Category Health Care

Delaying the Individual Mandate Isn’t A Real Possibility

Danny Vinik 1 Comment

One thing that Republicans have been clamoring about recently is for a one-year delay in the individual mandate in response to the Administration’s (unlawful) decision to delay the employer mandate a year. This morning, National Journal and Public Notice hosted an event at the Newseum titled “Fiscal Fallout: What is ‘Responsible’ in Today’s Fiscal Reality” with keynote addresses from Sen. Orrin Hatch (R-UT) and Center on Budget and Policy Priorities’s Robert Greenstein as well as a panel discussion on our fiscal situation. Near the end of the panel,  Bill Hoagland, the Senior Vice President at the Bipartisan Policy Center, discussed the possibility of delaying the individual mandate for a year:

You can’t defund Obamacare on a continuing resolution because 90% of Obamacare is entitlements so it doesn’t make any sense, but I do think Bob [CBPP’s Robert Greenstein] passed over one small thing. He mentioned that a delay would increase the number of uninsured by 11 million. Yet he did not mention that the CBO’s cost estimate on that was that it would save $35 billion too. I’m not here to propose a delay, but for the average person listening to this debate outside, [they may say,] ‘Wait a minute. You delayed the employer mandate. Why can’t we delay the individual mandate?” And I worked with some insurance companies also so I know that the argument will be that this will drive up premiums immediately. Quite frankly, premiums have been set here for the exchanges starting in a few weeks and the companies don’t know what the experience is going to be anyway. So I don’t find a delay necessarily to be bad. In fact, I would almost think the Administration would want a delay to get the exchanges ready [while] other provisions of the law remain in effect – no [rejecting people with] pre-existing conditions, [allowing young people to stay on their parents’ insurance] up until age 26. So I think one of the outcomes here will be that you hear more about a delay. And I’m not proposing it. I’m just suggesting you’ll hear more about a delay.

First of all, under no circumstance is the Obama Administration going to delay the individual mandate for a year. They’ve fought off challenge after challenge for the law to get to this point and they believe (as I do) that once it officially begins, it will be here to stay. Based on their desperate, stubborn refusal of House Republicans to fund the government unless the Administration agrees to defund the law, they seem to agree as well.

Second, just delaying the individual mandate would be a disaster. Hoagland says he understands the counter argument to such a delay, but he doesn’t seem to. The problem is that if you delay the individual mandate, but still require insurance companies to cover everyone with pre-existing conditions then the death spiral ensues. Only unhealthy people sign up for the law while healthy people forego insurance. Without the offset of those healthy people paying into the system, these insurers must raise premiums to cover the unhealthy ones. Hoagland notes this, but uses a bit of hand-waving to say that insurance prices are locked in and thus insurers won’t be able to raise premiums. Well if that’s the case, then insurance companies will go bankrupt. The companies came up with insurance premiums assuming that young, healthy individuals would purchase insurance. Their business model falls apart if those individuals aren’t required to sign up, but the firms are not allowed to revises their premiums.

Thus, if Hoagland wants to delay the individual mandate (which he never says he wants to do – he’s just suggesting it’s going to come up), then we must delay the pre-existing condition requirement as well. This would effectively delay the entire law and give Republicans another year to figure out how to repeal and undermine it. They can even try to delay it until the midterm elections where they will hope to win back the Senate and repeal it altogether (of course, the President would veto such a bill).

So, contrary to Hoagland’s suggestion, this isn’t something you’re going to hear more about. It would be an epic disaster policy-wise and the Administration isn’t going to consider it. Obamacare is the law of the land and that’s not changing.

Rand Paul: Health Care is Not a Right

Danny Vinik 2 Comments

Katrina Trinko has a nice piece at National Review on Rand Paul continuing to offer pro-bono healthcare work when he returns home to Kentucky. Trinko reports right from the operating room, where Paul is literally giving people back their vision through cataracts surgery. But, it’s what Paul said in a speech at the University of Louisville that is most interesting:

“There’s a philosophic debate which often gets me in trouble, you know, on whether health care’s a right or not,” Paul, in a red tie, white button-down shirt, and khakis, tells the students from the stage. “I think we as physicians have an obligation. As Christians, we have an obligation. . . . I really believe that, and it’s a deep-held belief,” he says of helping others.

“But I don’t think you have a right to my labor,” he continues. “You don’t have a right to anyone else’s labor. Food’s pretty important, do you have a right to the labor of the farmer?”

Paul then asks, rhetorically, if students have a right to food and water. “As humans, yeah, we do have an obligation to give people water, to give people food, to give people health care,” Paul muses. “But it’s not a right because once you conscript people and say, ‘Oh, it’s a right,’ then really you’re in charge, it’s servitude, you’re in charge of me and I’m supposed to do whatever you tell me to do. . . . It really shouldn’t be seen that way.”

There’s a nuisance nuance here that Paul misses. If I want to purchase food or water, I know I can do so at an affordable, reasonable rate. I may not have the money to do so, but I know that if I do make a bit of money, I’ll have the ability to feed and hydrate myself. Health care is not the same. If I have a pre-existing condition, health care providers may not offer me any coverage whatsoever, or may only offer plans that are way too expensive to be deemed reasonably affordable.

