The Death Spiral

I used to be a hero.  At one point we had quite a few nanny placement services in Greater Cleveland and many of the young women were hired to work in New York.  Most of these agencies referred their clients, the potential employers, to me for the health insurance needs of the caregivers.  The ones who called were very happy.  One of my health insurance companies would allow an Ohio policyholder to retain her coverage even if she moved to New York City.  Otherwise, she or her employer would have had to purchase a policy there. 

The Ohio policy was hundreds of dollars less per month.  

Hundreds.  Fifteen years ago.  The spread is much higher now. 

Two important questions:

It has been said that the road to Hell is paved with good intentions.  It is hot, really hot, in New York.  Years ago it was decided that all adults under age 65 should pay the same premium.  Twenty-two or sixty-two, the price is the same.  That sounds great if you are in your sixties, but it only works if you can drag the twenty-somethings to the table.  In the beginning your average participant age is in the mid-forties.   As the young drop out, the average age, and the price, increases.  

But age wasn’t the only pricing determinant abandoned in the interest of fairness.  New York insurers were forbidden to underwrite the risks.  The sicker you are the better that deal.  An insulin dependent diabetic with AIDS pays the same premium as someone who is perfectly healthy.  The system, in essence, welcomed pre-existing conditions and penalized the young and healthy. 

And of course, the cost of living is higher in New York, especially in NYC. 

As we have noted previously, Ohioans, on average, pay a lot less for health insurance for all of the reasons that New Yorkers pay more.  I have lots of clients, male and female, under the age of 30.  Some of these young adults shopped for this coverage and pay for it themselves.  The rest of these cases have some degree of parental involvement.  It is much easier for a parent to come up with $70 to $120 a month in Ohio than hundreds more in New York. 

Why are there millions of uninsured New Yorkers?  The 2.6 million number is actually from six years ago.  That number hasn’t gone down.  New Yorkers weren’t required to purchase insurance.  There was no Individual Mandate.  Penalized for their health and youth, many New Yorkers simply chose to not participate.  Making insurance affordable might get them back into the market.  Making insurance mandatory will have more impact.

It has been announced that the New York rates will be plummeting under the Patient Protection and Affordable Care Act (PPACA).  Governor Cuomo is ecstatic.  The President is pointing to New York as a model for the future.  And it is true, at least for the moment, that New York rates are coming down.  A lot.  But if you consider $1,000 per month normal, your great bargain may still sound awful to consumers in Ohio.  This link is to an article that dreams of young people paying only $190 for a basic policy, one that a guy living in Cleveland might buy today for $70! 

Will the New York rates stay cheap?  There are two major speed bumps ahead.  The first is the PPACA.  The 2014 New York rates are certainly much less than the current pricing, but are they cheap enough?  Will the subsidies be enough to spur sales when the penalty (tax or fee depending on your political persuasion) is only $95 or about 1% of income?  With the penalty so low, enforcement challenging, and the entire process confusing, the prediction is that many of the currently healthy uninsured will sit out a year or two.  Lose the young and healthy and New York is right back where it was. 

The second speed bump facing New York is the U S House of Representatives.  The Republicans sensed weakness in the Obama administration’s decision to shelve the employer mandate for a year.  (See previous blog)  Last week the Republicans attempted to put the individual mandate on hold, too.  Of course the bill passed the House.  And you might think that the bill will never see the light of day in the Senate, but don’t be so sure.  Punting the individual mandate might seem like a good idea to a group of people who are used to putting off important decisions and deflecting responsibility.  

Both the Democrats and the Republicans have a reason to kill the individual mandate.  As New York already proved, if we create super health policies that do everything but drive you to the doctor, don’t factor in the health conditions of the insureds, and don’t weigh the premiums properly for the ages of the participants, the rates will go through the roof if you can’t corral the young and healthy into the insurance pool.  Without an individual mandate forcing participation, you create a death spiral.  As the rates increase to reflect the claims, the young and healthy leave.  First the twenty somethings jump out.  Eventually the average age of the participants will be over 50.  Prices will be out of control and there will be only one answer – Single Payer.  

Your friends in New York and California are celebrating the health insurance rates they expect to see in 2014.  It would be tacky to point out that their new rates will still be significantly more than the rates we pay today.  And it is just sad to think that our new rates and their new rates are going to be about the same.