Sorry. If You Want The ACA to Work, You’re Going to Have To Actually Make People Buy Insurance

A THCB reader in New York writes in with this timely observation:

“If you want everyone to be able to get insurance, everyone has to actually have insurance.

Most people agree that one shouldn’t be denied insurance because of illness and pre-existing conditions.  This is probably the least controversial aspect of healthcare reform. The problem is, you can’t insist that insurance companies sell to all comers at reasonable rates unless you also guarantee a sufficiently large risk pool that includes the healthy as well as the sick.

If you don’t see to it that the healthy sign up, people will go without insurance until they get sick, and the pool of the insured will become so costly that premiums will quickly spiral out of control.

So, to make sure everyone CAN get insurance, everyone MUST get insurance.

This isn’t a moral or political stance, it’s not something you can choose to believe in, it’s basic economics.

The problem with the ACA’s approach to ensuring universal coverage is that the incentives for the healthy to sign up are too weak.
The healthy who decide not to purchase insurance will have to pay a penalty, but that penalty will usually be substantially lower than the price of insurance. Perversely, this weakened approach to ensuring universal coverage could make things worse than they are today.  How?

Today, if I’m healthy and uninsured, I know that if I develop a serious illness, I won’t be able to get coverage.  At all.  This is an incentive for me to go out and spend the money on insurance. Once the ACA is in full force, if I decide that I would rather pay the (cheaper) penalty than buy insurance, I have the security that should I become sick, assuming it’s not a super emergency, I will be able to get insurance to cover future costs, since policies will have to be offered to all.  This security blanket for those who choose to remain uninsured is a major problem.”

Demanding that insurers sell to all comers, while encouraging rather than ensuring that everyone be covered, is a major flaw of the ACA.Although some other countries use a mix of private and public insurance systems, they all require, rather than encourage, citizens to carry health insurance. There is no other way.”

If you have questions about the Affordable Care Act or your buying insurance on the federal state exchanges, drop us a a note. We’ll publish the good submissions.

35 replies »

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  2. You will also find common traits among super-utilizers (which tend to be high-cost) that include multiple chronic conditions, mental illness, often substance abuse, and various social factors (like unstable housing). However, I agree with Vik’s general point that general preventive doesn’t do much here. Indeed, it may not do much for the run-of-the-mill patients either. Some prevention has good ROI (immunizations and smoking cessation), while others will never pay for themselves. It may be justified as leading to better care in general (for some preventive items), but don’t look for money back. Indeed, in some cases, too much “prevention” can backfire.

    I would welcome it if Vik could offer a fresh rundown on which prevention/wellness items actually have a credible ROI.

  3. I know I’m a late comer to this post, and maybe there is more information out there for people like me. It’s seems to go alone with the economic incentives argument. I’m a 26 year old on an individual policy that would be considered “substandard” according to the ACA. I reasoned that my coverage would be cancelled, and I would have to pay twice as much soon. However, I called my insurance provider yesterday, and I was told they were not kicking me off or canceling my coverage. “Are you saying if I file a claim in January, it would be just like filing a claim today? Are you saying, you’ll be withdrawing the same premiums from my account as I pay now?”

    “Yes. Nothing will change.”

    “But, my coverage isn’t in accordance with the ACA, is it?”

    “No, but you can keep it.”

    “But, I would be breaking the law, wouldn’t I?”

    “Well, you would have to pay a $95 fine from your 2014 tax returns, but that’s all.”

    Are many insurance companies responding like this? Or, was this just a strange conversation? Basically, I was told not to worry about it for a while.

  4. Barry,
    I agree that your facts are true for many older people, but there are additional trends that should be considered: 1) Corporate layoffs are focused on older employees. Many older people are “retired” against their will, long before they qualify for social security and medicare. Their children are in college and they stay in a high cost location as they look for work. If they move to a low-cost location, they’re giving up their option of returning to work. 2) Their savings is what they have to live on for the rest of their lives. Pensions and Social Security are reduced to a pittance as inflation reduces their value. If a person in these circumstances is not offered the option of low-premium catastrophic insurance, he is forced to eat into his savings at the very time he should be contributing to it. This exposes him to the very real risk of outliving his savings, thereby becoming a burden to his children or society.

