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Home Publications Blogs Beat the Press Why Would the Addition of Young Healthy People Raise the Cost of Insurance?

Why Would the Addition of Young Healthy People Raise the Cost of Insurance?

Wednesday, 28 May 2014 04:59

That's what Washington Post readers are asking after reading an article warning of large price increases in 2017. The piece reported the output from a simulation model developed by Stephen Parente, a University of Minnesota health economist who advised Sen. John McCain's 2008 presidential campaign.

According to the article, Parente's model predicts a large increase in the price of bronze and catastrophic plans in the exchanges in 2017. It gives the reason for this increase:

"Parente estimates between 4 million and 6 million people will see their existing individual coverage end in the next few years when either their plans lose grandfathered status or the White House's extension of non-compliant health plans runs out near the end of 2016. These holdovers from the individual market predating the ACA are expected to be younger, healthier and more sensitive to price.

"Parente's model finds these factors will have the most significant affect on 2017 premiums for less-robust plans in Obamacare's "metal tiers." These include catastrophic and bronze-level health plans, which have the cheapest premiums but the highest out-of-pocket costs. The effects will differ by state, but the national picture shows a big price jump for bronze and catastrophic plans between 2016 and 2017 — premiums for the average individual bronze plan, before subsidies, are projected to climb between $2,132 and $4,174 between those two years."

Let's see, healthy people raise the cost of insurance? Maybe we can get some older, sick people into the pool.

Comments (7)Add Comment
Would Increasing the Risk Pool Increase the Average Cost?
written by Robert Salzberg, May 28, 2014 5:45
Parente's model implies that adding more people to the pool will increase average costs, the exact opposite of the bedrock principle of insurance. If you look at his actual projections, the premiums for bronze and catastrophic plan roughly double to quadruple in some states in the year between 2016 and 2017.

Double to quadruple jumps in premiums by adding more healthy people to the pools? Really?

Has Parente never heard of the medical loss ratios? Why would Parente think that the people being added to the pool would cost more than 4 times more than those already in the pool? Even assuming the new people added in one year doubled the size of the pool, their costs would have to be 8 times more to justify and increase in premiums of 400%.
Parente understands classic supply and demand
written by Joe T., May 28, 2014 6:14
It's clear to Parente that when demand skyrockets, the factory that makes insurance policies will take years to catch up.
Healthcare Cost Growth Slows Except One Year For Bronze Plans, Really?
written by Robert Salzberg, May 28, 2014 6:24
From CBO: "Major health care programs—Outlays for Medicare, Medicaid, the Children’s Health Insurance Program, and subsidies offered through health insurance exchanges are projected to increase more rapidly than outlays for Social Security, from 4.8 percent of GDP in 2014 to 6.1 percent in 2024, net of premium income and other offsetting receipts related to Medicare. (Offsetting receipts are certain collections by the government that are recorded as offsets to spending, rather than as revenues.) That increase is driven by the growing number of retirees, the expansion of federal subsidies for health insurance, and rising health care spending per beneficiary."

So the CBO estimates that overall health care spending from a variety of federal programs will increase a total of 25% as a percentage of GDP over the next decade. Even assuming we escape from our anemic growth rate sooner than projected and have emerging economy growth rates, we cannot do better than doubling our GDP over the next decade which would imply a 50% increase in healthcare spending.

So crazy GDP growth over a decade leads to a 50% growth in federal health care spending, but more healthy, young people added to a pool increases premiums by over 400% in some states for some plans in 1 year. Really?

Parente predicts one year 454% increase
written by Robert Salzberg, May 28, 2014 7:36
On page 5 of his report, Parente predicts that Arkansas' bronze catastrophic plan premiums will increase from $791 in 2016 to $4385 in 2017, a 454% increase. On page 7 of the report, Parente predicts a 434% increase in Florida bronze catastrophic plan premiums which jump from $737 in 2016 to $3942 in 2017.

A regressive tax, on healthy, previously uninsured people: may lead to a lot of irresponsible spending , Low-rated comment [Show]
Specifically, may we not wonder about the fair-mindedness of Mr. Mandate and his ilk?
written by Rachel, May 28, 2014 10:01

Mr. Mandate, that is how the NYT referred, in a very deferential article, to the fellow who designed the regressive ACA. (Although perhaps somewhere there's some term of art like U-regressive, to mean that it hurts the lower middle class most?) So the ACA increases demand, mandating that many lower-income healthy people pay extra, suffering a non-trivial loss.

At the same the ACA makes only minimal efforts, for example, to address the rudimentary problem that, despite a great many overseas physicians, we still have significantly fewer MDs per 100,000 than most European nations. So that source of inequality stays, may worsen. In other words, the ACA is not a particularly rational, democratic health plan; it's mostly a political creation, by people who don't mind upwards redistribution of wealth. And so, in the long run, why shouldn't prices inflate, and/or services degrade?
written by Eric377, May 28, 2014 10:15
As best I can follow he is predicting a massive decrease in covered individuals in the individual market between 2016 and 2017: down about 5 million. Maybe he expects that this is among those who would be the very healthiest who otherwise would purchase a "base metal" plan, which makes a lot of sense to me in that the system was deliberately created such that it is hard for the IRS to collect the penalty from most people. So if you think you are pretty likely to be very healthy you make sure you do not overpay your taxes, then set aside what otherwise would have been the premium for cash reserves and possibly buffer your finances with some portion of what you think your penalty would have otherwise been. The disciplined (and lucky) can make this work for them. A few will have to hold the "I got into a big skiing accident bake sale" until the next enrollment where they can reconsider. SO if you pull out the very healthiest of all, I guess even the costs associated with the "pretty healthy" might force price hikes.

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About Beat the Press

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.