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Fears About Insurance Market 'Death Spiral' Overblown, Kaiser Analysis Suggests

By Rebecca Adams, CQ HealthBeat Associate Editor

December 17, 2013 -- Insurers are likely to eke out small profit margins even if fewer young adults enroll in health exchanges than the administration is targeting, according to a new analysis by the nonpartisan Kaiser Family Foundation. The report suggests that the online marketplaces will be viable even if young adults enroll at a 50 percent lower rate than older people.

The Obama administration has said that it would like young adults to make up about 40 percent of the people who sign up through the exchanges, which will start providing benefits on Jan. 1. The younger adults are needed to even out the risk of caring for older adults who are likely sicker and more expensive to cover.

The five-page report analyzed the impact of lower-than-projected enrollment for young adults under two scenarios.

The authors estimated what would happen under a worst-case scenario, if people 18 to 34 years old enrolled at a 50 percent lower rate than older people. In that case, younger adults would make up about one-fourth of all of the people who enroll in the individual market. So far, that kind of breakdown has been observed in states such as California. But state and federal officials assume that will change because more younger adults are expected to sign up later, as the March 31 deadline for open enrollment approaches.

If young adults make up about one-fourth of the population in the individual market, the costs for the plans would be about 2.4 percent higher than the insurers' revenues from premiums, according to the report. Because insurance companies often set their premiums so that they get a 3 percent to 4 percent profit margin, the insurers would probably still make a slight profit. But it would be lower than they had hoped, and insurers might raise premiums for 2015 to make up the difference.

However, the Kaiser authors say, "a 1 to 2 percent premium increase would be well below the level that would trigger a 'death spiral,' which would occur if insurers needed to increase premiums substantially, in turn further discouraging young and healthy people from enrolling."

Under a less drastic alternative, young adults might sign up at rates that would make them one-third of total enrollees. Costs would end up being about 1.1 percent higher than premium revenues in that outcome, the report found.

"Enrollment of a disproportionate share of older and sicker people will tend to drive premiums up," the report stated. "However, premiums are not as sensitive to the mix of enrollment as fears about a 'death spiral' suggest, particularly with respect to age."

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