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How Risky Is It to Be Uninsured?

Wednesday, July 23, 2014

Our hodgepodge of efforts to help the uninsured have substantially reduced the incentive to buy coverage.

In a recent survey, 48 percent of uninsured respondents did not plan on looking for information on the health insurance exchanges set up under the Affordable Care Act, or had not heard about them. Are uninsured people ignorant? Or might the poll reflect a well-reasoned choice? What are the actual risks associated with being uninsured?

Lack of coverage may increase the odds of early death and slightly reduce everyday health status. Yet, at most, one year of being uninsured yields a loss of life expectancy of 16 healthy days of life (roughly equivalent to experiencing the foot problems of a typical 75-year-old).

Progressives claim that Obamacare will save lives because being uninsured purportedly increases mortality risk1 from 25 percent to 40 percent. But such statistics are based on cherry-picked evidence. Two recent studies show that the impact of being uninsured on mortality risk is not statistically significant, and there is a great deal of uncertainty in estimates tying being uninsured to higher mortality risk,  as shown in the figure below.

Conover_risk_1

The methodological limitations of these four observational studies have been detailed elsewhere. One systematic review of such studies concluded: “The Institute of Medicine’s estimate that lack of insurance leads to 18,000 excess deaths each year is almost certainly incorrect. It is not possible to draw firm causal inferences from the results of observational analyses, but there is little evidence to suggest that extending insurance coverage to all adults would have a large effect on the number of deaths in the United States.”

Evidence that being uninsured greatly increases mortality risk is spotty, and certainly not proven beyond a reasonable doubt. For purposes of discussion, I’ve averaged the four point estimates shown to obtain a relative mortality risk of 1.22.

Such a relative risk implies that at any given age, the annual chance of dying is 22 percent higher than for a statistical twin with private coverage. But this is quite similar to some common everyday risks faced by tens of millions of Americans.

Conover_risk_2

For each uninsured person gaining coverage under Obamacare, we could achieve roughly equivalent or greater mortality reductions by getting an obese person down to normal weight, or getting one smoker to quit. The best evidence shows that the average morbidity benefit, or reduction of the incidence or severity of disease, associated with gaining health insurance coverage for one year would equal 3.7 to 6.8 days of healthy life.

Financial Risks of Being Uninsured
The 1 percent of the population having the highest annual health expenses incurs acute care medical bills exceeding $116,000 in a year. For the average American worker or even median income household ($51,000), such a financial hit would be much harder to absorb. Most would rather pay a modest health insurance premium than face a financial risk that large.

Conover_3_new

If someone wanted to eliminate their risk of being an unlucky 1 percenter, an insurance company hypothetically would have to charge a premium of at least $1,161 (i.e., 100 people paying such a premium could collectively cover the cost of the 1 with the highest spending). Even if such an odd policy were available, it might not look particularly tempting to most uninsured adults since the bottom half of health spenders have bills under $400 a year. For the same reason, the average premium for employer-provided single coverage ($5,884) may seem exorbitant. A worker living paycheck to paycheck might well feel that the 50:50 gamble of spending under $400 is much preferable to spending 14 times that amount for certain on a policy that clearly has far less than a 50 percent chance of covering enough out-of-pocket costs to pay for itself.

Not having insurance increases a person’s risk of filing for medical bankruptcy by only 189 per 100,000 (i.e., less than 0.2 percent). The average amount of unpaid medical debts for so-called “medical bankruptcy” filers is only $5,600. Because medical bankruptcies are so rare, an actuarially fair premium to eliminate this $5,600 in medical debts would be only $13 annually. But such debts constitute only a fraction of the overall debt facing uninsured bankruptcy filers. That is, even if we completely eliminated all medical debts for uninsured bankruptcy filers, such families still would have an average net worth of negative $39,000! This explains why having health insurance would reduce an uninsured family’s chances of bankruptcy by only 11 percent.

