Topics: Barack Obama

Obamacare’s design assumes insurance is a bad deal for younger population

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Whether or not President Obama’s health care law succeeds depends in large part on a simple question of economic decision-making: Will a critical mass of younger and healthier Americans decide to purchase insurance next year, or opt to pay the penalty for going uninsured instead?

If too many younger Americans decide to remain uninsured, then insurers won’t be able to generate enough revenue to offset the cost of offering coverage to older and sicker Americans, particularly those with pre-existing conditions. That will force insurers to hike premiums, which in turn will prompt more younger Americans to leave the market, which will trigger further premium hikes leading to exits by additional younger Americans, and so on.

This process, known as the “death spiral,” is a bigger threat to the future of Obamacare then any legislative strategy Sens. Mike Lee or Ted Cruz can dream up.

Last week, I reported on a study by National Center for Public Policy Research’s David Hogberg, which attempted to quantify the economic decision facing younger Americans. According to his analysis, even taking into account subsidies, three million 18 to 34 year-olds would save at least $1,000 annually by paying a penalty and going without insurance once the law kicks in, while 3.7 million would save at least $500. If his calculations are accurate, that doesn’t bode well for the law.

My post on the study stirred a debate on Twitter, and eventually, this item by liberal Washington Post blogger Jonathan Bernstein, titled, “Obamacare-bashers forget that insurance has benefits.”

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.

There’s a reason I use the term “in aggregate.” It’s true that while, as a population, younger Americans are likely to pay more in premiums than they rack up in medical costs, any given American who is young and healthy is an accident or diagnosis away from significant medical bills.

But there are two important things to keep in mind about this reality. First, even if everybody were to agree that just to be on the safe side, it’s better for younger Americans to have insurance than to go without it, that conclusion is irrelevant to the empirical economic question of whether a critical mass of young Americans will determine that insurance is worth the costs for them. And the empirical question will be the important one next year.

Second, if liberals think it’s so important for young Americans to purchase insurance in case of something unexpected, then they shouldn’t have supported Obamacare, which makes it a lot harder and more expensive for young Americans to purchase the type of plans that would make the most sense for them — catastrophic plans that, while they don’t cover routine medical expenses, would have low monthly premiums and would protect them from financial ruin in the event of an accident or serious illness.

As the Hill reported, in Colorado, “A 27-year-old, non-smoker would pay $135 per month next year for the state’s cheapest catastrophic plan,” even though the “lowest price for a 30-year-old, non-smoker in Colorado is currently about $56 per month.” After 30, a younger American won’t even have the option of purchasing a catastrophic plan through the exchange.

Obamacare isn’t about making it easier for younger Americans to purchase the type of coverage that would make sense for them, however. It’s about using them as cash cows to finance others.

UPDATE: Hogberg responds to criticism of his study here.

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