What Is a Health Insurance Death Spiral?

What Causes a Death Spiral, and How Can It Be Prevented?

A health insurance death spiral describes a scenario in which premiums increase rapidly, causing healthy people to drop their coverage when they perceive that it's no longer worth the cost. That, in turn, causes premiums to increase even more, as the exodus of healthy people leaves a smaller, less healthy risk pool. As premiums continue to increase, healthier people continue to drop their coverage, and the situation continues to spiral until it reaches a point where the market simply collapses.

A blue and white spiral staircase
Aacilo / Getty Images

The collapse happens when coverage is too expensive for anyone to afford, and/or the insurers opt to exit the market altogether. Insurers generally only want to remain in markets that are fairly stable. And for an insurance market to be stable, the majority of the members in the insurance pool have to be relatively healthy, so their premiums can offset the cost of caring for the sickest members of the pool.

In a death spiral situation, the number of healthy enrollees declines sharply, leaving far fewer enrollees, but total costs that are nearly as high as they were before the healthy people dropped out, since the majority of the claims come from the sickest enrollees. When those costs are spread over the smaller remaining pool of insureds, premiums rise, and the death spiral cycle ensues.

A death spiral is the worst case scenario for an insurance market, and it results in the collapse or near-collapse of the market.

Death Spirals Are Often Misrepresented When Health Insurance Is Politicized

The term "death spiral" is often conflated with the concept of premium increases, regardless of whether the other aspects of a death spiral—dramatically shrinking enrollment and eventual market collapse—are present. And regardless of whether people fully understand the concept of a death spiral, the terminology certainly doesn't evoke pleasant images.

So it's not surprising that the term "death spiral" was frequently used by opponents of the Affordable Care Act during the debates over proposed ACA repeal legislation, particularly given that premiums in the ACA-compliant individual major medical market were increasing significantly during those years (particularly 2017 and 2018).

But warnings about potential death spirals were also issued by supporters of the ACA in those years, expressing concerns about how various legislative and regulatory changes could threaten the stability of the individual insurance markets, particularly in the most vulnerable states.

Lessons From Pre-ACA State-Based Healthcare Reform 

Before the ACA was implemented, the single most significant factor that individual market insurers used to keep premiums affordable (and thus avoid death spirals) was medical underwriting. Insurers in nearly every state would comb through applicants' medical history in order to determine whether the person would be a good risk or not.

Applicants whose medical history indicated that they might have substantial future claims were generally either rejected outright or offered coverage with significantly higher premiums or a blanket exclusion on pre-existing conditions. In this way, insurers in the individual market were able to keep their total claims costs as low as possible, resulting in premiums that were much lower than the premiums for employer-sponsored health insurance (even before the ACA, insurers that offered employer-sponsored coverage were not allowed to reject sick employees or charge them higher premiums; in addition, individual market coverage was historically less comprehensive than employer-sponsored coverage, with correspondingly lower premiums).

When the ACA was drafted, ensuring access to individual market coverage for people with pre-existing conditions was a priority. But lawmakers knew that if they simply required insurers to accept all applicants in the individual market, with premiums not based on medical history, the market would collapse.

An individual market collapse had already happened in Washington state, a decade before the ACA was written. Washington lawmakers had tackled healthcare reform in the early 1990s, enacting the Washington State Health Services Act of 1993. The law required insurers to accept all applicants, regardless of medical history.

But the individual mandate portion of the law, which had been slated to take effect in 1998, was repealed in 1995. This allowed healthy people to forego health insurance altogether, knowing that they could enroll at a later date if they became sick. It's easy to see how this creates an unsustainable market dynamic. When the Health Services Act was enacted, there were 19 insurers selling coverage in Washington's individual market. By 1999, there were zero—the market had collapsed altogether. Washington lawmakers revised the state's guaranteed-issue rules in 2000, making it harder for people to wait until they needed care to enroll in health coverage, and the market rebounded.

New York state also began requiring health insurers to cover all applicants, regardless of medical history, in the early 1990s. Premiums could only vary based on location and family size, so younger, healthier people were charged the same amount as sicker, older people (New York still requires insurers to charge older people the same amount as younger people, rather than the less strict 3:1 ratio that the ACA imposed). But as was the case in Washington, there was no mandate requiring people to maintain coverage, and the result was sky-high premiums and very few insurers offering coverage in the state.

New York had various state subsidies for low-income residents, and Washington's Basic Health Program offered subsidies to low-income enrollees. But neither state had a mechanism to subsidize the cost of coverage for middle-class enrollees. And as we've seen with the ACA, premium subsidies that extend well into the middle class are crucial for preventing death spirals.

