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Obamacare: Destined to Flop? Part II

Tuesday, September 17, 2013

In Part I of this four-part series, AEI’s Joseph Antos looked at how the health care exchanges will operate. In this installment, he looks at the issue of affordability.

The public relations battle over the cost of health insurance in the exchanges is in full roar. State insurance commissioners and health insurance exchange boards, eager to prove to taxpayers that they are doing their jobs, have announced that they will save consumers plenty of money — or at least not cost them too much more. Critics of the Affordable Care Act (ACA) dig into the rate filings and find unconscionable increases in premiums.

Neither side in this debate over premiums can address affordability from the only perspective that matters: the consumer’s. Premiums might be lower than expected by experts, but are they lower than expected by the people who are supposed to buy the insurance? Even if premiums are affordable as determined by consumers and not by some arbitrary government standard, is the insurance attractive enough to purchase?

Even if premiums are affordable as determined by consumers and not by some arbitrary government standard, is the insurance attractive enough to purchase?

The claims and counterclaims over exchange premiums in New York State illustrate the problem. On July 17, 2013, New York Governor Andrew Cuomo announced that premiums offered on the exchange in 2014 would be 53 percent lower than premiums currently available on the individual market. Elisabeth Benjamin, an official with the advocacy group Community Service Society of New York, said, “Health insurance coverage has suddenly become affordable in New York.”

Don’t be so sure. New York has the most heavily regulated insurance market in the country. In 1993, the state adopted guaranteed issue (which prevents insurers from turning down anyone due to preexisting conditions) and pure community rating (which requires that everyone purchasing insurance on the open market pay exactly the same premium, whether they are young or old, healthy or sick). Mandated benefits were expanded, and cost-reducing practices were limited.

As a consequence, premiums soared, insurers dropped out of the individual market, and people who had been able to buy their own insurance could no longer afford the cost. According to one estimate, 96 percent of the individual health insurance market vanished within five years. By 2009, the average cost of individual coverage in New York was $6,630 — nearly $1,500 higher than in neighboring Massachusetts, and more than $3,600 greater than the national average.

Elisabeth Benjamin, an official in a New York advocacy group, said, ‘Health insurance coverage has suddenly become affordable in New York.’ Don’t be so sure.

With that record, even a partial insurance reform would be able to reduce premiums. But that does not guarantee affordable coverage. An individual buying insurance next year in New York can expect to pay from $3,800–$8,300 per year for a silver (mid-level) plan covering about 70 percent of the cost of health care for an average person.

Low-income persons will receive a subsidy which substantially reduces their cost of coverage. State regulators said that an individual with an annual income of $17,000 will pay about $55 a month — or $660 a year — for silver coverage. A person with a $20,000 income will pay $85 a month, or $1,020 for the year.

The advocates and online premium calculators that back them up overlook an important fact: a more expensive plan will cost you more, whether or not you receive an exchange subsidy. With a fixed subsidy that does not change depending on the cost of the health plan, consumers become cost-conscious comparison shoppers. Health plans trying to attract customers have an incentive to offer better coverage at lower cost, and that promotes efficiency throughout the health system. This sound idea invariably draws hostile fire whenever Republicans (who call it premium support) propose it for Medicare.

For most people with low incomes, higher-cost plans that offer better access will be out of reach financially despite the exchange subsidy.

Here’s how it works under Obamacare. The exchange subsidy is tied to the silver plan offering the second-lowest premium. In New York State, that plan is New York Fidelis, with a monthly premium of $349.14. (This example should not be taken as a criticism or endorsement of any specific health plan).

A consumer — let’s call him Bill Johnson — has an income of $17,000 and will pay $55 a month for that plan, with the remaining $294.14 paid by the exchange subsidy. But that plan is likely to have a restricted network of doctors and hospitals that are willing to give New York Fidelis bigger discounts for the prospect of seeing more patients. If the network does not include his personal physician, Mr. Johnson might prefer a more expensive plan.

American Progressive Life and Health Insurance Company offers a silver plan whose premium falls squarely in the middle of the pack: $466.81 a month. If Mr. Johnson chooses that plan, he will pay the subsidized premium of $55 plus the difference between the two unsubsidized premiums. That comes to $172.67 a month, or $2,072 for the year — not the $660 promised by state officials. For most people with low incomes, higher-cost plans that offer better access will be out of reach financially despite the exchange subsidy.

Real rate shock will set in when prospective purchasers find out that even with a subsidy, exchange plans will not be free.