  5. Medicare part D is $30/month for him, as well.

    My point is: I can manage preventative care on my own. I take no prescription drugs. If I have a minor accident I will pay out-of-pocket, but I’ve never had one. I badly want to buy catastrophic insurance in the case of a major accident, and I hope when the dust settles on the ACA squabbles that there will be a reasonable plan available to me. I can’t have $450/month eating up my savings for the next 6 years. My savings is what I have to live on for the rest of my life as inflation eats up the value of my pension.

  6. Bill,
    Check your facts. Medicare part B costs my husband $106 a month. If I could qualify for Medicare I’d be a very happy person indeed. I know what a stay in a hospital costs, that’s exactly why I want to purchase catastrophic insurance. Health care costs are so high because only high-cost cadillac plans are available . Even before the ACA there were no catastrophic plans available to older people, and that’s what needs to change. The system is outrageously expensive because everybody is being forced into high-end plans with coverage they will never use.

  7. Most consumers are out of touch with how much health care really costs these days. Lisa is complaining about $450 per month premium, probably not realizing that even a two or three day stay in the hospital will wipe out a full year’s premium. And as you get older, the likelihood of needing to be hospitalized and how long you’lll be in there both go up considerably. A healthy person age 65 would look at $450 per month premium under Medicare Advantage as a great deal!

  8. As I understand it, you can still sign up for a policy outside the exchanges. No subsidies though.

  9. One element not noted in this thread is the new age banding requirements under ACA exchange pricing. Community rating allows age banding with no greater variance than 3:1. Variances were much higher under prior underwriting practices. The result is younger people will pay higher amounts for insurance which in turn creates an additional disincentive to purchase coverage. Until the penalty reaches the greater of 2% of AGI or $695, it won’t really grab the young and even then, a $3500 premium on a high deductible plan may not be worth the hassle. This also assumes i pay taxes so that the penalty is assesssed. Since half of the uninsured are under 30 years old, the risk to public pools without younger populations is very real.

    Disaster may not be as imminent as people think. Reinsurance and stop-loss pools are baked into ACA employer fees These will back-stop public exchange plans and are likely to help insurers defray the true cost of their losses. This will likely lead to lower than expected increases in first and second year renewals — prompting many exchange managers to declare victory. About the time that the reinsurance pools run out of money, ACA architects will be declaring victory and pointing to the low overall cost increases. Hillary takes the White House and 2017 becomes a bit of a sh@$t show as subsidies backstopping plans run dry and non profit insurer reserves get run down trying to subsidize renewals that HHS and Insurance Commisioners consider acceptable ( already pronounced as any renewal over 10%)

    My prediction is private plans withdraw or offer significantly pared down, narrow network, medically managed plans and consumers beg the exchange managers for a public option with more open access to compete with private plans. Once we introduce a public option in the form of expanded Medicaid or Medicare pre-65, the end is near. Or it is a beginning – depending on your perspective.

    I’m not sure we have the will or means to enforce the bi-lateral contract that I believe healthcare to be. If I provide healthcare for you or consent to pay higher taxes to finance your coverage because you are uninsured, I want you to get an annual physical, manage your chronic conditions, and be a conscientious consumer for ambulatory services ( recognizing that you are a consumer when you a standing up and a patient when you are lying down).

    Not sure if this is all just an expensive, confusing and dysfunctional decade long detour until we finally arrive at a single payer. One thing is certain, once the Cadillac Tax starts hitting employers in 2018 and larger percentages of their healthcare spend are not deductible, private insurance plans will shift to defined contribution strategies, gross people up and allow them to buy coverage in private and public exchanges. Once this consumer shift begins in earnest, we may start hearing the question we have been waiting to hear from unengaged consumers who have been living in ignorance in a third party payer system:, “so how much is this procedure going to cost?” The future of private healthcare depends on whether market economics can reshape outlier pricing and opaque practices as well as eliminate low value intermediaries — or whether consumers and employers waive the white flag and beg to get on the Medicare Ark before they drown in debt.

  10. Preventive medicine will do nothing of the kind. Catastrophic illnesses that produce super spender patients are almost always things like massive traumas, complicated pre-term births, multiple organ transplants, and rare disorders that require expensive biologics. Preventive medicine (or wellness) has nothing to do with preventing any of this.

  11. Not necessarily. I was diagnosed with NF2, a very serious disease, when I was 40. Since then I’ve had brain surgery and spine surgery. The disease is in my genes (literally, it’s a defect) and not one whit of diet nor exercise would change my fate. Not to mention that catastrophic insurance also covers against accidents, like car crashes or falls.

    More importantly, however, if someone WANTS catastrophic insurance and WANTS to pay out of pocket for everything else (including preventative medicine) who are you or anyone to keep her from doing so?

