Experts deny the marketplace is entering a ‘death spiral’

Health insurance premiums are on the rise, and it’s brought a frightening term back into conversation: death spiral.

Exact definitions vary, but this often refers to a “spiral” of rising premiums and falling enrollment that ends in the market’s collapse.

Experts told Healthcare Brew this isn’t likely to happen without drastic policy changes. But one way it could happen is if out-of-pocket increases motivated a significant amount of healthy people—the ones who pay more into the system than they cost—to leave the Affordable Care Act (ACA) marketplace.

Those who still enroll would likely be people who really need coverage: the sickest with the costliest medical care. This would spike insurers’ expenses, prompting them to further raise premiums and potentially scaring even more healthy people away in a self-propelling cycle of doom.

Right now, though, the market has fail-safes to stop that from happening.

“I think the ACA marketplaces, as they currently exist, really can’t result in a death spiral,” Larry Levitt, EVP of health policy at health policy research firm KFF, told Healthcare Brew.

Built-in buffer

Levitt said the ACA marketplace is protected from implosion through federal premium tax credits.

The 93% of enrollees receiving these tax credits only have to pay a certain portion of their income toward their insurance premium, and the government covers the rest. So even if premiums rise, “what people themselves have to pay doesn’t increase, so it doesn’t result in this self-fulfilling spiral,” Levitt said.

Why now?

Some of the renewed discussion about this potential issue is centered around the Dec. 31 expiration of enhanced premium tax credits.

“That will be a bad thing for ACA enrollees, but that doesn’t mean it’s truly a death spiral,” Levitt said.

The enhancement, effective since March 2021, generally increases who was eligible for subsidies and decreases the share of income enrollees have to pay toward their plan. Since it began, enrollment has grown from 11.4 million to a record 24.3 million.

If the expansion expires, previous limits will return. This means only people making 100% to 400% of the federal poverty level will be eligible, and those who do get assistance will pay a higher share of their income, per a KFF analysis.

The total individual market would shrink to about 19.2 million people—29% less than if enhanced tax credits were to stay in effect—and an estimated 4.8 million people would lose insurance coverage, according to a September Urban Institute report.

It’s then possible insurers might further raise premiums to account for those losses, Matthew Fiedler, senior fellow with the Center on Health Policy at nonprofit research organization Brookings Institution, told us.

But that likely wouldn’t create a spiral because many enrollees should still be eligible for the regular tax credits even without the expanded tax credits, he said. (In 2020, before the expansion, federal data shows 86% of enrollees received an advanced premium tax credit.)

This means while many would see an initial increase in what they pay from 2025 to 2026 due to the end of enhanced subsidies—and might leave the market because of it—those remaining likely wouldn’t feel any subsequent premium increases, Fiedler explained.

“The market will still shrink, but it won’t cause the market to collapse,” he said.

Fiedler remembers similar fears emerging when health insurers hiked up premiums between 2016 and 2017. But the market stayed relatively stable.

“If premiums go up, subsidies go up, and that will hold subsidized enrollees in the market and keep the death spiral from getting off the ground,” he said.

What could lead to a death spiral?

Policy changes could make a death spiral a realistic possibility, however.

For instance, on Nov. 18 President Trump promoted the idea on Truth Social of direct cash payments to help consumers pay for coverage.

If these payments weren’t set up to rise in proportion with income changes or premium increases, then “I think you probably would have a death spiral,” Fiedler said.

Florida Sen. Rick Scott proposed a bill Nov. 20 that would allow states to opt into a program that would substitute enhanced subsidies for direct payments to consumers.

In Scott’s system, each participating enrollee’s premium tax credit would be calculated based on average premiums in states that didn’t participate in the model, meaning these proposed direct payments would not necessarily rise in proportion with participants’ premium increases.

“That truly would lead to a death spiral,” Levitt said.