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.

Defunding Obamcare Doesn’t Change Odds of Immigration Reform

August 8, 2013Danny Vinik Leave a comment

Byron York, the conservative reporter for the Washington Examiner, penned a piece on Monday about how Tea Party activists have focused more on defunding Obamacare than opposing comprehensive immigration reform during the August recess. York notes that this could be a major boon for immigration reform’s chances of passing the House:

GOP activists should also keep in mind what they can change and what they can’t. And at the moment, the thing they can change is not Obamacare but immigration reform.

If August goes quietly on the immigration front, some Republican lawmakers may return to Washington with the sense that voters back home don’t really mind that immigration reform goes forward. And then it will. If, on the other hand, lawmakers hear expressions of serious opposition at town meetings, their conclusion will be just the opposite. And reform will likely go down to defeat.

So Democrats don’t really mind if Republicans use up all their grass-roots energy railing about Obamacare. It’s already the law. What would be a problem for Democrats, and for some pro-reform Republicans, is if the GOP grassroots concentrated its fire on immigration reform. That could well mean the end of President Obama’s top legislative priority for his second term.

The Washington Post’s Greg Sargent and Washington Monthly’s Ed Kilgore picked up on this as well today, but I just can’t see any way this happens.

There are really three possible ways that immigration reform passes:

A majority of Republican House members support it so Speaker John Boehner can bring it to the floor without breaking the Hastert Rule. This would require at least 117 House Republicans to support the legislation. Boehner will only have those votes if he brings a very conservative bill to the floor. But such a bill would receive no Democratic support and would also lose a number of Republicans. With only 234 House Republicans, the Speaker can only lose 16 of them or else the bill won’t pass. This puts him in a bind. Any bill that receives majority Republican support will lose too many moderate Republicans to pass.
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Boehner breaks the Hastert Rule and passes immigration reform with strong Democratic support. This would almost surely end his speakership and is thus highly unlikely to happen.
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Seventeen House Republicans agree to sign a discharge petition with all House Democrats (or a couple more House Republicans and a few less House Democrats) so that the bill is automatically brought to the floor, without support of House leadership. This would be an incredibly risky move for any Republican. It would antagonize the top Republicans and likely lead to a primary challenge. Thus, it’s also highly unlikely to happen.

Given those three possibilities, does less pressure from the base change anything? Maybe a bit. A few Congressmen may feel more willing to vote for the bill than if they faced major pressure during the recess. But let’s assume options two and three aren’t happening. That means that a lot of Republicans will have to support a moderate bill so Boehner doesn’t break the Hastert bill, but it still receives Democratic support to pass. The Tea Party hammering away at defunding Obamacare may convince a couple House Republicans that supporting moderate legislation is acceptable. But I can’t see how it will convince enough of them.

Not to mention, the reason Tea Party activists aren’t up in arms over immigration reform is that, as York writes, they think they’ve killed it already. If it comes back from the dead, they aren’t going to sit around and continue yelling about defunding Obamacare (well, they’ll still do that some surely). They’re going to scream at their representatives to oppose the bill.

How many of those House Republicans who supported the bill when they didn’t hear opposition to it during the August recess are still going to support it when that opposition does materialize? The answer: Not many.

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.