June 23, 2017
That’s the question millions are asking as the Senate plows ahead with its plan to repeal and replace Obamacare. Okay, I don’t think anyone is actually asking this question, but they should be if they are trying to take the Senate plan at face value.
As some folks may remember, we had a great wave of hysteria around the importance of the “young invincibles” for Obamacare. These were young healthy people who didn’t think they would ever need insurance. The concern was that they would not sign up for the plan and instead pay the penalties, depriving the system of their premiums. Because the ratio of insurance premiums for older to younger people was set slightly to the disadvantage of the young (compared with an actuarially fair rate), the loss of these young healthy people would worsen the program’s finances.
In fact, there was far less to the young invincibles story than was claimed in the hype. Kaiser did a simple analysis showing that even an extreme skewing of enrollment towards the old made little difference to the finances of the program. The basic point is that because the premiums of young people are low, it doesn’t make much difference whether they sign up or not.
This is not the case with older pre-Medicare age people with the Senate plan. The Senate plan gets rid of the compression of rates between age groups under Obamacare. According to the CBO analysis of the House bill, an insurance plan that covered the conditions required under the Affordable Care Act would cost a 64-year-old $21,000 (Table 5).
Just as is the case with young people, there are a large number of older people with few or no health care expenses. A recent study by the Centers for Medicare and Medicaid Services found that the average cost of the one-third of beneficiaries with 0 or 1 chronic condition was just over $2,000. That was in 2010, so let’s raise this by 50 percent to $3,000 adjusting for the rise in health care costs. On the other hand, this is for a population that is over age 65 or disabled, so this $3,000 figure would certainly be too high an average cost for the healthiest third of people in their early sixties.
But even taking this $3,000 figure, there certainly would be many people in their early sixties who would decide it was better to pay $3,000 out of their own pocket then send $21,000 a year to an insurance company. Of course, even after handing the insurance company $21,000, the plan would still have large deductibles and copays, so a healthy person would almost certainly be far better off without the insurance.
But suppose the person gets a serious illness? No problem. Under the Senate plan, insurance companies are not allowed to discriminate based on pre-existing conditions, just as is the case with Obamacare. This means that our old invincibles will face little risk if they go without insurance and pay their bills out of pocket. If their health deteriorates they can always buy into the system.
Of course, this is not a sustainable system. With the healthy opting not to buy insurance, the pool of insurees will be less healthy, meaning their costs will be greater than for the age-group as a whole. The average premium may then have to rise to $30,000 or even higher to cover the costs. This is the classic death spiral since even fewer people will then buy insurance, which will mean that those who remain in the pool will be even less healthy.
This scenario is a likely outcome given the system described in the Senate bill. It ain’t pretty, but as Donald Trump said, health care is complicated.
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