Obamacare Nudges Young And Healthy Away From Buying Insurance

May 9th, 2013

Rahm Emanuel, who was instrumental in President Obama’s decision to enact the Affordable Care Act when many told him not to, famously said that a crisis is a terrible thing to waste. Pass it now, and worry about it later. Now Rahm’s brother, Zeke, is helping to pick up the mess left behind by the rushed and unpopular law now known as Obamacare. In the WSJ, Zeke addresses some of the eventual problems with Obamacare–namely, that young, healthy people still won’t buy insurance. These are the very people the ACA sought to bring into the insurance market.

Here is the specific problem: Insurance companies worry that young people, especially young men, already think they are invincible, and they are bewildered about the health-care reform in general and exchanges in particular. They may tune out, forego purchasing health insurance and opt to pay a penalty instead when their taxes come due.

The consequence would be a disproportionate number of older and sicker people purchasing insurance, which will raise insurance premiums and, in turn, discourage more people from enrolling. This reluctance to enroll would damage a key aspect of reform.

Insurance companies are spooked by this possibility, so they are already raising premiums to protect themselves from potential losses. Yet this step can help create the very problem that they are trying to avoid. If premiums are high—or even just perceived to be high—young people will be more likely to avoid buying insurance, which could start the negative, downward spiral of exchanges full of the sick and elderly with not enough healthy people paying premiums.

Emanuel lays out the problem perfectly. But he has three solutions (none of which will work):

Fortunately, there are solutions [to this ACA-induced adverse selection problem]. First, young people believe in President Obama. They overwhelmingly voted for him. He won by a 23% margin among voters 18-29—just the people who need to enroll. The president connects with young people, too, so he needs to use that bond and get out there to convince them to sign up for health insurance to help this central part of his legacy. Every commencement address by an administration official should encourage young graduates to get health insurance.

Yeah, this won’t work. Voters–especially young men–are extremely prone to voter ignorance. And, to be frank, if the President’s charisma was enough to encourage people to have health insurance, we wouldn’t have needed an individual mandate which, for the first time ever, coerced people into buying insurance (it wasn’t a tax on failing to have insurance when it was initially enacted).

What is Zeke’s second solution?

Second, we need to make clear as a society that buying insurance is part of individual responsibility. If you don’t have insurance and you need to go to the emergency room or unexpectedly get diagnosed with cancer, you are free- riding on others. Insured Americans will have to pay more to hospitals and doctors to make up for your nonpayment. The social norm of individual responsibility must be equated with purchasing health insurance.

Again, the very reason why the mandate was imposed was because people didn’t give a damn about cost-shifting and free-riding. Free-riding is rational. If a person has a choice between paying a penalty of a few hundred dollars each year, or paying for insurance of a thousand dollars a year, it is rational for young and healthy people to stick with the penalty. This may be a foolish decision, but it makes dollars and sense.

Finally, and most important, we should adopt some of Massachusetts’ practices. When state officials in 2006-2007 were rolling out their exchange—called the Massachusetts Connector—they mounted a sustained campaign to encourage enrollment by young people. One aspect of the campaign focused in particular on young men, even heavily promoting the new exchange on TV during Red Sox games and hosting an annual “Health Connector Day” at Fenway Park.

A sizeable number of Americans think that the ACA is not even law. Whatever PR campaign the federal government is running has failed miserably.

I had dinner with a friend last night who has authored a number of books, and he asked me what will be the news hook for my book which comes in September. I told him the imminent role-out of the ACA on January 1, 2014 will indeed b a trainwreck. I will have the unenviable task of watching this collission happen in slow motion. I predict, firmly, that those like Emanuel will watch the failure of this law, and blame conservatives for opposing it, and making its implementation more difficulty. That will absolutely be correct. But the forseeable errors of this law, grounded in the most basic notions of behavioral economics, are unavoidable.

And lest we forget that the ACA bans catastrophic insurance–the very kind of insurance best-suited for young and healthy people. In a recent piece, the National Journal looks at how the law will likely do the exact opposite of what it was intended to do: raise premiums, and decreasea the number of people covered:

In both examples, the presidential sales pitch ended up being overhyped, with promises made that couldn’t realistically be achieved. At its heart, the mission to oust Saddam Hussein was about preventing a dangerous tyrant from using weapons of mass destruction – but administration officials advocated everything from democracy promotion to preventing an alliance between Iraq and al-Qaida as part of its overall argument. When events turned south, failure to achieve many of the items on the checklist proved politically embarrassing.

Obama’s health care law was designed to expand access to the uninsured. It’s a noble goal, if not necessarily a smart political priority. (It’s more popular to advocate for improved health care, not expanded access.) But to win support for the law, Obama claimed it would lower costs, improve the quality of care and not force anyone off their current health care plan. That’s not shaping up to be the case. Premiums are rising, employer uncertainty is growing and voters aren’t viewing the law favorably – with many not even aware of the frontloaded benefits already in place. And even on the access side, the law of unintended consequences is kicking in: Some large retail companies are cutting back employee hours so they won’t have to offer health insurance. That’s not good for the economy or health care access.

Tom Lambert has many more good points here.

Of course, Emanuel leaves out an important part of the story: the fact that the ACA itself encourages young, healthy people (the “young invincibles,” he calls them) to forego buying health insurance.  The statute does so by mandating that health insurance be sold on a “guaranteed issue” basis (meaning that insurance companies can’t deny coverage to people who waited to buy it until they became sick) and at prices based on “community rating” (meaning that those who are sick or susceptible to sickness can’t be charged more than the healthy).  Taken together, these provisions largely eliminate the adverse personal consequences of waiting to buy health insurance until you need medical treatment.  (You can’t be denied coverage or charged a higher premium reflecting your illness.)  They thereby decimate the incentive for young, healthy people to buy health insurance until they need it.  And since the law doesn’t (and can’t, according to the Supreme Court) require young, healthy people to carry insurance, many are likely to forego buying coverage in favor of paying a small “tax” — $95 in 2014, as opposed to the $2,480 out-of-pocket cost for an individual policy bought on a subsidized exchange by a 26 year-old earning $30,000.  As I have argued on this blog and elsewhere, the ACA is likely to generate a devastating spiral of adverse selection as the “young invincibles” drop out of the pool of insureds, causing premiums for the covered population to rise, encouraging even more of the marginally healthy to exit the risk pool, causing premiums to rise even further, etc., et c