The adverse selection death spiral has reared its ugly head again. PacAdvantage, an insurance pooling company for 6000 small and medium sized businesses in California has closed its doors. The Sacramento Business Journal reports (“Backer pulls plug on PacAdvantage health purchasing pool“) that the three remaining insurers underwriting the plan have pulled out. Michael Holt of The Health Care Blog analyzes has some perceptive analysis of the situation:
“What happens to voluntary purchasing pools? Simple economics—they only get customers who can’t get a better deal in the underwritten insurance market and so they go into a death spiral where the people in them are too sick to be supported by the premiums they charge. Today PacAdvantage announced that it was closing down, throwing 110,000 people into the small group and individual market, where by definition, no insurer wants them (unless they’re like me—very lucky).
PacAdvantage is the type of organization that our friends in the ‘voluntary universal insurance’ world (Cato, Galen et al) think is going to solve all of our problems, with no need for pesky mandates to buy insurance, or for community rating, or standardized benefits packages.”
In my June 15th post, I mentioned Cutler and Zeckhauser’s 1997 paper which discussed this concept of an adverse selection death spiral in the context of Harvard’s employee health insurance plans.