Equilibrium or Death Spiral?

The answer is that we don’t know. Megan McArdle has a pretty good post at Bloomberg in which she muses over the in all likelihood double digit premium increases that will hit the insurance plans offered under the PPACA:

What does that mean for the future? A few months back I was on a panel with a very smart health-care reporter who said, basically, “Yes, there will be rate hikes, but there is some price at which insurance can be sold profitably, and eventually, insurers will figure out what that price is.” My response was that this isn’t necessarily true. Insurance markets have some interesting features, one of which is that it is quite possible for there to be no price at which insurance can be profitably sold.

In health insurance markets, this phenomenon is known as the adverse-selection death spiral. Basically, every time the price of insurance goes up, many of the people in the insurance pool who use the least health care decide that it makes more sense to go without the insurance and bear the risk themselves, and they drop their coverage. That means you’re left with the more expensive patients to cover, which means the average cost goes up, which means prices have to go up … and, well, you get the idea. The price the market eventually finds may be so high that very few people want to buy the insurance.

We’ll know whether an equilibrium price has been reached if future premium prices rise no faster than other healthcare insurance premiums and the number of policies sold continues to increase. If the number of policies sold takes a nose dive or premiums rise in double digits while healthcare insurance premiums off the Marketplace rise at some slower rate, the PPACA will be collapsing and we should probably have a plan for what we do then.