Obamacare and the Young Invincibles


credit: Fonzie's cousin / Foter.com / CC BY-NC-SA

At the end of May, California's regulators announced that premiums in the state's insurance exchange would be lower than expected. But it quickly turned out that individual market premiums would actually be higher, and coverage would be more robust, than in the current individual market.

Since then, there's been a lot of back and forth regarding Obamacare and health premium "rate shock." But at this point, there's little dispute that Obamacare will cause individual market health insurance premiums to rise for younger, healthier individuals, relative to the price of individual market insurance that is sold today. Indeed, some folks are arguing that that's the whole point.

Josh Barro, in his new digs at Business Insider, makes this explicit. "What's happening in California," he says, "is exactly what's supposed to happen: If you're young, healthy, and affluent, your insurance is getting more expensive." And conversely, he says, insurance will become cheaper for the "old, sick, and poor."

The young and healthy are the key issue here. But it's not only the law's impact on the more affluent members of that group that matters. Indeed, in important ways the law's functionality turns on decisions made by relatively less well-off young people. The Economist's Will Wilkinson lays out the choice for a hypothetical uninsured woman in her mid 20s. 

Nicole is a healthy 25-year-old freelance illustrator making $30,000 a year. She is presently uninsured due to cost. How can she be expected to behave under Obamacare? Taking into account Nicole's subsidy, she'll be able to buy the least expensive "Bronze" plan on an exchange for $1,919, according the Kaiser Family Foundation's subsidy calculator

Look, that's not great. After going uninsured for a spell, about a year ago I signed up for a catastrophic plan (found through the Freelancer's Union) that cost me about $100 a month. I was…older than 25. Anyway, it's not always easy to get by on $30,000 in places with high rents, so one can imagine why Nicole might opt to go uninsured. But what about the non-compliance penalty under the individual mandate? Won't it coax her into enrollment?

Over the next two years, as the penalty scales up, it's pretty clear that Nicole would be smartest to pay the initially meagre fine and not sign up for insurance unless she comes down with something expensive. (No exclusions for pre-existing conditions!) But what about in 2016, when the non-compliance penalty is finally fully unfurled? That will be the greater of $695 per uninsured person, or 2.5% of household income over the filing threshold, which is not yet set, but this year was about $10,000 for individuals. So in Nicole's case, that's 2.5% of $20,000, which is only $500. So she's on the hook for $695. For Nicole in 2016, then, the difference between going uninsured and getting a Bronze plan is $1,224, which is just a touch more than I recently paid for a cheap catastrophic plan. If America's Nicoles are going without insurance due to cost, they're not going to be induced to get it under Obamacare. If the programme is going to bring down the cost of an average policy by goading the likes of Nicole into the risk pool, it needs a bigger carrot, stick or both.

I don't know what part of America's young, healthy and uninsured will find itself in a situation akin to Nicole's, but it would seem there's some reason to worry that the programme will not function as promised—especially when most of those eligible for subsidies don't know it, and surveys show that nearly "two-thirds of Americans who currently lack health insurance don't know yet if they will purchase that coverage by the Jan. 1 deadline set by the ACA". In any case, it is not at all clear that Obamacare's subsidies and mandate penalties are sufficient in size to prevent a situation in which the rules of the law "simply shift costs around", or to prevent a cost spiral that would drive the young and healthy out of the market…

How the nation's Nicoles—a group often referred to as young invincibles—decide to respond to these choices will end up having a big impact on how Obamacare functions. As The Examiner's Philip Klein wrote yesterday, "The success of Obamacare hinges completely on the young and healthy. The reason is that the dream of a system in which sicker individuals can obtain coverage at affordable rates is predicated on the idea that the government can corral a lot more young and healthy individuals into the insurance market to offset costs." That may be somewhat difficult, however, if the law's point is to raise costs for those same individuals it needs to cajole into joining the system.