The average uninsured person pays only 21 percent of their own medical bills. Taking into account the risks faced by the uninsured of having to pay out-of-pocket costs of varying amounts (anywhere from a few dollars to possibly thousands of dollars) researchers have been able to determine that the typical uninsured person is only willing to pay $91 to $182 to avoid the actual out-of-pocket risks they face (the so-called “risk premium”). Without the ACA, projected medical spending per capita on the uninsured will be only $1,450 to $5,370 in 2016.  An uninsured person who expected to spend $1,450 out of pocket should not be willing to pay more than $1,632 (i.e., expected spending plus $182 to avoid the uncertainty associated with that spending). Yet the coverage available on the exchanges will cost an average of $7,202 per person (premiums plus cost-sharing). This far exceeds the willingness to pay of even uninsured people at the upper end of the expected spending range.

Hence, rather than make coverage more affordable, the ACA instead requires the typical uninsured person seeking exchange coverage to increase their pre-ACA average annual health spending anywhere from 39 percent to 79 percent. Such high costs mean that the ACA will disproportionately attract people with much higher than average spending, which evidence now confirms.

Our hodgepodge of efforts to help the uninsured have substantially reduced the incentive to buy coverage. As mentioned, only 21 percent

of annual health spending by the uninsured is covered out of pocket. The rest is uncompensated care. But two-thirds of this uncompensated care is financed by taxpayers. The balance represents implicitly subsidized care (the difference between what providers actually got paid and what they typically get paid by insured patients). Providers evidently absorbed this loss: “there is no evidence that providers have charged private payers higher rates to offset rising uncompensated care costs.”

In addition, 100 percent of those on Medicaid and 85 percent of those who gained coverage on the exchanges are receiving taxpayer subsidies, with the average amount of subsidies on the exchange totaling $4,410 per subsidized enrollee.

Bottom line: it’s clear that the “solution” will cost far more than the underlying “problem,” as this graph illustrates:

Conover_risk_4

If “free riding” is the problem ($572 + $1,113), how sensible is it to pay more than 2.5 times that amount to fix it?

Why Are We Doing This?
Expanding coverage is expensive. A nation with a fiscal gap of $244 trillion needs to think long and hard about why it should divert hard-earned taxpayer dollars into achieving this objective. Even if we cover 25 million uninsured, the likelihood that Obamacare will save many lives is not guaranteed. Even if we grant the possibly that expanded coverage will save lives, there are other comparable risks faced by Americans that hypothetically could be reduced through public policy interventions. So why have we chosen to focus on reducing the risk of death due to being uninsured rather than these other conditions, especially when we could lower mortality far more cost-effectively by addressing other risks?

Specifically, we are foregoing the chance to save at least eight lives for every person to whom we provide subsidized coverage on the exchanges. Consequently, we ought to have a compelling reason to do so. Yet, the cost to address the actual financial risks faced by uninsured families is far below the actual cost of coverage available under Obamacare.

A lot of heated political rhetoric was used to ram through Obamacare. But exactly what problem was Obamacare seeking to solve? It’s not obvious the actual risks facing the uninsured warranted a solution costing $4,975 in annual premiums (plus $1,227 in out-of-pocket spending).  I personally favor “repeal and replace,” but regardless of how we fix this terribly misguided law, let’s start with a clear idea of what problems health reform is supposed to solve and make certain we adopt a reform plan whose size and scope are much better suited to those problems.

Christopher J. Conover is an adjunct scholar at the American Enterprise Institute, a research scholar at Duke University’s Center for Health Policy and Inequalities Research, and an affiliated senior scholar with the Mercatus Center.

 
FURTHER READING: Conover also writes “‘Not One Dime’: Health Care Law Projected to Add $6.2 Trillion to U.S. Deficit” and "Is U.S. Health Spending on Another Planet?"  Joseph Antos contributes “Sebelius Gets Tough on Medicaid Enrollment.” Thomas P. Miller writes “Why the Patient CARE Act Proposal Isn’t Ready to Replace Obamacare.” Arnold Kling considers “Fantasy Despot Syndrome and Healthcare.gov.” 

 

Footnotes:

  1. The recently released Massachusetts health reform study does not resolve this issue since researchers had no way of telling how much of the reduction in mortality occurred among those previously uninsured. The study implied a relative mortality risk of 1.43 if and only if all of the estimated mortality reductions occurred among people who previously were uninsured.

 

Image by Dianna Ingram / Bergman Group

 

 

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