Obamacare Slowly Implodes (Updated)

Readers of this blog know that I am a critic of the Affordable Care Act.  My view is that it was poorly designed and it has harmed millions of people who have lost access to their doctors and hospitals. (There are links at the end of this article to previous posts on this profoundly misguided law.) There is now accumulating evidence that the insurance exchanges are moving into what has been termed a “death” spiral, a process which can lead to the collapse of the insurance exchanges set up by the law.

This death spiral refers to a situation where insurance companies lose money selling health insurance on the exchanges and thus stop selling insurance to avoid these losses. The exchanges can collapse if all insurers withdraw from the exchanges, leaving millions of Americans without coverage. The design of the Affordable Care Act raises the possibility of this collapse because it limits the ability of insurers to charge higher prices to riskier applicants and because the law requires guaranteed issue, meaning that insurers must sell a policy to anyone who applies. Thus insurers must treat everyone as if they are bad risks and charge correspondingly higher prices for insurance but, if the applicant pool of insurance buyers is dominated by bad risks, insurance companies may lose money on their policies. This latter situation is known as “adverse selection.” There is now accumulating evidence that adverse selection has occurred in these insurance exchanges.

Recently United Health Group, the largest insurance company measured by sales on the exchanges, reported that it has lost a substantial amount of money by selling health insurance on the exchanges (here is a link to a news article on this subject). The firm has observed people buying insurance, getting the health care they need, and then dropping the policy once they have completed treatment. This is exactly what is meant by adverse selection. The firm has announced that it will consider stopping the sale of policies on the health insurance exchanges in the near future. Other insurance companies are reporting losses as well.

Further, the Affordable Care Act set up co-ops designed to sell health insurance on the exchanges, providing more competition to the existing insurance companies. Over half of these co-ops have failed and been shut down. These co-ops were given loan money to start up their operations and this taxpayer money has most probably been lost. In short, we now have empirical evidence that adverse selection does indeed occur in insurance markets if market participants (namely, insurance firms) cannot manage their affairs so as to properly price risk.

As an economist who regards himself as an empiricist, I am pleased to see the predictions of economic theory hold up in the actual economy. Too bad the politicians who designed the Affordable Care Act did not take economic theory very seriously when they decided to centrally plan our health insurance system.

Update: Two additional insurance companies, Aetna and Humana, have also reported losses on the policies they have sold on the Obamacare Exchanges.

Previous Posts on Obamacare:

The Affordable Care Act As Lawyer Relief Act

Enforcing Obamacare Fines

The Exchange Fiasco is Only the Beginning

Analyses of Obamacare: Part I, Part II, Part III, Part IV




  1. John Seater
    November 30, 2015 at 7:40 PM

    Unfortunately, many *economists* don’t take economic theory seriously when they turn their attention to economic policy. The most famous case is Card and Krueger’s paper that reported that demand curves slope up. They didn’t put it that way, but that’s the only way to interpret their finding that labor demand goes up when the minimum wage is increased. Other economists are more devious, or perhaps just more naive. Joseph Stiglitz, a truly brilliant man, finds market failures everywhere (usually because of a theory he devised but that no one has ever tested) and then advocates government action to fix the problem. There is a problem with Stiglitz’s solution, though – he completely ignores government failure, acting as if government is run by a collection of omniscient angels who know everything and whose only goal in life is to maximize social welfare. The most pathetic of all is Krugman, another brilliant guy who lost his mind when George Bush became president in 2000. Since then, Krugman has written reams of economic nonsense, sometimes contradicting his own previous writings. Krugman will say whatever he must so that he can tar a Republican. Those economists, and many more, abandon economic theory as soon as it gets in the way of their policy preferences. Instead of using their science to discipline their policy choices, the do things the other way around, deciding their policy choices first and then bending, inventing, or ignoring economic theory AND evidence as necessary to justify their prior choices.

    What a disgusting bunch of charlatans.

  2. November 30, 2015 at 7:57 PM

    Well the way I would put it, these are people who don’t seem to take their own craft seriously. I once heard an economist say that the difference between Chicago economists and the rest of the profession is that the Chicago crowd actually believe the stuff. I believe because I can frequently see it in the data. But there is a larger problem. Many academics are completely divorced from reality so their policy prescriptions are laughable.

  1. November 15, 2016 at 8:15 AM
  2. December 21, 2017 at 1:42 PM
  3. January 2, 2018 at 9:11 AM

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