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

August 20, 2013Danny 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.

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.

Purchasing Health Insurance Right When You Get Sick

August 6, 2013Danny Vinik 1 Comment

This is more of a question than a comment, but Ramesh Ponnuru brings up a point that’s been bugging me a bit in his column in Bloomberg today. He quotes a piece by Kevin Drum who sarcastically asked if FreedomWorks would pay the health care costs of anyone who was convinced by the organization to forego health insurance and then contracted leukemia. Ponnuru responds:

The other thing Drum misses is that people who “contract leukemia” will be able to buy insurance once they’re sick at the same rate they could have gotten it for when they were well. That’s the part of the Obamacare law that its defenders are usually most keen to emphasize. People who go without insurance while they’re healthy may have to pay a tax — although even at that the Internal Revenue Service will be limited in its methods of collection — and may, if they get sick, find their options for getting insurance limited for a few months.

Since insurers can no longer refuse to cover people with pre-existing conditions, that means that if I don’t have health insurance, but get sick, I immediately can purchase a plan that covers my costs. Thus, I avoid paying for health insurance when I’m healthy, but as soon as I need it, I buy it. But does that really work in practice?

Obamacare is supposed to make purchasing health insurance easier through the online exchanges, but that doesn’t mean it will be a straightforward process as you’re sitting in a hospital. And what about all the costs that accrue before you purchase your plan, but while you’re being diagnosed? Or what if something happens that requires a visit to the ER? Or a serious injury that requires immediate surgery and gives you no time to purchase a plan?

You’re going to be left with some major bills at the end. So I don’t think it’s fair to say that people shouldn’t wait to purchase coverage until right when they get sick. Because it won’t always be possible to do so quickly enough to cover the costs. There is a risk in postponing buying health insurance. It’s certainly much less than it was when insurers could refuse to cover you if you had a preexisting condition. But there is some risk still.

Is that risk enough to make it economically sound to purchase coverage? Well that depends. Purchasing a bronze level plan will cost a certain amount depending on your state. Not purchasing a plan will cost you in two ways: the penalty for not paying the individual mandate and the risk-adjusted amount you’ll pay if you get sick and can’t purchase coverage in time to cover all your costs. Now, that’s not a calculation many people will make. That risk-adjusted amount is incredibly hard to determine. But economic theory has demonstrated that people are loss averse – meaning that when the risk of losses exist, people act in risk-averse fashion.

This is an aspect of the law that I haven’t seen get any coverage. I have seen few people challenge the idea that people will be able to buy coverage immediately and not accrue any costs in the meantime. But that is unlikely to be the case. Ponnuru admits as much in his article and proponents of the law would be smart to point it out as well. After all, if people don’t sign up for health insurance (particularly young people), then the law will fail. Showing people that they can still face substantial costs if they decide to purchase coverage just when they get sick is a good way to convince them to sign up.

Liberals Should Use the Term “Obamacare”

August 9, 2012Danny Vinik Leave a comment

President Obama signs the Affordable Care Act into law

For a while, liberals stayed away from the term, but as the public as grown more and more accustomed to it, they have changed tactics.

I’m with Kevin Drum. I’ve never really had a problem with the term. I’ve never really seen what the problem is. And I somewhat agree with Drum when he writes “if ACA eventually becomes popular, then Obamacare will be a positive term. If it fails, then it will fade away. It’s that simple.”

I don’t think it’d fade away if the law fails. Conservatives will forever use it to remind the public that the Democrats tried and failed to reform health care. But I think there’s a better reason for liberals to use the term “Obamacare.” If (and when, in my opinion) the law succeeds and popularity for it soars, Obama and the Democrats deserve credit it.

And Democrats will receive a great share of that credit, but Republicans are not going to just let the Dems bask in the glory of the law without trying to gain some of that credit themselves. They may claim that the success of the law is because of the state-run exchanges, not the federal government. They may claim it’s a result of governors actually accepting the new Medicaid expansion. No matter what though, they are going to try to spin it more in their favor, no matter how hard that may be.

And under that scenario, “Obamacare” would certainly disappear from the conservative lexicon. But it shouldn’t disappear from the public’s lexicon. After all, conservatives have used the word to attack Obama for the past 3+ years. Why should it disappear right when the law becomes successful?

In all likelihood, it wouldn’t. It’s likely too ingrained in the public image of the law to simply vanish just because it’s no longer a conservative talking point. But Democrats have proven inept at messaging the law and it’s not impossible for that to happen.

But Democrats and Obama deserve credit for the law if it succeeds. They cannot allow Republican messaging to diminish the fact that the Democrat plan worked. So how do we prevent that from happening? By calling it “Obamacare” now. Make sure the name is even more embedded in the public discourse. Make sure Democrats are used to using the term. Support the law and build a positive message around the term. And don’t back away from it if (and when) it succeeds. That’s how you ensure that Obama and Democrats get credit.

It starts by accepting the term now and I’m glad to see Democrats (finally) doing that. (Image Via)