  12. Bob –

    I think it’s important to remember that every age cohort has one or two categories of expenses that account for a large percentage of their budget. For young people, it’s buying and furnishing a home and starting a family. For middle age folks, it’s paying for college and trying to save for retirement. For older people, it’s healthcare and health insurance costs.

    Most people in their early 60’s have fully paid for homes and children who are grown and (hopefully) on their own. If they’re retired, they no longer have job related expenses. If they’re reasonably healthy, they can finance a middle class lifestyle on far less income than younger people with children to feed, a mortgage to pay for and job related expenses. If they’ve built some savings, they can use some of that to help pay for health insurance until they become eligible for Medicare at 65.

    Retired people also have the option of moving to one of many cities and towns where the cost of housing and local property taxes are extremely low at least by the standards of the Northeast and Mid-Atlantic regions. Younger people tied to a job don’t have that luxury. Frankly, I think some of these older folks protest too much though I do think they should have the option of buying a high deductible health plan.

  13. I wrote the original post. To legacyflyer’s comment:

    “If I have to wait until the next open enrollment period and that is 6 months away, the strategy of waiting until I am sick to sign up may not be such a good one. Nevermind getting hit by a truck”

    Agreed. The exclusion of pre-existing conditions doesn’t mean you can get an insurance policy the moment you’re hit by a truck. But it still takes the edge off going without insurance. Most of the catastrophic expenses are caused by illnesses that extend over longer periods of time. And people will feel falsely secure about going without insurance if pre-existing conditions are taken out of the equation.


  14. Good points, Barry. Megan McCardle had a post about one month ago and discussed the exact same scenario.

    The tax deduction you mentioned earlier is kind of scrawny. Say that my hypothetical couple pays the $16,000 and pays $2,000 in out of pocket costs for the year

    $18,000 exceeds 10% of their income by about $12,000. Taking a deduction for $12,000 saves them about $2400 in federal income taxes

    I rest my case. In exchange for spending $18,000, the taxpayers get a $2400 break. Peanuts.

    Maybe we should allow $12,000 as a tax credit instead!

  15. Bob –

    To take your example of a 55 or older couple paying $16,000 for health insurance, we would need to raise the subsidy qualifying threshold to $168,400 to cap their share of the premium at 9.5% of income which is the maximum for those who currently earn between 251% and 400% of the FPL. Only about 2%-3% of taxpayers earn more than $168K.

    Moreover, if the subsidy threshold were raised that high, there would be a huge incentive for employers to stop offering health insurance, increase employee pay by the amount they were previously paying for health insurance and let the employees shop for insurance in the exchanges. Assuming Congress then made the out-of-pocket cost of health insurance premiums tax deductible and lowered income tax rates enough to maintain revenue neutrality, most people would be significantly better off financially even if they had to pay FICA taxes on their increased pay. With over 150 million lives currently insured by employer provided health insurance, the potential shift to the exchanges could result in an astronomical increase in spending for subsidies. This would be a huge unintended but largely predictable consequence of what you propose.

    As for a taxpayer funded single payer system, there just isn’t anywhere near enough support to pass it through the U.S. Congress. Even if there were, we would quickly learn that there is a lot more to fixing healthcare than lower administrative costs and negotiating drug prices down to European levels. With a fixation on keeping administrative costs low, the system would be exposed to even more fraud than there is now in Medicare and Medicaid and would underinvest in computerization and data analytics. The fee for service system would encourage more volume of services. We would underpay for many services creating shortages while overpaying for others. Innovation would be adversely affected. Politics would have way too much influence on coverage and payment decisions. We would be stuck with a one size fits all mess. This is basically the analysis put forth by the liberal expert Dr. Ezekiel Emanuel.

    Only Canada and the UK use that model and both have rationing through either long wait times for certain types of care, refusal to pay for certain drugs based on QALY metrics or other approaches. The other countries in Western Europe all use insurance companies and for good reason.

  16. But if only a small number sign up, then total spending on subsidies will be lower than projected. We could potentially afford to raise the threshold,, and still spend less on subsidies than we are projected right now.

    I do not pretend for a minute that my little exercise solves the whole problem.
    The cancellations of individual coverage are a huge issue. Even if only 3 million persons are affected, they will make a lot of noise. It took a lot fewer than 3 million affluent elderly to sink the 1989 Catastrophic Care Act.

