It turns out that the so-called “insurance death spiral” which we modeled in class this past Tuesday (see page 21 of the Moral Hazard and Adverse Selection lecture note for a verbal description and the Dynamic Adverse Selection Spreadsheet for a numerical illustration of the problem) is very much in the news these days; e.g., see the editorial entitled Salvaging Private Health Insurance in today’s Wall Street Journal and yesterday’s page 1 WSJ article entitled In Start to Unwinding the Health Law, Trump to Ease Insurance Rules. Quoting from today’s WSJ editorial,
“ObamaCare’s defenders are calling all of this “sabotage” and warning about “adverse selection,” in which a more robust individual market will siphon off the healthy customers that prop up ObamaCare’s exchanges. They predict a death spiral of higher premiums for the sick or elderly left on the exchanges.”
Sound familiar? As we discussed in class last Tuesday, since the implementation of combined premium schemes effectively force good risks to pay too much whereas bad risks pay too little, the good risks opt out. When this occurs, expected cost of claims (and correspondingly higher premiums) are in store for those who remain in the risk pool.