Anatomy of a Slow-Motion Health Insurance Death Spiral

Adverse selection death spirals are dramatic, and so far, exotic economic events.  The possibility of death spirals has garnered recent policy and even popular attention because of the pricing regulations in the Affordable Care Act of 2010 makes health plans more vulnerable to them.  Most death spirals tracked in the literature have involved selection against a group plan that is quickly dropped by the employer.  In this paper, we empirically document a death spiral in individual health insurance, triggered by the closing of a block, that went very slowly because the insurer partially subsidized the block.  Indeed, our data runs from the start 1981 to 2009, by which time premiums were high indeed (about 14 times a benchmark we calculate) and very few policyholders remained.  The history of this slow-moving event is directly relevant to current policy discussions because of both adverse selection in general and the particular problems induced by closing a block.