    I just think that raising the threshold is the simplest thing to do. Otherwise you will have couples over 55 making $62,001 a year looking at family policies that cost $16,000 a year on the exchanges, or more. These are about the last people we want to be uninsured.

  17. I really can see that the young uninsured are going to be reluctant to sign up, and may even face that minor tax penalties involved. As young adults, unless we have a condition, we don’t want to pay for that insurance. We want it when we get older and when we get a family. We basically want to coast through our 20’s and pay nothing, except what’s withheld from our paychecks for Medicare, no choice there! Once we develop a health problem or have an accident, then we become big fans of health insurance, we become in fact desperate for insurance at that point. The bankruptcy filings show health care to be THE cause of bankruptcy in America by a large margin. Youth will always seek to avoid being the part of the insurance pool that pays in and gets little out. Age will change that in a way few kids in their 20’s can even imagine.

    ObamaCare is the best law the insurance industry could write, their political power is nearly absolute inside the beltway. Their campaign and under the table payments to politicians and others in the system insure their powers remain in tact. All ObamaCare seeks to do is to force all working Americans into the private insurance pool, bringing more profits to the Industry. After all, the industry would LOVE to force every kid from age18-30 to kick in to their plans, and by experience, the industry knows this class of insured rarely requires payouts on the coverage.

    Even if the ObamaCare law works, and all Americans who work opt IN to the private Insurance pools, nothing at all will change as regards the excessive costs of health care. Rates will probably skyrocket once Americans are all captives of the health insurance industry. The neo-fascist corporate powers that ObamaCare involves will surely tempt the industry to rent seek on a vast scale. Hundreds of different insurance companies do not compete with each other, instead that use their power to take over government. ObamaCare amounts to corporations running health insurance. Government provides the levers of power for this Industry to capture the American public and make them forced customers. It takes a rotten system and makes it worse. So what else is new in Washington?

  18. As a 20 something entrepreneur without healthcare, I’m psyched for Obamacare. It means I will have cheaper access to healthcare then I had before and doesn’t make starting a business SUCH a huge risk.

    Now I don’t have healthcare because I can’t afford it, but the lowered prices helped by subsidies make it feasible. Also, I’m very healthy so I’m happy to subsidize those who aren’t :).

  19. Bob –

    Raising the threshold for subsidies would just result in spending more taxpayer money that we don’t have.

    It’s worth noting that individual spending for out-of-pocket healthcare as well as for premiums to pay for health insurance, dental insurance and long term care insurance are tax deductible to the extent that they exceed 10% of adjusted gross income (previously 7%). So, people who don’t qualify for health insurance subsidies will likely get at least some of their costs covered via the tax code assuming they itemize deductions.

    I also think it would be appropriate to allow people who don’t qualify for subsidies to purchase catastrophic insurance plans with much higher deductibles than the ACA currently allows. A maximum deductible of $10K per person would be a reasonable option in my opinion.

    I would also like to see insurers, for information purposes at least, break down the health insurance premium into a listing of the costs for each of the 10 essential benefits. My auto insurance premium lists the cost for liability, uninsured motorist, comprehensive damage (fire, theft, etc.) as well as collision. Let’s see a listing of the cost of maternity benefits, mental health, substance abuse, chiropractic care, etc. Maybe some of these benefits that most people think they don’t need and don’t want to pay for don’t cost as much as they think they do.

    On the bright side, the most recent CBO data shows that federal spending on Medicare in fiscal 2013 net of beneficiary premiums increased only 2.3% from 2012 which I believe is slightly less than the growth in the number of beneficiaries. Five years after the financial meltdown, maybe we’re finally learning how to bend the medical cost growth curve.

  20. Let me stake out a minority position here.

    Let’s say that the only customers in the ACA exchanges are older and/or in poor health. Let;s also say that the great majority of customers are getting subsidies.

    The premiums charged in the 2nd year of the exchanges will be quite high.

    But for everyone under the 400% threshold, that won’t matter because their insurance costs are capped as a per cent of income.

    Where is the problem?

    OK, those who are over the threshold will face very high premiums. This is solvable — raise the thresholds!

  21. If we could only extract the profit motive out of smartphones, we would all be in utopia.

  22. Maybe we need to limit smartphones to only people with ACA approved health coverage, you know, like smartphone control.

  23. The Achilles heel of the ACA is adverse selection which we are likely to experience because the penalty for not buying insurance is so low, at least in the first year. Insurers need a pool of people with an average age of 40 or so to make the numbers work. So far, most people buying insurance through the exchanges are 50 and older. If the younger people don’t enroll in sufficient numbers, we will have the feared adverse selection and premiums will increase sharply in 2015.

