(Bloomberg View) — In November, UnitedHealth (NYSE:UNH) abruptly reversed its previously sunny take on the Patient Protection and Affordable Care Act (PPACA) — Obamacare — and said that the company would have to pull out of the government-run exchanges if market conditions didn’t improve. The problem: People signing up during “special enrollment” (the majority of the year that falls outside of the annual open enrollment period) were much sicker, and paying premiums for much less time, than the rest of the exchange population.
The result: Those policies were losing a ton of money.
UnitedHealth’s bombshell raised the specter, once thought safely in the grave, of the “adverse selection death spiral,” the phenomenon where sick people are more likely to buy insurance, which raises the average expenditure, which means higher premiums, which makes insurance a worse deal for the healthiest members of your insurance pool, which means they drop out, which means your pool is even sicker and average expenditure goes up even more … and there goes the insurance market.
The mandate was supposed to prevent this, but the mandate has pretty skimpy penalties, meaning that it may be economically rational to forgo insurance, and buy it only if you get sick.
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This sort of strategic behavior was very risky before Obamacare, because insurers generally refused to cover pre-existing conditions that popped up while you were uninsured. With insurers forbidden to exclude such conditions, or price the insurance to cover their added costs, it suddenly became a viable tactic.
Pundits and wonks worried a lot about this when the law was being debated, but over time, a consensus developed that restricting signups to open enrollment would make the system too hard to game for this to be much of a problem. But then suddenly, UnitedHealth described a pattern in its insurance claims that sounded a lot like gaming, as I noted at the time.
But it was hard to know how seriously to take that threat. It’s just one company, said the law’s supporters, and not a major player on the exchanges. I found UnitedHealth’s warnings more worrying than the optimists did, but even I was skeptical that there was much gaming going on. Special enrollment is only for people who have had major life events like changing jobs, getting married or having a baby. So I assumed that the folks who had a qualifying life event, and actually signed up for insurance during special enrollment, were more likely to be sick people who really needed insurance, while healthier folks who had a qualifying event decided to wait until they got a new job, or until open enrollment rolled around again. That would certainly skew the pool, but probably not disastrously.
But yesterday, Politico published a long article giving more support to the “gaming” hypothesis. People who sign up during special enrollment, insurers say, “run up much higher medical bills and then jump ship, contributing to double-digit rate increases and financial losses.” Customers are also exploiting the three-month “grace period” when they can stop paying premiums and still get treatment from providers. And the article suggests that at least some Americans have realized that under current regulations, they need to be insured for only nine months of the year to avoid the mandate penalty.
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So you can sign up for insurance, cram all your spending into that shorter time frame, and then stop paying for the last three months.