Is Obamacare doomed without extended subsidies?

0:01NPR

0:11We're about a month into the government shutdown, and lawmakers are still at an impasse over health insurance subsidies. Democrats say they won't vote to reopen the government unless Republicans agree to extend subsidies for people who get health insurance through Obamacare, aka the Affordable Care Act. And if these subsidies expire at the end of the year, millions of Americans could see the amount they pay for premiums double or more. That's according to the nonpartisan health policy think tank KFF. And this could just be the start of a cascade of consequences. Theoretically speaking, a big price hike like this could even lead to something called an adverse selection death spiral.

0:52How's that for a spooky season econ terminology? This is The Indicator from Planet Money. I'm Adrian Ma. And I'm Darian Woods. Today on the show, we explain why the specter of a death spiral has haunted Obamacare ever since it began. And we ask if Congress lets these Obamacare subsidies expire, could a death spiral be in its future?

1:35in one place. Get a$250 credit on your next campaign so you can try it yourself. Just go to linkedin.com slash nprpod. That's linkedin.com slash nprpod. Terms and conditions apply. Only on LinkedIn ads.

2:05available at amazonbusiness.com. This message comes from Apple Card. You left your wallet in the car, or was it at home? No need to panic. With your iPhone, you can tap to pay using Apple Card with Apple Pay, and earn unlimited daily cash back when you do. Apple Card is ready when you need it. Subject to credit approval. Apple Card issued by Goldman Sachs Bank USA Salt Lake City Branch. Terms and more at applecard.com. Before we dive into death spirals, a little bit of history is helpful here. So back in 2010, about 20 percent of Americans had no health insurance, which is double what it is today.

2:43And for many of them, it's not as if they didn't want insurance. It's just that they couldn't afford it or insurance companies wouldn't cover them because they had a pre-existing medical condition. And during then President Barack Obama's first term, Democrats had an idea. They said, what if we created a government subsidized marketplace for health insurance, and we passed a law saying that companies can basically no longer deny people with pre-existing conditions. Those ideas would become cornerstones of the Affordable Care Act, aka Obamacare. But Cynthia Cox, who conducts research on Obamacare for KFF, says those proposals came with their own complications.

3:22When an insurance company has to cover people who have pre-existing conditions and they have to actually, you know, cover all of the benefits that that person might need. That makes health insurance premiums more expensive. And why does it do that? Well, if you think about it, people who are young and healthy are less likely to buy health insurance than those who are older or who have chronic illnesses. And people who are sick also use their benefits more to pay for medications and doctors and so on. In economics, they call this a problem of adverse selection. And from an insurance company's perspective, it is not good for profits.

3:56Because at the end of the day, their goal is just to collect more in-member premiums than they have to pay out in benefits. And so what does an insurance company do when it's suddenly forced to cover people they would previously have rejected as too sick or too costly? Well, they raise the premiums on all their other customers. And here, Cynthia says, is where the slope can get very slippery. The health insurance premiums to cover that group of people are going to be so expensive that the people who are just a little bit sick might drop out next year. Then the market's going to be an even sicker group of people.

4:32And then the people who are only moderately sick would drop out the following year. And then you're left with a group of people who are only very, very sick to the point that, you know, there are fewer and fewer people signing up each year. Premiums are going up more and more and more each year. And that is where you get into a death spiral. A death spiral. A negative cycle where rising prices drive healthier customers out of the insurance pool. and companies raise prices more to compensate. And on and on it goes until the market collapses. Now, to try and avoid this fate, the ACA included a few incentives to try and get more healthy people into the Obamacare insurance marketplace.

5:10As Cynthia puts it, The original Affordable Care Act included both carrots and sticks. The sticks included the so-called individual mandate. If you did not buy health insurance or did not get it through Medicare or Medicaid, then you had to pay a penalty. Meanwhile, the carrots included subsidies and tax credits. And those were to make health insurance affordable for lower-income and middle-income people who otherwise would not have been able to afford it. So through a combination of subsidies and mandates, carrots and sticks, the hope was lots of healthy people would enroll in Obamacare plans, thus bolstering the ACA marketplace against any potential death spiral dynamics.

5:51That was the theory anyway. The ACA marketplace officially launched in 2013, and in the early years, it kind of struggled. The rollout was messy, and there were constant political attacks and lawsuits against the individual mandate. It all created a lot of confusion. Enrollment was significantly below expectations. That's Brian Blaze, who's the president of Paragon Health Institute, which is a conservative health policy think tank with ties to the Trump administration. As insurance premiums went up, Brian, like many critics of Obamacare, saw signs of a potential death spiral in the making. Many parts of the country, in fact more than half of counties, only had one or two insurers that were offering coverage.

6:37So it was not a competitive, well-functioning insurance market. Then in 2017, as part of a big overhaul of the tax code, Republicans finally got their wish and ended the individual mandate's tax penalty. And this was a big blow to Obamacare because it took away the stick, one of the key incentives for healthy people to get insured. During these years, Obamacare enrollment declined about 6%. And yet, a full-on Obamacare death spiral never really materialized. And the reason was the carrot, the tax credits and subsidies which made ACA plans cheaper for most people. This carrot will grow even larger in 2021 as part of a pandemic spending package.

7:23Congress boosted funding for Obamacare subsidies, which made the plans even cheaper. And even though it was only supposed to be temporary, in 2022, Congress extended the subsidies through the end of 2025. Because of those enhanced subsidies, the number of people enrolled in Obamacare plans doubled, reaching 24 million today. So far from entering a death spiral, you might argue that Obamacare the past few years has been in a sort of health spiral. I would say yes to that. It's an interesting way of phrasing it. Maybe a little bit cautious with that? Interesting is not the word you want to hear sometimes.

7:58Yeah, well, Sarah Collins is a health policy researcher for the Commonwealth Fund, a nonprofit focused on improving the health care system. And she says the enhanced subsidies, they've actually strengthened the ACA marketplace and given consumers more choice. This greater enrollment did what you would expect it to do. It brought more insurers to the marketplaces and increased price competition. In 2024, 96 % of enrollees had a choice of three or more plans. And this brings us to today, back to our original question we posed at the start of the show, which is, if the extra Obamacare subsidies resulted in more people getting insured and kept premium prices lower than they would have been, could letting these subsidies expire do the opposite?

8:43And more to the point, could it actually push Obamacare towards a death spiral? All the experts we interviewed said no. People's premiums will rise. Many may drop out of their health insurance because of that. But the original Obamacare subsidies, those original carrots, will stay in place. And for that reason, the ACA market won't collapse. For Paragon Health Institute's Brian Blaze, He says he's in favor of letting the enhanced subsidies expire because he thinks Obamacare has oversubsidized the insurance market. I think what we need to do is reform the underlying structure rather than just continue to send more money to health insurance companies to prop it up.

9:26The Commonwealth Fund's Sarah Collins has a different view. It isn't OK to let this happen. It's not necessary to let it happen. and we know that these tax credits work. And we need a country where everybody has health insurance coverage. It's almost like a microcosm of the debate in Congress right now. Totally. And, I mean, I guess we'll see who Congress agrees with if they ever reopen the government.

9:52This episode was produced by Julia Ritchie with engineering by Ko Takasugi Chernovan. It was fact-checked by Sierra Juarez. KK Cannon edits the show and the indicators are production of NPR.

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