    A plan with a high deductible of, say, $5,000 per person before insurance kicks in would probably work satisfactorily for the upper half of the income distribution but lower income people wouldn’t be able to afford the policy’s deductible. Besides, the premium savings would not be as much as many people think because such a large percentage of healthcare costs are accounted for by a small percentage of people with extremely high medical expenses. In any given year, 5% of the people account for 50% of healthcare costs though they are generally not the same people from one year to the next.

    As for preventive care, it will help people to live longer and healthier lives but it won’t save money for the healthcare system on a lifetime cost basis. I wish liberals would stop trying to sell preventive care as a cost saver. You can do everything right in terms of diet, exercise, getting recommended checkups and screenings, etc. but still get cancer or heart disease because of your genetic makeup. Moreover, the checkups and screenings can often result in false positives that result in follow-up care that exposes patients to additional risks and could easily do more harm than good while racking up costs in the process.

  24. I think Lisa was saying that she’d rather cover her regular checkups and preventive medicine on her own, and have insurance for catastrophic coverage. And I agree she should be able to.

  25. Sure, insurance can be offered to cover pre-existing conditions, but it should remain in the province of the insurance company to set the price. Most folks have group insurance, so it is a non issue for employee provided health insurance. No one should be coerced into getting insurance if they don’t want it, and, if they want it, it is their choice what they can afford to purchase. If the penalty(tax) were increased, then it would be a penalty and not a tax, and, thus, the ACA would be unconstitutional, which it is, really. ACA is an oxymoron, in that it does not attack the costs of delivering care to patients. There were many suggestions to help achieve cost savings that cost NOTHING, but they were ignored by the architects of ACA.

  26. The majority of healthy 20 somethings faced with the choice of signing up for healthcare or keeping their smartphone will not hesitate to keep the smartphone. Unemployed or underemployed young adults don’t have enough money to support all the Corporate profiteers in healthcare, energy, food, and technology and most of their parents are tapped out thanks to the rape of the housing equity/bubble.

    The lack of young and healthy enrollees will cause prices to rise, which will cause more young and healthy to exit, and so on. In the end, you will only be left with the poor whose plans are paid for by the government, and the extremely unhealthy. Government healthcare expenditures will skyrocket.

    The future isn’t look so bright in ObamaCare-land.

  27. Most of us would rather manage our own health care decisions and rely on insurance only for the case of a major accident or serious health issue. I can handle my own checkups and colds, it’s the major health problems that destroy people financially. As an older person I accept the reality that my premiums will be higher than a 20 year old, but there needs to be more sanity in the system. A catastrophic policy with a low premium and high deductible would be ideal. I would be more than willing to buy a policy like that, but I resent having to pay $450 a month for a bronze plan that I won’t use unless I have an accident. Why aren’t catastrophic plans available to everybody?

  28. legacyflyer, you will need to get an exemption or wait until the next open enrollment period.

  29. “Assuming it is not a super emergency”

    What are the mechanisms for signing up? Suppose that I don’t buy health insurance and decide to pay the penalty. Then suppose that I find out that I need a major operation or other expensive treatment in the next month (or so).

    Can I sign up or do I need to wait until the next open enrollment period?

    If I have to wait until the next open enrollment period and that is 6 months away, the strategy or waiting until I am sick to sign up may not be such a good one. Nevermind getting hit by a truck.

  30. Only a PART of this stuff is actually “insurance” in the very real actuarial risk vetting sense. For most people, year over year, it is nothing more than expensive “pre-payment” for expected routine services (and, now, for millions more under PPACA, having to be bought with after-tax dollars). Pre-payment with a continuing boatload of exclusions, deductibles, and co-pays.

    Y’see, we don’t want actual health CARE, we want myriad inscrutable health care “PLANS,” with faceless intermediaries continuing to expensively interpose themselves between us and actual care. We apparently want vacuous “choice,” not “care.” We want our “choices” Supersized — and consisting of large sticks of care delivery cotton candy.

    We’re completely idiotic. The principal beneficiary of AHIPcare, is and will continue to be, well, AHIP. Really starting to look like Obama’s gettin ‘seriously played here. Beyond his execrable HealthCare.gov CusterFluck.

  31. I’ve never understood why they think this is going to work.

    A token financial penalty is supposed to stop and make us think?