Insurance Death Spiral

Basically, the problem is that, under the new law, it is cheaper for healthy individuals to drop their coverage, and pay the fines. Since the government is forcing insurers to pick up anybody who requests coverage (no matter how sick they already are), people can wait until they need care, avoid paying premiums, and then get insurance when they need it. This provides the insurer with very little money from premiums, and high expenditures from paying out for sick people.

As people continue to move out of the market for insurance, the insurers will either collapse or be propped up by the government at great expense. The relatively low fines for breaking the mandate will not be enough to pay for even a small part of the massive government outlays. Either they will come up with a system for rationing care (which will be hugely unpopular), or they will raise fines drastically, (which will also be hugely unpopular). In the end, they may simply pay the insurers’ bills, leading to severe deficits or severe tax hikes.

Ultimately, the government may try to simply nationalize the insurers, but the Republicans are likely to be in a position to prevent the Democrats from doing this, and they have every incentive to block this nationalization. They can simply (and justly) blame the Democrats for the catastrophe they created by passing Obamacare, and reap the political rewards for having said “I TOLD YOU SO!”