Individual Plans and the So-Called “Death Spiral”

Allowing people to keep individual health insurance policies that don’t meet ACA requirements is not likely to send new health insurance exchanges into a death spiral, according to a RAND study. In November, President Obama announced rules that allow current non-group enrollees to keep their existing health plans, provided their state’s health insurance commissioner permits such actions. This was after criticism that some consumers in the individual market were losing their health insurance plans.

The three options to help people keep their old plans would all cause some disruption to risk pools, but not enough to threaten their viability. An option adopted by President Obama to allow state insurance commissioners to decide whether to extend old insurance policies is the least disruptive of the three policies examined by the RAND report. The study predicts the president’s action will have only minimal effect on enrollment and premiums.

The most disruptive proposal would allow people to keep their old health plans and allow others to buy the policies. It would lead to moderate price hikes and sharply lower enrollment in the new marketplaces, substantially increasing federal spending on subsidies for enrollees.

Two alternative proposals have stalled in Congress. One would require insurance companies to continue offering non-compliant individual health plans indefinitely, but not take new enrollees. A second bill would allow non-compliant plans to continue and be offered to new enrollees.

Because each of the proposals would divert many young and healthy people from the new health insurance marketplaces, there has been concern the changes could lead to a self-reinforcing cycle of increasing premiums and enrollment drops that could lead to the implosion of the marketplaces.

All three proposals are likely to increase the number of people with health insurance because many non-compliant insurance policies are likely to be less expensive than those in exchanges. However, many of the non-compliant policies are likely to offer fewer benefits than policies offered in the exchanges.

Opening the non-conforming plans would be likely to raise premiums in the marketplaces by as much as 10% and decrease enrollment by 3.2 million nationally. It would also trigger an additional $5 billion in federal spending on subsidies and tax credits in the individual marketplace in 2015. The two other strategies would result in far smaller cost increases. For more information, visit www.rand.org.

Last Updated 09/23/2020

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