Monday, July 30, 2012

The Wrong Crowd

Death spirals are the worst kind of spirals.  They occur when organizations face ‘adverse selection’ and attract the wrong type of customers.  I experienced one firsthand in a misguided attempt to “try new things” in college (that being “exercise regularly”).  At first, the beginner karate club worked as intended.  I was there with my friends and we were all petite, freshman girls, who were terrible at karate— the perfect beginners.  As the class progressed, however, my friends started to drop out.  This meant that we couldn’t always pair up but now had to fight the bigger guys in the class.  Then the guys who didn’t enjoy beating up little girls and the little girls that didn’t enjoy being beat up all dropped out.  Each person that left made it harder for those that stayed.  Until in the end, there were only two big guys left (and me— I was too dimwitted to catch on).  Dan was promoted to ‘teaching assistant’ because he had obvious, undisclosed karate experience.  Which left Josh, the 6’3 senior and track star, to be my sparring partner.  No, I was not taller back then. 

Death spirals work in a similar way in health insurance, inadvertently weeding out desirables when insurers attract more sick people than expected.  For insurance companies, sick people are expensive and healthy people cheap.  Attracting sick people raises medical costs and forces companies to raise premiums.  This then drives away the healthy (the sick stay because they have less of a choice— fewer other insurers want them and they can’t afford to be uninsured). Each time the healthy leave and the sick stay, costs go up, driving away more healthy, profitable people.  You see the pattern here?  Death spiral.  Insurance death spirals may not lead to a grown man pummeling a feeble, teenage girl, all the while whispering “I’m so sorry,” as the coach yells, “Punch! Harder!  Don’t cheat yourself!,” but they are bad for everyone— saddling companies and individuals with unbearable costs and force people to seek coverage elsewhere. 
"Death spiral": A literal interpretation

The death spiral is a simple concept to grasp but a difficult one to solve.  Moreover, addressing death spirals requires us to confront what this society values and whether there is a commitment to insuring the extra sick and/or the extra poor.  And what, if anything, should be used to decide who gets health insurance?  This post gives you a taste of the greater healthcare debate in our country, and in the coming posts, we’ll examine some solutions in more detail.

Policy Implications:  Death spirals are bad.  Policies that try to address them will come with necessary trade-offs.


  1. I would think that if insurance companies incentivize joining for young people (gym memberships, discounts at sports stores, advertising in these fitness events like Crossfit games, Tough Mudder, etc), that should be able to build some healthy patient margin.

  2. You're exactly right, Jeong-- that's one way that insurance companies can attract healthy people (and encourage people to be healthy). And by structuring plans differently (with and without these incentives, covering different disease groups differently, deductibles, etc.), they can discern who is likely to be healthy by what people choose. This doesn't necessarily prevent death spirals (even if you attract people with $400 fitness rebates, they'll still leave if their premiums keep rising if the sick outweigh the healthy), but it's definitely a piece of the puzzle.