The War On Bros: Exchange Subsidies Won't Protect Young People From Obamacare's Higher Insurance Premiums
The controversy continues over the impact of Obamacare on rising health insurance premiums. Today, the President visits California to tout his health law in that state. As I noted last week and on Monday, California’s new subsidized insurance exchange announced prices that were nearly double those commonly found in the existing individual insurance market. In response, progressive bloggers are arguing that “rate shock” for young people is overstated, because it mainly applies to healthy people, and to those who won’t benefit from Obamacare’s subsidies. So I went back and rebuilt my quantitative analysis from the ground up, in order to address both of these points. What I found out might surprise you: The majority of participants in Obamacare’s exchanges will still pay more.
Ezra Klein of the Washington Post has offered the most substantive formulation of the progressive critique. He put it this way: “To judge [rate shock] from a baseline…that asks only what the wealthy and healthy will pay and ignores the benefits to the poor, the sick, the old, and women—well, that is a bit shocking.”
But what Ezra and his compatriots are neglecting is something that Ross Douthat has figured out: that the issue here isn’t equity, it’s economic functionality. Obamacare’s intricate system of mandates and subsidies only works if young, healthy, cheap-to-insure people participate in the market. “You don’t have to care much about bros and their problems,” Ross wrote in the New York Times, “to care about what they’re being asked to pay for health insurance. That will be a better clue than most to health care reform’s ultimate fate,” because if “bros” drop out, and don’t pay for excessively costly ACA insurance, insurance will get far more costly for everyone else.
That, indeed, is why I focused on them in the first place. I didn’t focus on them because I was indifferent to how Obamacare benefits the uninsured sick. I focused on them because if they don’t participate in the program, Obamacare won’t work.
Rate shock, take two
Actually I have Ezra to thank for a key component of my new analysis. I had not been aware of a feature offered by healthcare.gov, which offers an eHealthInsurance.com – like portal for shopping for insurance plans. Healthcare.gov lists along with each plan the percentage of people who were charged a different rate than the listed one, and the percentage of people who were rejected after applying.
So I rebuilt my analysis using data from healthcare.gov, instead of eHealth. As before, I entered into healthcare.gov’s portal the most populous zip code in a particular California insurance rating region; said that I wanted the policy to start on June 15, 2013, and that my birthday was June 15, 1988. I then sorted the plans by premiums: what the site calls “estimated monthly base rate, lowest to highest.”
That’s where I started to do things differently. Instead of taking an average of the five least-costly plans, I looked only at the single least expensive one. I noted the percentage of people who had been surcharged, and the percentage of people who had been denied coverage. I then assumed that the surcharged population was charged an average of 75 percent more than the quoted rate, and that the rejected population found insurance elsewhere at three times the quoted rate. I then combined these numbers with the percentage of people who did get the quoted rate, to create a weighted average.
I then compared this adjusted, weighted-average price of the least costly pre-Obamacare plan to the least costly Bronze plan offered under Covered California, that state’s ACA exchange, to assess the difference.
I found two things of interest. The first is that plans on healthcare.gov are significantly cheaper than those on eHealth, likely because the government doesn’t charge carriers commissions to list their products. In California’s 19 insurance rating regions, the median price of eHealth’s lowest-cost plan—unadjusted for surcharges or denials—was $84 per month. On healthcare.gov, the median price of the lowest-cost plan was $74 per month.
The second thing I found is that Ezra’s point about surcharges and denials mattered in some districts, but not most. The median rate of surcharging was 12 percent, and the median denial rate was 14 percent. In a few areas, these rates were higher.
You can see where it mattered on the map I’ve posted on the right. Even in those districts where surcharges and denials had an impact, average rates still went up dramatically. Most significantly, the new analysis had an impact in Los Angeles County, where rate shock went from 103 percent in my previous comparison of eHealth to the ACA Bronze plan for 25-year-olds, down to 44 percent in my new analysis. That’s still a significant amount of rate shock, but significantly lower than what I had calculated before. In the San Francisco and San Diego areas, however, rates still doubled or nearly so.
In other words, the overall effect of Obamacare on premiums was still substantial, (a) because most districts weren’t significantly affected by the new analysis, and (b) because the cheaper healthcare.gov quotes gave a more flattering comparison. In my old analysis, the ACA Bronze plan was 128 percent costlier for 25-year-olds than pre-ACA eHealth plans. In my new analysis, the ACA Bronze plan was 92 percent costlier, at $183 per month, than the pre-ACA healthcare.gov plans, adjusted for pre-existing conditions, at $101 per month.
Most bros don’t benefit from subsidies
In order to assess the impact of subsidies on this population, I conducted a relatively standard analysis using childless, unmarried young men. (You have to get specific on that point because the federal poverty level, which is used to calculate Obamacare’s subsidies, varies depending on the number of people in your household.)
What I found was striking: in the healthy population of 25-year-old non-smoking males—the focus of my original study—more than 90 percent of the subsidy-eligible population would face higher premium costs under Obamacare, even when you take the subsidies into account. As you will see in the chart below, the point at which Obamacare starts to cost more is at 162 percent of the federal poverty level, or $18,558 in 2013 numbers. In other words, if you’re a healthy, non-smoking 25-year-old man, and you make more than $18,558, your health insurance will cost more under Obamacare—possibly a lot more.
