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Home Publications Blogs Beat the Press It Doesn't Help Obamacare If Heavily Subsidized Healthy Young People Sign Up

It Doesn't Help Obamacare If Heavily Subsidized Healthy Young People Sign Up

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Tuesday, 05 November 2013 08:00

The obsession with healthy young people and Obamacare is getting really whacky. Yesterday the NYT had a piece reporting on the large number of people who would be able to get plans at little or no cost because of the subsidies provided under the Affordable Care Act. At one point it refers to comments from Mark V. Pauly, a professor of health care management at the University of Pennsylvania’s Wharton School:

"The availability of zero-premium plans may make the deal especially enticing to the healthy young people the marketplace needs to succeed,... 'This is such a good deal that you’d have to believe you were immortal not to really pick it up.'"

Actually the marketplace does not need heavily subsidized healthy young people to succeed. If healthy young people pay little or nothing for their insurance then it makes the adverse selection worse, not better. They are likely to have costs that exceed what they pay into the system. To succeed, the market needs healthy young people who do not have heavy subsidies and therefore pay more into the system than they receive back in benefits.

In fact, the key adjective is "healthy," not "young." To avoid adverse selection the system needs healthy people to sign up regardless of their age. It also needs people who earn enough so that they are actually paying a substantial portion of their insurance premium themselves. If the government is picking up the tab for the insurance, it doesn't help the system's finances.

 

Note:

The ACA provides additional payments to insurers if they get an especially unhealthy mix of clients so the issue really is the cost of the whole system, not whether some number of insurers are victims of adverse selection. Of course this will be a political question as to whether higher than expected costs lead to a scaling back of the system.

Comments (15)Add Comment
Young/Healthy People Are Needed for the Private Insurers NOT the System
written by Joe M, November 05, 2013 8:46
The program needs young healthy people to sign up because there is a maximum ratio of 1:3 for plan costs (higher risk people can only be charged up to three times that of lower risk) and some states have opted for a lower ratio. This means that sometimes private insurers will charge healthy/young people $100 for something that is really only worth $80 so they can sell for $300 something that may actually be worth $320. Which means that person wouldn't buy it. However, a young person who gets that $100 from the government way as well buy it so the insurance company gets their money and stays in the program. If insurers don't participate in the exchanges, the program falls apart. This should be less of an issue once the penalty for not buying insurance is larger.
ACA Provides payments for insurers with high risk populations
written by Dean, November 05, 2013 9:19
Joe,

this wouldn't be a problem for particular insurers since the bill provides compensation for them http://www.google.com/url?sa=t...Wc&cad=rja
...
written by JDM, November 05, 2013 9:32
It really s remarkable how major news outfits are staffed entirely with people who don't understand the very concept of insurance.

It certainly couldn't be that they are deliberately trying to mislead their readers.
"System" doesn't need to break even
written by Bill H, November 05, 2013 9:46
The "system" only needed the pretense of break even to pass Congress. Once it is in effect no one will ever care whether it actually does break even or not. The heavily subsidized signups are needed for health insurance companies to break even, and that is all that the administration cares about. If health insurance companies don't break even the "system" will fail, so government is happy to pay any cost to assure that they do.
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written by skeptonomist, November 05, 2013 10:25
The system presumably won't succeed if insurance companies pull out or go bankrupt because they don't get premiums from healthy people (young or old). It doesn't matter to them whether those premiums come from the healthy people themselves or from government. If it is the government that pays through subsidies, then the money is raised by taxes, which at least in principle are progressive, that is somewhat according to ability to pay, not state of health (although really sick people tend not to make much money). Subsidies for indigent and unhealthy people also contribute to the system.

The ACA is so complicated that I think even Dean is confused.
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written by Jerry Brown, November 05, 2013 10:26
You say that "If healthy young people pay little or nothing for their insurance then it makes the adverse selection worse, not better". This makes no sense to me. If healthy people who would not purchase a policy without a subsidy are able to get a policy because of the subsidy that should reduce the adverse selection problem. For it to work as an "insurance" program, what matters is that there are healthy in the system whose total health care costs average less than their premium payments including subsidies.
bill H, the "system" will grow, its a poor design...
written by pete, November 05, 2013 10:26
Because of the subsidies, and the fact that insurance companies can keep 20% of the premiums that are not paid out in health costs, their interest is to increase the premiums so they can gobble the additional. This is known as the Averch-Johnson effect in regulatory economics. For example, uninsurable items like annual check ups, blood work, contraception, etc., (these are not "accidents"), get folded into health insurance so that the insurance company can keep 25% above the cost. This raises our premiums unnecessarily, only cover these recurring items. It would be like the government requiring auto insurance to cover oil changes, so that the auto insurers could bake a % of the oil change.
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written by skeptonomist, November 05, 2013 10:32
The sentence "To avoid adverse selection the system needs healthy people to sign up regardless of their age" is correct. The following two sentences are not.
Skepto Dean is for some reason finally inclucing taxes as a cost...
written by pete, November 05, 2013 11:43
I guess Dean is saying the system includes the taxes required to fund the subsidies. Why not apply this same logic to other government programs...calling them a system inclusive of the taxes required? For example, public sector pensions. Which are "underfunded" to most, but not Dean.
Who's On First?
written by Last Mover, November 05, 2013 11:50