The decision to buy insurance, and which plan to choose, can only be made by the consumer. An individual with higher health needs is more likely to purchase insurance than someone who is young and healthy. A more expensive plan that meets the consumer’s needs is a better buy than a cheap plan that does not. Simply knowing the price is not enough information to make a good decision.

Similarly, knowing how much the price increases from this year to next — the so-called “rate shock” — stirs the passions of commentators, but it is overrated as a factor influencing insurance purchases. Most people who will consider buying coverage on the exchanges are uninsured, and the price they will pay is more important than the price they might have paid if they had previously purchased insurance. Real rate shock will set in when prospective purchasers find out that even with a subsidy, exchange plans will not be free.

Assessing the Penalties

Will the uninsured, particularly those who are young and healthy, decide that buying health insurance makes sense for them? Timothy Jost, a leading advocate for Obamacare, says adverse selection — the disproportionate enrollment of high-cost, high-risk individuals — is the greatest threat facing the exchanges. Adverse selection drives up the cost of benefits, which increases the premiums that must be charged and discourages enrollment not only by the young and healthy but also anyone who is not eligible for an exchange subsidy and must pay the full premium.

Even with an exchange subsidy, health insurance will not be worth the money for many young people. They are likely to discount the possibility of a serious accident or an unexpected diagnosis, and for all but an unfortunate few, the risk is worth taking.

That is why the law mandates everyone to buy insurance or face a penalty. But the penalty is far less than the cost of insurance, even with the subsidy. Next year, scofflaws are liable for a $95 penalty or 1 percent of their income. For Mr. Johnson, who makes $17,000, the penalty is $170, or just over three months of subsidized insurance premiums for the low-cost plan. The $490 he would save by skipping coverage for a year will cover a month’s car payment with change left over.

Buying health insurance on a wait-and-see basis will be a good strategy for many people. Insurers cannot turn you down if you skip a year, and your premiums can’t be increased either. The exchange subsidy is tied to your income, not whether you followed the rules. And there is a good chance that the Internal Revenue Service will not be able to collect the penalty, since it is limited to taking the money out of your tax refund. Half of American households do not even file federal income tax returns and are not subject to the penalty, and the rest can adjust their withholding to avoid the penalty.

Even with an exchange subsidy, health insurance will not be worth the money for many young people. They are likely to discount the possibility of a serious accident or an unexpected diagnosis, and for all but an unfortunate few, the risk is worth taking. Those who decide to check their insurance options are likely to be discouraged by the cumbersome and intrusive application process required by the exchanges.

Purchasing health insurance through the exchanges will be complicated and the plans will be expensive, even with sizeable federal subsidies. That will disappoint many of the uninsured, but they are not the only people who will find that the Affordable Care Act does not live up to their expectations.

The individual mandate will cause some people to buy exchange coverage who otherwise would not have done so, but not because of the penalty. The mandate is an attempt to establish a new social norm that remaining uninsured is unacceptable. The massive media campaign that is soon to be unleashed will try to break through the defenses of reluctant consumers even without the help of the National Football League. Backing up the message is a wad of cash, courtesy of the taxpayer.

USA Today surveyed the 19 states running their own insurance exchanges and reported that “at least 8.5 million [people]” were expected to use the exchanges by the end of March. That exceeds the administration’s target of 7 million people, but the state exchange boards have strong incentives to exaggerate their own performance.

Health and Human Services Secretary Kathleen Sebelius offered a more realistic prediction, saying, “I'm optimistic we'll have millions of people sign up.” Whatever the final count is, the administration will declare the ACA a success.

As we have seen, purchasing health insurance through the exchanges will be complicated and the plans will be expensive, even with sizable federal subsidies. That will disappoint many of the uninsured, who are counting on health reform to give them easier access to affordable insurance. But they are not the only people who will find that the Affordable Care Act does not live up to their expectations. In the next installment of this series, we will look at how Obamacare will affect those who already have insurance.

Joseph Antos is Wilson H. Taylor Scholar in Health Care and Retirement Policy at the American Enterprise Institute.

FURTHER READING: Antos also writes "No, Obamacare Really Doesn’t Add Up" and sat down with AEI blogger James Pethokoukis in "Pethokoukis Podcast: A Chat About Medicare Reform With Joe Antos." A poll by NBC News/Wall Street Journal shows that Americans are still "Lukewarm On Obamacare," while Michael M. Rosen looks back at the Supreme Court’s ACA ruling in "The New Textualists’ Finest Hour?" Stan Veuger contributes “Give Up the Defund Obamacare Push” and Scott Gotlieb explains “How Obamacare Will Harm Cancer Patients.

Image by Dianna Ingram / Bergman Group

 

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