent actions to avoid closing.

Why are co-ops failing? Chougule explains:

In an attempt to gain market share, the co-ops are offering policies at rates that don’t come close to covering Obamacare’s enormous costs. As a result, enrollment in their plans far exceeded projections, making their financial holes even worse.

He points to the case of the Nebraska-Iowa shared co-op:

Offering artificially low rates, it enrolled ten times more people than expected. This resulted in premium income far below patients’ medical claims, forcing the co-op into liquidation. Now 100,000 people will have to find other plans.

As for slowing enrollment, a matter I discussed here, the White House recently said it expects just 1.3 million new enrollees in 2016. Chougule notes that this number is far below the 8 million originally predicted for 2016.

The key question, though, is who is enrolling, and here’s where the central conceptual problem with Obamacare lies. It offers a disproportionate enrollment incentive to people who have higher health costs and qualify for larger subsidies. The possibility of a downward spiral is therefore obvious:

As costs [imposed by highly incentivized enrollees] continue to rise, so do the premiums on healthier and wealthier enrollees in traditional, non-co-op plans. Understandably, the latter then enroll in smaller numbers. That in turn forces even higher premiums on the remaining enrollees, creating a downward spiral: Over time, the enrollee pool becomes poorer and sicker and incurs ever-increasing costs.

This phenomenon, one suspects, is a significant factor in the disappointing enrollment figures the White House is projecting.

The combination of failing co-ops and declining enrollment in non-co-op plan by healthy, non-subsidized individuals creates a huge challenge to Obamacare. The program may not be on “death spiral” alert, but it isn’t looking sound.