Bohanon: Obamacare’s Youth Market: A Policy Misfit?

December 9, 2013

by Cecil Bohanon, Ph.D.

Central to the success of the Affordable Care Act (ACA), aka Obamacare, are 20- to 30-year-olds buying government-approved health-insurance policies. The administration, its friends and allies are running a full-court public-relations drive touting the advantages of health insurance to these young folks. Advertising may facilitate some to sign up, but economists generally believe that incentives are more important. How, then, does the ACA change economic incentives so that the young and uninsured will buy health insurance?

Consider the health-insurance market before the ACA was in place. Charlie is a 27-year-old single male who freelances in Anytown, Ind. He earns $45,000 a year and is not currently buying health insurance. Economists surmise his choice not to buy is the by-product of a cost-benefit calculation.

The costs of health insurance are the premiums that Charlie has to pay. The benefits of buying health insurance are twofold. If Charlie has a catastrophic medical event — such as contracting a rare form of cancer — most of his health bills will be paid for by his insurance carrier. Second, by purchasing health insurance before such an awful disease develops, he has continued access to coverage. In a pre-ACA, world there is a strong incentive for a healthy young person to buy insurance to insure against the risk of becoming uninsurable. But apparently Charlie finds the costs of being insured exceed its benefits.

So how does the ACA impact his calculation? According to the Kaiser Foundation Health Care website,* a bronze-level ACA plan for Charlie will cost him $2,542 a year. This is almost certainly more than what Charlie would pay for equivalent coverage pre-ACA. The ACA mandates the young to overpay for health insurance so that the older folks can be allowed to underpay. The premium in the above-quoted figure reflects this intention. If Charlie doesn’t want health insurance at lower pre-ACA premiums, why would he want it at higher post-ACA premiums? Intergenerational cost-shifting, a central component of the ACA, gives Charlie less of an incentive to buy insurance.

There is a second reason why the structure of the ACA actually reduces Charlie’s incentive to buy: He can sign up for health insurance after the fact. The ACA forbids insurance companies from discriminating based on pre-existing conditions.

The designers of the ACA knew these two facts, and incorporated a tax for not buying health insurance into the ACA, a tax that clearly generates an incentive to buy insurance. But is it enough? For Charlie, the tax for not buying insurance will be $350 in 2014, rise to $700 in 2015 and then to $875 in 2016. The ACA premium is 5.6 percent of his income, the tax for not buying is .8 — 1.9 percent of his income. Charlie saves $1,667-$2,192 or around 3.7 percent (4.8 percent of his gross income) if he does not buy health insurance under the ACA. Moreover, he can continue to accrue these savings and then sign up for insurance if and when his health deteriorates.

One is hard-pressed to give a plausible economic reason why Charlie would change his mind and buy insurance under the ACA. Granted, if Charlie’s income is a lot more, say six figures, the tax he owes for not buying insurance will be greater, making it more likely that he buys. If his income is a lot less, say $20,000, available government subsidies make him more likely to opt for an insurance purchase. But we suspect the richer Charlies are already buying insurance and the poorer Charlies are a net fiscal drain to the ACA.

So this seems clear: The ACA reduces the incentive to buy insurance for many of the very folks who are needed to make it work.

Cecil Bohanon, Ph.D., an adjunct scholar with the Indiana Policy Review Foundation, is a professor of economics at Ball State University.

* http://kff.org/interactive/subsidy-calculator/

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