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Are Death Spirals Real? Has Anybody Ever Seen One?

A THCB reader in Virginia writes:

“As a small business owner, I’ve been following the arguments about Obamacare with a mixture of amusement and total horror. Just when you thought Washington couldn’t screw things up any worse, they find new and creative ways to do exactly that.

My question concerns the phenomenon of the “death spiral” the terrifying sounding scenario that observers predict will occur if not enough people buy insurance. According to this theory, if not enough people buy health insurance, insurers will be forced to abandon unprofitable markets.  As a business owner myself, this argument resonates. But I still don’t get it. This seems like common sense.

It is certainly true that if nobody buys my goods and services, my business will go into a “death spiral.” I will no longer be able to make a living selling my widgets. I will be forced to invent a new widget. Or go get a new job. This is like my kid saying if he doesn’t to play more Call of Duty IV he will go into an “entertainment death spiral” and be unable to do his homework ever again or be a productive member of society.

Or McDonalds warning that if too many people take up vegetarianism, its business will go into a horrible “hamburger death spiral.” So what evidence do we have? I need documentation. Like, let’s say, a picture. Or a YouTube clip.

Seriously, when has this happened? Otherwise, the death spiral thing sounds like really good economic spin to me …”

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JonathanJardinero1Barry CarolKaren503Al Lewis Recent comment authors
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Jonathan
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Jonathan

To follow up on what Jardinero wrote, death spirals are not only specific to a market, but a product. An insurer might offer 5 or 15 different products in a state, each with its own risk pool, or pools. It may happen that one of those 15 products gets a skewed risk profile, high utilization, and is forced to become either unprofitable or keep raising prices beyond those of competitors or what the market will bear. In other words, the choice is a death spiral or keep the product going at a loss in order not to lose more good… Read more »

Jardinero1
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Jardinero1

Insurance carriers go out of business one of two ways. They are swamped instantaneously by a large number of claims or they lose the insureds who don’t make claims while retaining those who do make claims – the death spiral. This is the lifecycle of insurance companies. There is no analog to a death spiral for a manufacturing company or a restaurant or service company. This is because insurance carriers do not make a product or provide a tangible service. They merely hedge risk for a fee. If they hedge wrong they must raise their price to stay afloat. If… Read more »

Barry Carol
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Barry Carol

New York individual health insurance market pre-ACA.

Guaranteed issue + no mandate to buy + community rating = sky high premiums, especially for young people.

Result: very few buyers as a percentage of the potential population of buyers.

Al Lewis
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Al Lewis

Oh, yeah, it happens. There was a hotel in SF with an incredible breakfast buffet, that attracted people from all over. It was pretty high-priced but I think they still lost money on it. so they raised the price again, thus chasing away all but thebmost committed buffet-eater. There were no casual eaters to average out the power-eaters, so they had to stop offering it. This is why auto insurance (and universal health) is compulsory — otherwise low-users wouldnt bother. The diffence vs. the buffet example is that when something happens to an uninsured person we all pay.

Datum
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Economics = Ideology / Science + Marketing

Steve
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Steve

Qualify used cars
The low cost sharing Harvard health plan
Annuity markets in the US
The Pizza Hut salad bar in China

Obviously he doesn’t understand death spirals.

Mike B.
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Mike B.

The Apothecary, With Avik Roy
INSIGHTS INTO HEALTH CARE AND ENTITLEMENT REFORM.

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PHARMA & HEALTHCARE | 3/30/2012 @ 11:17AM |12,836 views
Want to See a Health Insurance Death Spiral? Visit Washington State

Karen503
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Karen503

Do read the article. It illustrates the foolishness of not requiring an individual mandate. I’m sure the folks both R and D who drafted the ACA had input from the ex-gov of Wash state who oversaw this particular death spiral which happened in the early 1990s. This time around, apparently Wash state is having great success signing up folks for the ACA.