The Return of the Death Spiral?

In November 2012, I attended a meeting in Washington, D.C. with about two dozen healthcare executives, including C-suite representatives from Humana, United, BCBS TN, Excellus BCBS, Ascension and Geisinger. One of the speakers was Neera Tanden, who had worked with the White House Office of Health Reform in 2009 as a senior advisor to Health and Human Services Secretary Sebelius. 

In a session titled “Status of ACA Expansion,” Ms. Tanden provided her polished talking points about the benefits of the Affordable Care Act (ACA), seemingly unaware of the background of the audience members. I remember the health plan executives in the room repeatedly asking Ms. Tanden questions about the potential risk of a “death spiral” for the exchange plans. What I recall about her answers is that they were actuarially deficient. As the questions continued, I also recall her change of demeanor as she slowly realized that the audience knew much more about health insurance than she did. Even so, she never conceded that the death spiral was a possibility. 

In the last few weeks, I have reflected on that meeting after reading the earnings warnings, guidance and/or results from Centene, Elevance, Molina, Oscar and United. Each has reported some variation of the theme of higher-than-expected utilization or morbidity driving higher-than-expected costs. Notably, each has been remarkably consistent in not sharing actual numbers. 

Due to the nature of our business, I have access to a significant amount of healthcare utilization data. While it is of course possible that certain populations could be consuming more healthcare services while others consume less, we can find no evidence of an increase in utilization of healthcare services nationally. Moreover, we can see that utilization by Medicare fee-for-service beneficiaries has been flat to declining in the last five years for the most resource-intensive and expensive types of healthcare utilization: hospital inpatient, hospital outpatient, skilled nursing, inpatient rehabilitation and home health. 

The one obvious exception is Part D spending, which resembles the “hockey stick” growth craved by Wall Street and PBM executives, many of whom work for subsidiaries of some of those same health insurers.

Nevertheless, the publicly traded health insurers are telling a different story about utilization, which merits further consideration. 

If there is a consistent theme in health insurer earnings calls, it is that utilization of healthcare services by Medicaid and ACA enrollees is higher than expected. While the insurers don’t mention it, most disinterested and all cynical observers would wonder whether some of the earnings warnings are tied to recent revelations of “dual enrollees” – not “dual eligibles” – in Medicaid and Medicare Advantage (MA), which theoretically represent as much as 100% gross margin for one of the multiple plans in which they are enrolled.  

CMS has determined that 2.8M Americans are “either enrolled in Medicaid or the Children’s Health Insurance Program (CHIP) in multiple states or simultaneously enrolled in both Medicaid/CHIP and a subsidized Affordable Care Act (ACA) Exchange plan.” Similarly, The Wall Street Journal has reported that veterans with Veterans Administration health benefits who are also enrolled in Medicare Advantage plans were quite profitable for those MA plans in the past few years. Moreover, there are reports of improper enrollment in ACA plans, with more enrollees in certain income bands than the maximum number of potential enrollees within those bands, particularly the lowest income level band with the highest subsidy.¹

Statutory Medicaid redeterminations were suspended from March 2020 through March 2023 pursuant to the COVID-19 Public Health Emergency. Full eligibility redeterminations resumed in April 2023 and will continue through the end of 2025. Given that the U.S. Government Accountability Office reports that 27M individuals were disenrolled between April 2023 and October 2024, it is surprising that the health insurers are only now reporting material financial impacts of the redetermination process.

Even so, the disenrollment of even a small number of “dual enrollees” in either Medicaid or Medicare Advantage could explain a significant portion of what the health insurers are reporting. For every “dual enrollee” that was accessing benefits exclusively through “Insurer A,” then “Insurer B” was not only recognizing a high profit margin but a lower-than-expected utilization rate; in turn, the loss of each such “dual enrollee” from “Insurer B” automatically increases the morbidity of “Insurer B’s” remaining membership. To the extent that Insurer B’s projected utilization for 2025 was based in part on low-to-zero utilization by tens of thousands of “dual enrollees” in 2023 and 2024, it is obvious how the loss of those “dual enrollees” would cause the utilization rate per capita to increase, even if actual utilization did not. Said differently, for the last few years, health insurers have, like Planet Fitness, benefitted from members who were fully paid but rarely showed up.

Because fraud is an endemic feature of the U.S. health economy, the fact that the health insurers have benefited from consumer fraud aided and abetted by health insurance brokers likely masks a more significant structural issue. Reading the earnings call transcripts, which I encourage you to do, recalls the discussion of “death spirals” in the early days of the ACA. 

