...A few months back I was on a panel with a very smart health-care reporter who said, basically, “Yes, there will be rate hikes, but there is some price at which insurance can be sold profitably, and eventually, insurers will figure out what that price is.” My response was that this isn’t necessarily true. Insurance markets have some interesting features, one of which is that it is quite possible for there to be no price at which insurance can be profitably sold.
In health insurance markets, this phenomenon is known as the adverse-selection death spiral. Basically, every time the price of insurance goes up, many of the people in the insurance pool who use the least health care decide that it makes more sense to go without the insurance and bear the risk themselves, and they drop their coverage. That means you’re left with the more expensive patients to cover, which means the average cost goes up, which means prices have to go up … and, well, you get the idea. The price the market eventually finds may be so high that very few people want to buy the insurance....
...The subsidies, on the other hand, are obviously affecting behavior, because most of the people buying exchange policies qualify for substantial subsidies. The good news is that this will blunt the desire for healthier people to drop their coverage as the price of policies rises, because those cost increases will be passed on to the government rather than the consumer....
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