Will the Affordable Care Act, a.k.a. Obamacare, begin a "death spiral" in 2014? The scary-sounding term "death spiral" is used to describe a scenario where individuals with higher health expenses flock to an insurance plan, resulting in more costly premiums that dissuade healthier individuals from enrolling. With fewer healthy enrollees to subsidize the medical costs of the less-healthy members, the cycle continues until few can afford the insurance.
A recent study says that Obamacare appears poised to experience this "death spiral" effect. How likely is this to actually happen? The answers depend on whom you ask.
The Obama administration hopes to enroll 7 million Americans in health insurance exchanges by the end of next March. Administration officials say for Obamacare to succeed, 2.7 million of these enrollees need to come from the relatively healthy demographic group of young adults between ages 18 and 30. Research conducted by David Hogberg, health policy analyst with the National Center for Public Policy Research, however, casts doubt on whether that many young Americans will actually sign up.
Hogberg found that around 4.3 million young adults ages 18 through 30 are likely to be eligible for plans on the Obamacare exchanges. 2.9 million of these individuals would be financially better off by at least $500 in 2014. Nearly 2.4 million would have $1,000 more in their pockets by forgoing health insurance. And that's assuming the cheapest Obamacare plans with applicable federal subsidies included.
Another study by the Commonwealth Fund found that the most important reason young adults currently don't buy health insurance is affordability. This survey also reported that only 27% of respondents between ages 19 and 27 were aware of Obamacare exchanges.
If the majority of those with financial incentives to remain uninsured don't purchase health insurance (because they're unaware of the option and/or the perceived economic impact is negative), Obamacare will fall well short of the 2.7 million young adults that the White House says are needed. Insurers participating in the exchanges would then almost certainly raise premiums for the following year -- which could make buying health insurance even more unappealing for young adults despite higher penalties in 2015. The "death spiral" could easily kick into gear if this happens.
More spin than spiral
On the other hand, that Commonwealth Fund survey also said that the data suggest that young adults "will eventually enroll in large numbers" as they become more aware of Obamacare's benefits. Most younger individuals do actually want to have health insurance coverage, according to the survey.
These results could mean that the future prognosis looks better for Obamacare even if too few young adults enroll in 2014. The "death spiral" scenario requires a progressively worsening state of affairs. However, if increased awareness and higher financial penalties in the years after 2014 significantly motivate young adults to buy insurance, the worst-case situation might not materialize -- even if the negative predictions about enrollment of young Americans next year come true.
All of this might not matter, anyway, assuming that a 2012 study conducted by RAND is right. The study focused on the impact of eliminating the individual mandate altogether. According to RAND researchers, insurance premiums would only rise by 2.4% for most individuals even without the financial penalties for buying insurance, although significantly fewer people would gain coverage. Such a small increase, if correct, wouldn't lead to the spiraling deterioration expected by some.
Wait and see
Which view is correct? Some big players are taking a wait-and-see stance.
UnitedHealth Group (NYSE: UNH ) , the nation's largest health insurer, isn't jumping in head-first. Stephen Hemsley, UnitedHealth's CEO, expressed concerns that the first enrollees in the Obamacare exchanges could be the most costly. Because of this possibility, the insurer is participating in only 12 exchanges in the first year. Earlier this year, Hemsley indicated that UnitedHealth could market its products in as many as 25 exchanges.
Aetna (NYSE: AET ) , like UnitedHealth and Cigna (NYSE: CI ) , opted out of participating in California, one of the largest individual health insurance markets. The company, which is the nation's third-largest insurer in terms of enrollment, is participating in 14 Obamacare exchanges. Cigna has indicated that it will participate in a grand total of five exchanges.
WellPoint (NYSE: WLP ) stands out among its peers with a different take. The country's second-largest insurer plans to participate in California and in all of the states where it operates.
In my view, a cautious approach makes a lot of sense. I think the White House is correct that several million young adults must enroll for Obamacare to succeed. I also suspect that many of the country's younger citizens will forgo health insurance for financial reasons even with the subsidies that are available. What I question, though, is whether the issues will be severe enough to result in the ominous "death spiral."
With that in mind, the more tentative insurers could be the better investing choices. UnitedHealth, in particular, seems positioned well. It's taking a cautious stance on the Obamacare exchanges. I also like its fast-growing Optum business segment that provides health management, consulting, technology, and pharmacy benefits management services. This large company seems unlikely to be sucked into a "death spiral" if one happens. And that's still a big "if" at this point.