In June 2012, Larry Leavitt and Gary Claxton summarized the issue in a KFF article titled “Is a Death Spiral Inevitable If There is No Mandate?”:

“If the Supreme Court acts within the next couple of weeks to overturn the individual mandate in the Affordable Care Act (ACA) while leaving the rest of the law intact, expect to hear a lot about how the individual insurance market will be destined for a ‘death spiral.’ 

When compared with implementing the ACA in full as planned, there’s a consensus that eliminating the mandate would increase premiums and mean that far fewer of the currently uninsured would become covered. But, it is by no means inevitable that the individual insurance market will enter a spiral of death. In fact, there are some good reasons to believe that may not happen. 

What is a death spiral and why do some people believe it could happen? 

If the individual mandate were overturned by the court with the rest of the ACA untouched, we would be left with an individual insurance market beginning in 2014 where everyone would be guaranteed access to insurance, even if they have pre-existing health conditions requiring expensive medical care. Insurers could not turn people down based on health status, restrict their coverage, or surcharge their premiums. People who are healthy could choose to forego insurance, knowing that they could start buying it if they get sick (although they’d have to wait until the next open enrollment period). 

It’s pretty clear that in a system like that, sicker people would be more likely to buy insurance, and premiums would rise as a result. This is known as ‘adverse selection.’ As premiums rise, insurance would look like even less of a good deal for people who are healthy, leading some of them to drop coverage and forcing premiums even higher. And so on. A mandate can prevent such a spiral by requiring that healthy people buy insurance, even if they don’t perceive it to be in their financial interest.” 

The Supreme Court famously declined to eliminate the individual mandate in National Federation of Independent Business v. Sebelius, holding that it was valid under Congress’ power to tax, which the IRS summarized this way: 

However, in 2017, Congress repealed “the penalty for individuals who fail to maintain minimum essential health coverage as required by the Patient Protection and Affordable Care Act,” effectively gutting the individual mandate.² The online source healthinsurance.org notes that “[a]lthough there is no longer a penalty for non-compliance with the mandate, the ACA-compliant individual market has remained very stable — with record high enrollment in 2024 — due in large part to the robust premium subsidies that make coverage much more affordable than it would otherwise be.”³ (Emphasis added) 

The Commonwealth Fund provides an overview of those “robust premium subsidies”: 

“Many people who purchase health insurance through the Affordable Care Act’s marketplaces are eligible for tax credits that lower their monthly premiums. In 2021, as the COVID-19 pandemic still raged, Congress made those tax credits more generous. This improved the affordability of marketplace health plans, which was a barrier to many people who needed coverage, even prior to the pandemic. Lower costs of coverage drove record enrollment in the marketplaces through 2025… 

As part of the American Rescue Plan Act of 2020, Congress increased the ACA marketplace premium tax credits (PTCs) to ensure that Americans had access to affordable health insurance during the pandemic. In 2022, Congress extended these enhanced tax credits through 2025 as part of the Inflation Reduction Act. 

The tax credits reduce the insurance premiums that enrollees pay based on their projected income for the next year. The credits are paid directly to health insurers, who in turn lower the monthly amounts they charge. The credit amounts then need to be reconciled with actual income at year’s end when enrollees file their federal taxes. 

Enhanced premium tax credits provide additional subsidies to people who are already eligible for the regular tax credits. In addition, they extend tax credits to people with annual income equivalent to 400 percent of the federal poverty level (see table below) or higher, thereby eliminating the ACA’s ‘subsidy cliff,’ which rendered people with incomes even just above 400 percent of poverty ineligible to receive financial assistance for coverage. With the enhanced subsidies, most enrollees at the lowest income level — under 150 percent of poverty — pay little or nothing for their plan… 

In 2023 and 2024, 80 percent of marketplace enrollees could find a plan for $10 or less per month on HealthCare.gov, the federal marketplace that operates in 31 states (19 states and the District of Columbia run their own marketplaces).”⁴  

So, today, the ACA enables almost 20M Americans to access healthcare coverage for 40% less than an Amazon Prime subscription, but there is no penalty for failing to purchase health insurance. 

Elevance’s July 17, 2025 earnings call transcript is replete with comments from its CEO and CFO that sure sound a lot like KFF’s 2012 description of a death spiral: 

“In the ACA market, membership shifts from Medicaid into ACA following the redetermination process, together with lower effectuation rates have driven a market-wide increase in morbidity resulting in elevated medical cost trends…Medicaid cost trend decelerated in the second quarter, though at a more modest pace than initially expected, we are experiencing higher acuity resulting from ongoing disenrollment as well as an overall increase in member utilization. 

