Health Insurance Reform and the “Death Spiral”

It ought to be so easy. Congress waves its magic wand, makes it illegal for health insurers to discriminate against sick people by charging them higher premiums or excluding their “pre-existing conditions,” and voila, there you have it — reform that everyone wants. But here’s the downside, and here is why health insurance reform is not easy without tough and unpopular mandates on healthy people.

If insurance discrimination against the sick was outlawed without any requirement that everyone buy health insurance, then many people would take a chance and “go bare” of insurance while they’re in good health. After all, they couldn’t be punished financially once they got sick and really needed the coverage. More and more, the only people buying insurance would be the ones with big medical bills. And without the premium money from the healthy to subsidize the bills for the sick, the insurance companies would have to raise rates, and this would discourage more people from buying insurance, and soon we would have what economists call “the death spiral” of ever higher premiums and ever fewer insureds.

So no health reform has ever succeeded without a wide base of financing where the healthy and the sick alike contribute to the money pool, whether through insurance premiums or taxes.

Uwe Reinhardt, the Princeton health economist, explains this in a recent “economix” blog post in the New York Times.

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