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Health Insurance Death Spiral

Many of us have warned that the health insurance industry may soon head into an insurance death spiral. The announcement the other day that the biggest health insurer may pull out of Obamacare is an indication of what may be ahead.

A death spiral occurs when the pool of insured people fills up with more and more people who are very sick. This drives the premiums higher. Younger and healthier people begin dropping out of the pool. The pool is now smaller, and the people are sicker, than before. That drives up the cost of premiums even more.

The front page of U.S. Today tells the story: Biggest Insurer May Quit Obamacare. The story focused on United Health Group, but it could also apply to other health insurers. Dr. Merrill Matthews reports that Texas BlueCross BlueShield is also facing financial problems and has cancelled hundreds of thousands of policies. McKinsey Company reports they lost $2.5 billion in the individual health insurance market.

Why is this happening? Dr. Matthews says that proponents of Obamacare decided to ignore long-standing actuarial principles. First, the bill required guaranteed issue. That means people can enter into an Obamacare exchange regardless of their health status. Second, many of these people actually are uninsured until they get sick. Then they sign up for insurance, and companies cannot charge more for treatment for their illness.

It is worth noting that the health insurance industry opposed the concept of guaranteed issue because they knew such requirements in the law would lead to a death spiral. But they dropped some of those objections when President Obama pushed forward his health care plan. Now they are dealing with the consequences.

Some insurers are dropping out of Obamacare now. But others are sure to follow. These federal policies will no doubt send other companies into a death spiral.

Viewpoints by Kerby Anderson

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