However, the Law of Unintended Consequences says that the base case is likely to be wrong. We just don’t know how yet.

In one alternative scenario, employers begin to dump coverage en masse, preferring to pay the penalty rather than exorbitant premiums. This outcome is even more likely if California is successful in establishing an insurance exchange offering affordable, high-quality options for individuals buying insurance with the help of federal subsidies.

The American Action Forum – headed by a former CBO chief – has published an analysis that suggests the number of new lives who purchase on the individual market could be three times the official estimate from the CBO. In this case, California’s insurers could find themselves competing furiously for individual policies, while the large group market stagnates or shrinks.

Another scenario

In another alternative scenario, government-sponsored plans – like the multistate plan that will be authorized by the federal Office of Personnel Management – are able to exploit their size and legal advantages to offer more competitive products than private insurers (much as Fannie Mae and Freddie Mac have done in the mortgage markets).

In this case, employers would likely still dump health coverage, but the employees would be scooped up by government plans offering better benefits and lower premiums. Private insurers would face a slowly dwindling market.

One final scenario is even scarier. In it, employers cut coverage en masse. But healthy individuals, knowing they can’t be denied, refuse to buy insurance until they get sick. The fines for being uninsured prove to be too small … or the government doesn’t enforce them … or the individual mandate is ruled unconstitutional.

With a risk pool made up of the sick, insurers are forced to raise premiums, which causes even more individuals to drop coverage. The resulting negative feedback loop pushes insurers into a death spiral, and the government is forced to step in and bail them out.

In the 1990s, several states – including Kentucky, Maine and Washington – passed laws requiring insurers to offer coverage to all comers and limit price discrimination. In those states that didn’t have an effective individual mandate (like Massachusetts does now), the individual market soon dried up, as healthy individuals declined to purchase coverage and insurers withdrew their offerings.

While the doomsday scenario may not be likely, it can’t be ruled out from where we are now. Just about the only thing we know for sure is that Southern California employers – both large and small – will face very difficult decisions about whether to continue providing health insurance coverage for their employees.

Tim DeRoche is the founder and president of DeRoche Consulting Group in Los Angeles, which specializes in strategy work for senior executives.


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