If Paul wants to make those markets more similar to each other, then he must require insurance companies to cover those with pre-existing conditions. That way everyone has the ability to purchase insurance. But if that happens, then the old and sick buy coverage while the young and healthy forego it. This creates a bad risk pool and leads to higher premiums, causing more young, healthy people to drop out of the market. Thus, the death spiral ensues. How do you stop that? By requiring or convincing young, healthy people to purchase health care. That’s what the Affordable Care Act does using both carrots (subsidies) and a stick (individual mandate). Paul’s comparison of health care to food and water demonstrates the need for greater regulation in the insurance market.

Paul’s answer to health care reform has always been that there needs to be greater competition in the industry. But greater competition isn’t going to help those with pre-existing conditions. If insurers don’t want to cover them, they aren’t going to cover them up – barring a requirement from the government that they do. That’s the type of requirement that makes the healthcare market more similar to the market for food or water. It’s also the type of requirement that Paul vehemently opposes. Nevertheless, that inherent contradiction doesn’t seem to bother the young senator as his speech at Louisville shows.

Obamacare is a Good Deal for Young People in the Long Run

Danny Vinik 18 Comments

The Washington Examiner’s Phillip Klein wrote an article this morning outlining the financial incentives for young people to forego insurance. This is a hotly debated part of the law because if young people don’t sign up for health care, the law will almost certainly fail. The Obama Administration has focused its outreach efforts on young people for precisely that reason. In Klein’s article, he links to a recently released study by the National Center for Public Policy Research, which calculated how much better off 18-34 year olds would be if they didn’t sign up for the exchanges and paid the penalty instead. Here are their findings:

 About 3.7 million of those ages 18-34 will be at least $500 better off if they forgo insurance and pay the penalty. More than 3 million will be $1,000 better off if they go the same route. This raises the likelihood that an insufficient number of young and healthy people will participate in the exchanges, thereby leading to a death spiral.

This isn’t surprising. Obamacare is set up so that the young and healthy pay more to offset the high costs of the old and sick. After all, those young and healthy people are going to be old and sick some day. They pay extra now, but save on costs in the future. This gets to a problem with studies like the one above: it only examines the financial incentives for young people in the short-term, not overall.

In the next ten years, the average young person will likely face minor medical costs. Insurance will be unnecessary. Young people may look at the money they are paying for a bronze plan each month and decide to drop their health insurance. As the Center above calculated, this will save them money each year (barring an unlucky health catastrophe – something the study ignores as well).

Let’s say an individual doesn’t get sick throughout his 20s and when he turns 35, he figures the risks are high enough now that he should purchase insurance. Over the next 30 years, he will likely come down with some illness. It may even be so serious that insurers would not cover him in the pre-Obamacare age. Under those circumstance, he’s very thankful that insurers can’t deny him coverage for having a pre-existing condition. Suddenly, he finds that Obamacare isn’t so bad after all. He paid a modest fee in his young years for not purchasing insurance and now that he’s older, he can buy reasonably priced coverage to cover his health bills. And those bills are paid for by the new young “suckers” who aren’t following in his footsteps and foregoing insurance.

Obamacare is a good deal for young people in the long run.

Obamacare is a good deal for young people in the long run.

But what if those new young people aren’t suckers? What if everyone looks at the world as he does and forgoes insurance? Well, Obamacare will descend into a death spiral and collapse under its own weight. How does that young person’s lifetime costs look now? Well, he saves a bit more money by not having to pay the fee for ignoring the now-defunct individual mandate. He grows older and suddenly finds himself with a pre-existing condition and insurers refuse to cover him. He racks up huge health care costs and can do nothing about them. Suddenly, he realizes how much better off he would be under Obamacare and regrets the choice that he and all his friends made to forego coverage. If only they had paid the $1,000 extra so that the law didn’t collapse, he would be covered right now.

There’s an even deeper problem here though. All young people understand the financial incentives they have to forego insurance. If they believe that everyone else is going to listen to those incentives and not purchase coverage, then they don’t have a reason to purchase it either. After all, if I’m the only one buying health insurance, the law is going to fail anyways and I’m just wasting my money. This is a classic collective action problem. All young people are better off in the long run if they all agree to purchase insurance. But they all have individual financial incentives in the short-run to forego it. The individual mandate is supposed to correct this, but the penalty ramps up over time so the incentives still exist next year to not purchase insurance.

This is why Klein is wrong in his article. On an individual level, each person has a financial incentive in the short-run and long-run to not purchase insurance. In the short-run, the person saves money. In the long-run, the collective action problem will cause the law to collapse anyways. But, in aggregate, young people should purchase insurance. It may not be financially beneficial in the short-run, but in the long-run it almost certainly is. Klein misses this distinction in his piece:

It’s worth keeping in mind that purchasing health insurance, in aggregate, is a bad deal for younger Americans. This isn’t even very controversial. The design of Obamacare rests on the very assumption that windfall profits from selling younger and healthier Americans more insurance than they need will be enough to subsidize older and sicker Americans.

In aggregate over the long-term, young Americans will face higher costs at the beginning, but significantly lower ones later in their life – and for those who develop a pre-existing condition, they will save a huge amount of money. This part of the law is tough to explain to young people. No one my age is thinking about how Obamacare will save them money 40 years from now. But that’s exactly how they should be thinking about it. Klein’s article only looks at the short-term financial incentives and this obscures the long-term benefits that young people gain as well. In aggregate, it is a good deal for them. It just requires a longer time horizon to see it.