Pauly mocks the notion that insurance is free, Baker takes him seriously to point out if so, subsidies won't keep the system solvent. Take that loser liberals.

Beyond that it's a question of Who's on First Base? Is WHAT on first base or is it really WHO?

There's a reason the article has more than 1300 comments - the headline bait that so many qualify for "free" insurance under Obamacare, a guaranteed pull of many gawking eyeballs screaming with indignity and offense that there is no free lunch.

It's true. The 1% already ate it.
I guess I don't understand, then.
written by Tom Allen, November 05, 2013 3:27
If the government is picking up the tab for the insurance, it doesn't help the system's finances.


The idea behind Obamacare is to subsidize insurance companies using taxes, bribing the companies to increase the number of people they cover. It doesn't matter to the insurance companies who pays the bill. If every healthy subscriber's payments were 100% covered by the government, the industry makes just as much profit as if 0% were covered. It's only the unhealthy subscribers who collect from them.

"Young" is important, I presume, because older enrollees will make fewer payments before they start to become unhealthy.

And obviously it would be much cheaper and more effective to cut out the middle man and have the government itself provide the insurance via Medicare or the like.
Subsidies Go to the Insurance Companies
written by Robbie Bruens, November 05, 2013 3:51
Dean, I think you might have it wrong on this one. The government pays the subsidies directly to the insurance companies, so why does it make any difference (in terms of the adverse selection problem) if a young person is paying or if the government is paying?
...
written by AlanInAZ, November 05, 2013 6:00
Today virtually all health care insurance is subsidized. The government currently subsidizes employer supplied health insurance, Medicare and Medicaid. Employer sponsored plans receive $300 billion, Medicare parts B and D receive about $220 billion, and Medicaid gets $420 billion. Now the ACA adds the 15% without insurance to the subsidized group. We have nationally subsidized health insurance without the cost containment from a real national insurance system. I think the extra cost for the ACA will be about $150 billion. That is large but smaller than existing subsidies. The vast majority of people have no idea about the size and scope of all the subsidies. If this was better understood I think a more unified system would find voter approval. Today the USA wins the prize for the most complex and inefficient health care system among advanced nations.
But isn't the USA's medical system a government created jobs program?
written by John Wright, November 05, 2013 10:37
If as some suggest, we need more government spending to ramp up US demand to create jobs, is not the USA's medical system a case of government spending and subsidy that HAS created more USA jobs than would be otherwise?

Rather than state the USA spends 2x the amount per capita on medical care compared to any other developed country, we could feel better by arguing the USA spends 1x on medical care and an additional 1x on creating USA medical care jobs.

So from an economic demand standpoint, the USA medical industry is working quite well.

But maybe the "opportunity cost" of more worthwhile societal investments should be brought into the picture.
...
written by skeptonomist, November 06, 2013 10:03
Health-care spending is not necessarily beneficial in itself to the overall economy in the first approximation. In Keynesian theory, the benefit of government spending comes mainly from the ability to oppose business cycles - this requires increased spending in a business down-cycle. Having overall health-care spending follow a Keynesian pattern is not really practicable, although there are some things that could be Keynesian such as building hospitals.

But private health care is pro-cyclic - when people lose their jobs they are no longer able to pay for care or insurance. Making health care universal and a function of federal government essentially makes it an automatic stabilizer - at least spending would not decrease in a down-cycle.

Automatic stabilizers - which include a high level of "defense" spending as well as social programs - are probably a major reason for greater stability of economies since the Great Depression. They are more plausible causes than the actions of the Maestros.

The problem with health care in the US is its inefficiency - the amount of effort expended on things like denying coverage and the profit-taking by financiers detract from provision of actual health care. We know that more centrally-controlled health-care systems in other countries are more efficient.

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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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