There are three principal factors that we are monitoring and which are behind the sharper uptick on medical trend in our ACA book. The first is the risk pool acuity and morbidity, which has risen materially as a result of the higher proportion of relatively healthier members, especially in states with a larger portion of fully subsidized individuals. And we’ve seen that occur because of the exit from the market. And that’s concurrent with higher acuity members from Medicaid moving into ACA following the redetermination process. And you could think about that as being about 70% of the total impact. Second and third impacts related to utilization. Utilization is running higher in several cost categories in ACA, notably emergency room visits, behavioral health services, some prescription drugs in specialty pharmacy, very consistent with the claims pattern that we have previously called out… 

On risk adjustment, the key point here is that the uptick in member acuity we are observing is driven by a broader market-wide morbidity trend, not by shift in our membership mix versus the market or a risk adjustment profile… 

So that’s embedded as people will seek treatment before coverage could potentially lapse, and I think that’s an important assumption. Secondarily, on Medicaid, we’re also planning for elevated morbidity due to the ongoing enrollment losses. You saw that in the second quarter in some states that have already begun more aggressive redetermination processes… 

Maybe let me start off by saying the ACA marketplace is in the midst of a broad recalibration that is exerting near-term pressure on managed care performance across the industry. And there are several underlying drivers, some of which I called out a moment ago, but principally among them the migration of membership for Medicaid post redeterminations on to the exchanges. And that, together with the lower effectuation rates we’re seeing in some states has made the resulting risk pool much more acute, and that’s really what’s driving the elevated medical cost trends. So in effect, again, you could think about this as a market-wide morbidity shift not in Elevance’s specific pricing or risk adjustment issue. 

As we think about the individual categories, as I noted earlier, chief among them is emergency room and behavioral health services. Maybe just to call out one stat here. For the ACA, we are seeing members in our 2024, ’25 cohort utilizing the emergency room at nearly 2x the level of our commercial group members… 

So there are a number of variables. One of the — in terms of the opportunities we see, I guess, I would price to, first and foremost, significant discipline in our pricing for cost trends. And that is across the ACA, which we’ve already talked about, our product filings, are addressing this higher market acuity and the potential for further deterioration in the risk pool should those subsidies not be renewed. In Medicaid, we’re also, as we also shared on this call working with other states to ensure that our rates are tracking to the member acuity as well as preparing for the policy shifts that can occur… 

The biggest unknown for us right now is the policy uncertainties around the ultimate disposition of the enhanced subsidies in the individual ACA market. Whether they expire or there’s a step down, I think, is really an important factor going into it. The impact of the market integrity rule, which will come into play, which we think is a positive, quite frankly, for the discipline in the market… 

Ultimately, we believe the ACA market will likely be smaller and higher acuity driven next year, especially if the enhanced subsidies expire…  

To be clear, at least for the remainder of 2025, we’ve assumed membership stability in the ACA base. What we have done is think about what fourth quarter utilization is going to do. And here, obviously, if Congress allows the enhanced premium tax credits to lapse at the year-end, we will expect a measurable last chance uptick in fourth quarter utilization as some members are going to schedule their elective care before their out-of-pocket costs rise in 2026. And historically, the reason I bring this up is that this use it or lose it pattern has been modest in the individual market because most ACA enrollees either use coverage consistently throughout the year or they’re going to hold it for financial protection… 

However, the combination of what we’re seeing now with this higher prevailing acuity and the likely subsidy clip has led us to believe that we’re going to see a much more meaningful Q4 surge than in prior years. And that’s the key assumption that we’ve now embedded in our full year guidance outlook… 

I simply say Medicaid cost trend did moderate in the second quarter. The slowdown was far less pronounced than we had expected. And to the point Gail made a couple of moments ago, we are seeing more disenrollments among relatively lower acuity members, especially as states enact more stringent eligibility reviews. That obviously raises the average acuity of the remaining population.”⁵ 

The comments from Elevance’s leadership undoubtedly foreshadow a fierce lobbying effort between now and Christmas to have Congress extend the premium subsidies for ACA exchange products, which recalls this statement by President Ronald Reagan: 

“No government ever voluntarily reduces itself in size. Government programs, once launched, never disappear. Actually, a government bureau is the nearest thing to eternal life we'll ever see on this earth!” 

Karl Marx said that “religion is the opiate of the masses,” proving that he did not understand Americans, for whom a good deal or, even better, free stuff is the most powerful opiate. No one who can think critically – which excludes far too many health economy stakeholders – should be surprised to find that 20M Americans are savvy enough to sign up for healthcare that is 14x cheaper than the average cell phone bill.  

What is surprising is to discover that so many health insurers seem to have, in the words of Juicy J, “messed around and got addicted” to the opiates of “dual enrollees” and premium subsidies for ACA exchange products. As Katy Perry sang in the same song, the question for health insurers and Congress is this: “Are you ready for a perfect storm?” 

Hal Andrews, President & CEO, Trilliant Health

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