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Column: Are Health Exchanges Heading Toward a Death Spiral?

As the clock ticks down to the end of open enrollment for health coverage, one thing is becoming clearer: what the final demographics will look like. Demographics matter a lot because they will help determine whether the health insurance market goes into a death spiral (or requires hefty federal subsidies to keep it from doing so). Young healthy people, and a lot of them, are needed to keep the market stable and premiums low. As we head into the final few weeks, we have a pretty good idea of how many young healthy people there will be, and the answer is: a whole lot fewer than the health-care wonks were expecting.

But wait a minute! I hear you cry. We don’t know any such thing! After all, everyone expects a lot of young healthy people to wait until the last minute! Are you saying they’re wrong?

Not exactly. I, too, expect the demographics of March enrollment to skew younger than prior months. But at this point, unless that enrollment is truly massive, I don’t think that will be enough.

To see why, let’s start with some basic numbers. As of March 1, 4,242,325 people had selected a plan on one of the exchanges; 1,075,990 of them, or just a smidge over 25 percent, were young adults ages 18 to 35 - that critical demographic that the exchanges need to enroll. Previous projections had been for 40 percent.

It’s true that in Massachusetts, the young showed up relatively late to the party:

However, at this point, with one month to go, the youth contingent would have to be truly massive to get near the 38.5 percent that was originally projected.

Just how massive depends on the total number of sign-ups in March. But to get some perspective, it’s not even mathematically possible for youth sign-ups to get to 40 percent of total sign-ups unless we get at least 912,174 more people to sign up in March — and then, it’s only possible if every single one of those people, including covered family members, is between the ages of 18 to 35.

This is, of course, not likely. Thankfully, as the number of sign-ups rises, the percentage of them that needs to be young adults falls. But even if we assume 3.5 million people sign up in March — theoretically possible, but not what anyone I’m aware of is projecting — 55 percent of them would have to be young to pull the demographics back in line.

A lower target — say, 33 percent — would be easier to achieve. We could hit that even if the sign-ups in March are less than 50 percent young adults … as long as at least 2 million people sign up. That’s about 10 percent higher than the December numbers — certainly doable, but I don’t know if I’d call it the most likely scenario.

How much does this matter? Well, a team from the Kaiser Family Foundation calculated that if enrollment were only 33 percent young, costs would exceed premiums by about 1.1 percent; if it were 25 percent (that is, if it doesn’t change much), costs would exceed premiums by about 2.4 percent.

However, Seth Chandler, a law professor who specializes in health and insurance law, disputes that calculation. And as far as I can tell, it’s only looking at age — that is, we’re assuming that if we get fewer young people, we get fewer of every kind of young people.

But what if what we’re witnessing is the broad operation of adverse selection — older and sicker people buying while the young and healthy stay away? The first place that would show up in the data would be … a disproportionately low number of young people, particularly young men. Which is exactly what we do see. This explanation seems more likely to me than the alternative.

So are we definitely due for a death spiral?

No. For one thing, that 38.5 percent number doesn’t come from the insurers; it comes from the government. The government has been talking to insurers, but it isn’t running their actuarial models. If the insurers assumed a worse demographic mix than the government analysts, then we may not need so many young people to keep the markets sound.

Insurers also want this to work, so they may be willing to take losses for a few years to keep premiums low — especially if the government funnels money to them through the risk-corridor program.

What this does tell us, however, is that it is now probably impossible to achieve the demographic mix that the government has been forecasting. And keeping it from happening may well prove very expensive for the federal government.

Megan McArdle writes about economics, business and public policy for Bloomberg View.