(There is a detail to understand about this analysis. I used a second weighted average to come up with the average cost of insurance state-wide, taking into account Covered California’s estimates of the subsidy-eligible population in each rating region; I did this to ensure that the impact of large districts like Los Angeles would not be understated. Hence, the weighted-average unadjusted premium was $72, not $74; the adjusted premium was $99, not $101; and the Bronze plan was $170, not $183.)
You can then see the second break-even point, which is where the adjusted pre-ACA premium hits the post-subsidy, post-ACA premium. That is at 183 percent of FPL, or $21,012. But this adjusted rate is less useful for this analysis, because it’s not a real premium from a real plan. If you’re uninsured and you’re one of the rare 25-year-olds with cancer, Obamacare will save you a bunch of money. If you have a penchant for cigars, like Ben Domenech, it probably won’t make much of a difference. But it does give you a sense of how much less the subsidy protects you than you might think.
Remember that in California, everyone under 138 percent of FPL will be enrolled into Medicaid, not the exchange. (Writers who suggest otherwise are misleading you.) This is a critical point. If only sick people and a few poor people have an incentive to enroll in the exchange, and the healthy don’t bother, the exchanges could undergo an adverse selection death spiral, like the one we saw in Washington state in the 1990s.
What would be the consequences of such a death spiral? Insurance for the sick and the poor would cost a lot more; that extra cost would be borne by higher taxpayer subsidies. In addition, a lot of normal middle-class people will be priced out of the individual market. In other words: if you want insurance on Obamacare’s exchanges to be affordable for the poor and the sick, it needs also to be a reasonable deal for the healthy and the middle-class.
The fate of the individual market will affect a lot of Americans. According to the Congressional Budget Office’s most recent estimates, in 2017 there will be approximately 77 million people interacting with the individual market for health insurance. 24 million, CBO thinks, will enroll in the exchanges; 22 million will purchase individual insurance for themselves by some other means; and 31 million will remain uninsured. For all of these people, getting the exchanges right is of critical importance.
Not every state is like California
California, contrary to its reputation as a deep-blue state, has one of the best—if not the best—individual insurance markets in the nation. In nearly every corner of the state, Californians who want to buy coverage for themselves can do so, today, at a price that is about the same as my monthly iPhone contract.
Some states, like New York, are on the other extreme; they already have Obamacare-like regulations that have wrecked their individual insurance markets. Indeed, because Obamacare adds an individual mandate to New York, the Empire State’s individual market is likely to improve relative to where it is today. Also, because insurance in New York is so much more expensive, Obamacare’s subsidies will benefit a wider range of people than they will in copacetic California.
In January, I wrote at length about a rigorous study published in Contingencies, the official magazine of the American Academy of Actuaries. The authors of that study found that “almost 80 percent of those aged 21 to 29 with incomes greater than 138 percent of FPL [in the individual market] can expect to pay more out of pocket for coverage than they pay today.” Their estimate was quite conservative, because it focused mainly on the effect of community rating, as opposed to the whole panoply of Obamacare insurance mandates, thereby understating the effect of rate shock.
Unlike the Contingencies paper, my analysis focuses on young men, not on young women, nor on older people. I explained the reasons why up above: if these cheapest-to-insure “young invincibles” aren’t willing to pay uneconomically high rates for their health insurance, everyone else will have to pay more.
A few words about motives
With the notable exception of Ezra Klein, most of the prominent progressives who wrote about my findings veered into ad hominem meltdown. (Paul Krugman denounced me not once, not twice, but three times at his New York Times blog, after his initial hyping of the Covered California rates was found wanting.)
Given the apparent fascination with my motives, allow me to declare them.
I support universal coverage. The richest country in the world should be able to protect every American from bankruptcy due to injury or illness. I believe that there are ways to achieve universal coverage that would be a vast improvement on the current U.S. health-care system, in terms of cost, affordability, choice, competition, and government intrusion. Such a result would be a victory for progressives and conservatives alike.
The irony is that I have more of a rooting interest in private insurance exchanges than the hard left does. The hard left hopes that if the exchanges fail, voters will finally give them an opportunity to install true, government-run single-payer health care. (Not bloody likely.)
I have proposed, along with Doug Holtz-Eakin, that conservatives can make important changes to the exchanges and then gradually migrate the Medicare, Medicaid, and employer-sponsored populations onto them. Done right, such an approach would yield a superior outcome to repealing Obamacare.
My lefty friends know this—Krugman and many others wrote about it at the time—so they shouldn’t be surprised that I continue to be a critic of the way in which Obamacare’s exchanges were designed, and a presenter of constructive ways to fix them.
For example, in the conclusion to my post from Monday, I proposed repealing Obamacare’s 3:1 age-based community rating band, and relaxing the law’s actuarial value requirements. Instead, you could install community rating based on your birth year, so that you pay similar rates to other people of your age, regardless of prior health status.
These changes would do much to tone down the “war on bros,” and would give young and/or healthy people a better economic incentive to enroll onto the exchanges.
In the end, of course, progressives are free to ignore my advice. But if they do, and rate shock is the result, they won’t have to answer to me—they’ll have to answer to the electorate.
This piece originally appeared in Forbes
This piece originally appeared in Forbes