The ACA Was Designed to Prevent Death Spirals

The lawmakers who drafted the ACA were aware of the problems caused when coverage has to be guaranteed issue (ie, nobody can be rejected or charged more based on medical history) without other provisions to ensure that healthy people continue to purchase coverage.

So to avoid triggering a death spiral in the individual market, the ACA included:

  • Premium subsidies for people earning up to 400% of the poverty level. And for 2021 and 2022, the American Rescue Plan has removed the upper income limit for subsidy eligibility. For those two years, a household with income above 400% of the poverty level can qualify for a premium subsidy if the cost of the benchmark plan would otherwise be more than 8.5% of the household's income. Premium subsidies are designed to keep the after-subsidy cost of coverage at a specified percentage of income that's considered affordable.
  • An individual mandate that requires almost all Americans to have health insurance or pay a penalty. The federal penalty for non-compliance was eliminated as of 2019. But New Jersey, Massachusetts, Rhode Island, California, and Washington DC have their own individual mandates and associated penalties for non-compliance.
  • An annual open enrollment window during which people can enroll in individual market coverage (through the exchange, or directly through an insurer). The annual open enrollment window is currently November 1 to December 15 in nearly every state. Outside of that window, people normally cannot purchase coverage in the individual market unless they're eligible for a special enrollment period (in 2021, to address the ongoing COVID pandemic and the enhanced premium subsidies created by the American Rescue Plan, a one-time enrollment window is available through August 15, 2021 in most states; a qualifying event is not necessary during this window). Since coverage in the individual market cannot simply be purchased at any time a person chooses, it makes it harder for people to go without coverage and then be able to buy coverage if and when they need medical care.

No Death Spiral, Even Without a Penalty for Being Uninsured

The Tax Cuts and Jobs Act, enacted in December 2017, eliminated the individual mandate penalty after the end of 2018. So people who are uninsured in 2019 and beyond no longer face a penalty unless they are in a state that imposes its own penalty

There is no doubt that this caused premiums for 2019 to be higher than they would otherwise have been—even in states where average premiums decreased for 2019 (they would have decreased even more without the repeal of the individual mandate penalty). The Congressional Budget Office initially projected that without the individual mandate penalty, premiums in future years would be an average of 10% higher than they would otherwise have been. That increase was evident in the rate filings that insurers submitted (and that regulators approved) for 2019.

Premium changes in the individual market were a bit complicated for 2019: Average premiums grew slightly nationwide, although average benchmark premiums decreased slightly across the states that use HealthCare.gov (which is the majority of the country; there are only 15 fully state-run exchanges as of 2021). But although the average premium increase across all plans was small, there would likely have been an overall average premium decrease if not for the elimination of the individual mandate penalty and the Trump administration's efforts to expand access to short-term health insurance and association health plans (healthy people are more likely to gravitate to those plans, leaving sicker people in the ACA-compliant market, resulting in higher premiums).

But the limited enrollment window and the premium subsidies remain unchanged, and they have been the key to preventing a widespread death spiral in the individual market. 

Although premiums grew sharply in 2017 and 2018, premium subsidies also grew (and grew disproportionately large starting in 2018, to account for the loss of federal funding for cost-sharing reductions; this ultimately made coverage more affordable for more people). Because premium subsidies have kept coverage affordable for the majority of the people who have coverage through the exchanges nationwide, enrollment in the exchanges was only slightly lower in 2019 than it had been the year before, despite the elimination of the penalty for being uninsured. For 2020, enrollment in the health insurance exchanges ended up almost exactly the same as it had been the year before, with 11.41 million enrollees in 2020 versus 11.44 million enrollees in 2019.And enrollment grew to more than 12 million enrollees during the open enrollment period for 2021 coverage.

Out of 10.5 million people with effectuated enrollment in the exchanges nationwide as of 2020, more than 9.1 million were receiving premium subsidies. Premium subsidies keep pace with benchmark plan premiums, keeping the price of a benchmark plan very similar from one year to the next.

[That doesn't mean, however, that the price of a particular plan will remain unchanged from one year to the next, even after accounting for subsidies. The after-subsidy price of a given plan depends on how that plan's premium changes, as well as how the benchmark premium (and thus the premium subsidy) amount in that area changes. As a result, people can end up with higher or lower net premiums just based on the change in the subsidy amounts, regardless of how much the cost of their own plan actually changes.]

