Obamacare and Millennials: Designed for Failure?

Premium Increases for “Young Invincibles” Under the ACA and the Impending Premium Spiral

One of the longstanding criticisms of the regime designed by the ACA was that it is a trojan horse:  it’s real objective was to collapse the private insurance and pave the way for a single payer system, which is what its proponents wanted all along but couldn’t get passed.  While I am not a fan of the law, I have thought this line of reasoning was solidly in tinfoil hat territory. And it is the law — numerous attempts to overturn it legislatively and judicially have failed.   But stepping outside the politics of the ACA, will it work economically?

Hard numbers on this are difficult to obtain.  I haven’t actually been able to sign in to the healthcare.gov website, and it would appear very few have.  Insurers report at this point that the policies they have sold are in the single digits.  An early success story of a Millennial who signed up that was reported in multiple media outlets proved untrue — Chad Henderson did not, in fact, buy a policy.  (Naturally, this was disclosed in an interview with his father).  Moreover, the website is poorly designed and in the words of Ezra Klein (no tea-partier):

the Obama administration doesn’t have a basically working product that would be improved by a software update. They have a Web site that almost nobody has been able to successfully use. If Apple launched a major new product that functioned as badly as Obamacare’s online insurance marketplace, the tech world would be calling for Tim Cook’s head.

If my work had a theme it would be “What you think you know may be wrong.”  That means using a lot of data and I try to be very careful to use unbiased sources whenever possible.  I’ve found a study produced by the American Action Forum, which is a center-right group but relies on data produced by the Kaiser Family Foundation.  And what is suggests is pretty shocking.

The individual mandate is the key to Obamacare.  The system needs young healthy people to pay more for insurance than they will consume so they can offset the cost of insuring old, sick people who use healthcare a lot.  While there are some features to the ACA that shift a huge cost burden to young, healthy people, in concept it’s the same basic idea as insurance.  The ACA contains a penalty for those who don’t buy insurance to avoid adverse selection. The AAF report has compared the Kaiser figures on penalties, subsidies and premiums by income bracket to determine if it makes financial sense to pay the penalty or purchase insurance.  Here’s what they found:

Ratio of Premiums Net Subsidies to the Individual Mandate Penalties 2014-2016

Starting in 2014, it only make sense for the lowest income bracket to buy insurance instead of paying the penalty.  Over time, penalties increase in an attempt to discourage adverse selection, but only in 2016 does the buy decision make sense for the next income bracket.  For every other income bracket, it is much cheaper to pay the penalty.  If the penalty were sufficient to offset the impact of adverse selection, then why is it so much lower than the premium?  What plans have been made

Won’t people buy insurance anyway?  Obviously, people buy insurance for health care coverage.  It’s hard to say what impact it will have because the new regime is proving highly disruptive to the insurance marketplace and because of the poorly designed system it’s hard to weigh what the Obamacare policy will cost versus what existing policies cost.

However, the argument has been that young, healthy people who don’t buy insurance need to be persuaded to buy it.  So those are people not presently buying insurance.  I believe people respond to incentives, and I don’t see anything here that suggests that healthy Millennials will be incented to buy an ACA policy.  If anything, because of the community rating and pre-existing condition provisions of the law, those most likely to buy policies would be those excluded from current insurance markets — meaning people with costly illnesses or conditions who presently can’t get coverage.  That may be a good thing for public policy but that doesn’t help the argument that Obamacare will be financially successful.

The bottom line is that those who expressed concern about building failure into the design of the ACA insurance regime are right to be concerned and we may have again proved Dr. Thomas Sowell’s maxim:

The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.

Unanswered is what healthcare and insurance will look like when this mess is over.  I’d suggest you read the entire study.  I’ve posted the table with the premium, subsidy and penalty calculations below.

FPL Percent Premium Cap Income Level Annual Subsidy Subsidy Percent Premium Cost* 2014 Penalty^ 2015 Penalty 2016 Penalty
133 % 3.00 % $ 15281.70 $ 2839.00 100 % $ 0.00 $ 95.00 $ 325.00 $ 695.00
175 % 5.15 % $ 20107.50 $ 2390.00 84 % $ 449.00 $ 103.57 $ 325.00 $ 695.00
225 % 7.18 % $ 25852.50 $ 1571.00 55 % $ 1269.00 $ 161.02 $ 325.00 $ 695.00
275 % 8.78 % $ 31597.50 $ 653.00 23 % $ 2186.00 $ 218.47 $ 436.95 $ 695.00
325 % 9.50 % $ 37342.50 $ 0 0 % $ 2839.00 $ 275.92 $ 551.85 $ 695.00
375 % 9.50 % $ 43087.50 $ 0 0 % $ 2839.00 $ 333.37 $ 666.75 $ 833.43
425 % 9.50 % $ 48832.50 $ 0 0 % $ 2839.00 $ 390.82 $ 781.65 $ 977.06
Source: Kaiser Family Foundation Subsidy Calculator, available at http://kff.org/interactive/subsidy-calculator/.* Annual premium costs net any subsidies; assumes unsubsidized annual bronze plan premium of $2839.00.^ Percent of income penalties are calculated by taking the given income level, subtracting the most recent tax threshold amount of $9,350, and multiplying by the appropriate percentage depending on the penalty year.
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