But overall, the likelihood of a death spiral (ie, higher premiums resulting in healthy people dropping coverage) is muted for the population that receives premium subsidies, as they're insulated from the higher premiums. And as noted above, premium subsidies are larger and more widely available in 2021, thanks to the American Rescue Plan's enhancements to the ACA's premium subsidies.

A Death Spiral in the Unsubsidized ACA-Compliant Market? 

Although enrollment in the exchanges has remained quite steady in recent years, there has certainly been a drop in enrollment in ACA-compliant individual market plans sold outside the exchange, where enrollees are not eligible for premium subsidies.

From 2016 through 2018, individual market enrollment among people who do not receive premium subsidies declined by 2.5 million people—a drop of about 40%. Most of these enrollees had previously had coverage outside the exchange, but subsidies are not available for exchange enrollees who are affected by the family glitch, or are in the Medicaid coverage gap. In most years, subsidies are also not available to enrollees who earn more than 400% of the poverty level, but the American Rescue Plan has eliminated that cap for 2021 and 2022.

While premium subsidies protect most exchange enrollees from steep rate increases, there is nothing to protect unsubsidized enrollees when premiums rise sharply. Unsurprisingly, the drop in unsubsidized enrollment has been particularly significant in states where rate increases have been especially large.

Those sharp rate increases were common in 2016, 2017, and 2018, but rates changed very little from 2019 through 2021, and average benchmark premiums in states that use HealthCare.gov had declined in each of those years.

So the exodus of people from the unsubsidized market is unlikely to continue at the rate it was happening for the last few years. This is particularly true in 2021 and 2022, given that many people who were previously ineligible for subsidies are newly eligible as a result of the American Rescue Plan. While they may have previously opted to go without coverage or settle for non-insurance coverage (such as a health care sharing ministry plan), they may find that ACA-compliant coverage is affordable under the American Rescue Plan's provisions.

What Can States Do to Prevent Death Spirals?

Although the ACA's regulations apply nationwide, individual health insurance is also regulated at the state level. The ACA sets minimum standards and requirements, but states can impose additional rules, or even make adjustments to the ACA's rules by using 1332 waivers.

There are several approaches that states can use to improve the stability of their individual insurance markets and ward off death spirals among the population that doesn't qualify for premium subsidies:

  • States can impose their own individual mandate.
  • States can offer premium subsidies to people who earn too much for the ACA's subsidies. Minnesota did this in 2017 (for one year only), and California began offering premium subsidies as of 2020 for people with income up to 600% of the poverty level. New Jersey began offering state-funded subsidies in 2021, and Washington is working on a plan to provide premium subsidies to people with income up to 500% of the poverty level as of 2022.
  • States can enact regulations and legislation to prevent widespread access to longer short-term plans and association health plans. Nearly two-thirds of the states have restrictions on short-term plans that are more strict than the federal rules. By preventing healthy people from circumventing the ACA-compliant market in favor of plans that don't comply with the ACA's regulations, states help to ensure that their ACA-compliant markets continue to have a good mix of healthy people, who serve to keep the risk pool stable.
  • States can seek 1332 waivers in order to receive federal funding to implement reinsurance programs or other innovative approaches to keeping premiums under control. More than a dozen states have already established reinsurance programs, which have helped to stabilize their individual markets. In most cases, states that have created reinsurance programs have seen premium decreases as a result. These decreases apply to full-price premiums, so they make coverage more affordable for people who don't get premium subsidies. [Although in some cases, reinsurance programs can result in higher after-subsidy premiums for people who do get subsidies, as the reduction in subsidy amounts sometimes exceeds the reduction in overall average premiums. This is a Catch-22 that state regulators must keep in mind when designing reinsurance programs.]

A Word From Verywell

The talk of death spirals in relation to the ACA applies to the individual health insurance market, and relatively few people purchase coverage in the individual market. Almost all insured Americans get their coverage either from an employer or from the government (Medicare, Medicaid, CHIP). Fewer than 15 million people, out of a nation of 327 million, obtain coverage in the individual market. So worries about insurance market instability probably won't affect your coverage.

And even in the individual market, overall rates have been quite stable for the last few years, and the majority of current enrollees receive premium subsidies, keeping their coverage fairly affordable. Those subsidies are larger and more widely available in 2021, thanks to the American Rescue Plan.

But this is little consolation to people who still aren't subsidy-eligible, such as folks caught by the "family glitch" or the Medicaid coverage gap. If you're not subsidy eligible, you may be tempted to switch to non-ACA-compliant coverage, but it's important to understand the drawbacks of those plans before you enroll—there's a reason they're so much less expensive than real health insurance. 

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