Democrats point to reduction in uninsured as an example of Obamacare working. Conservatives point to premium hikes as an example of law not working. Obamacare analysis are usually full of cherry picked numbers. It is very easy to prove by cherry picking that the law is great or that it is horrible. It just depends on your opinion of the law and statistics used. Rather then going into an ideological debate, I wanted to see if the law is financially sustainable from a financial incentive perspective. This is important as law mandates that prior condition is not a reason for refusal of coverage or premium hike – basically I can crash my car and then buy insurance and ask the insurer to pay to have my car fixed. This type of problem is also known as the moral hazard. For the moral hazard to be avoided costs for not having insurance would have to be higher then if a person was insured.
First thing to look at are the deductibles, basically what you would pay out of pocket before insurance kicks in. For a low-end bronze plan average deductible for an individual is around $6,000.
Second is actual penalty that individual has to pay if there is no continuous coverage. Law states that for an individual the penalty is the greater of $695 or 2.5% of annual income.
Third is cost of plans – annual average cost of a low end bronze plan is around $3,700 for a 30 year old.
So does it make sense to game the system? Pay the penalty and then get insurance once unthinkable happens, that is the question that basically answers the question of sustainability of the law. If penalties are higher than insurance cost then the law is sustainable, if not then the law is a disaster waiting to happen.
For a 30-34 year old, average income is around $35,000.
Subsidies are only available if income is below 250% of federal poverty level, which is around $30,000. Our average 30 -34 year old is above the level of poverty and gets no subsidy.
Applying the penalty at 2.5% of income means that individuals without health insurance will owe $875 to the IRS. This is much less than $3,700 for the bronze healthcare plan.
Simple conclusion here is that if you are an average 30 – 34 year old, it doesn’t make sense to have health insurance.
But what if you are not an average earner, how much would you have to earn to be at a breakeven point of not having the coverage?
This is the number that is never really analyzed. Math is pretty simple 2.5% of income would have to equal all out of pocket expenses (yearly premium + deductible). To figure out out of pocket expenses we need to compare total annual premiums and deductibles for each of the plans: platinum ($7,000); gold ($6,700); silver ($7,900); and bronze ($9,700). Total out of pocket expenses are lowest for a gold plan and a rational player looking to game the system would chose gold plan should serious medical condition develop. That’s the out of pocket cost to the employee, however there’s a employer side that needs to be taken into account as well.
The law states that employers with over 50 employees need to provide affordable healthcare insurance to their employees with minimum coverage. Affordable means that the cost to the employee of healthcare premium must cost less than 9.56% of their annual income, affordability is met if cost to the employee is less than $3,300. Minimum coverage means employers need to offer bronze plans or better. It is rational to assume that employers seeking to keep the costs down would opt for cheapest bronze plans. Since most insurance companies require employers to cover at least 50% of the cost of the premium; actual out of pocket premium cost for our 30-34 year old would be half of $3,700 or $1,850; maximum out of pocket (premium + deductible) cost would be $6,850. But should something happen rational person would opt for gold plan and with max out of pocket expenses of $6,700. This gold plan would be better choice than having company sponsored and subsidized bronze plan.
Therefore we can determine that breakeven point for having insurance is when individual penalty is at least $6,700. Annual income required for the current penalty to be breakeven is around $270,000. Average income for the top 1% of the earners in the 30-34 age group is $185,000.
But what about other age groups? It actually gets worse. Healthcare premiums increase with age, while deductible stays the same. But even if we assume that premiums stayed the same, how many people would chose to get healthcare because of financial incentives?According to Census Bureau only 2.4 million people make more than $250,000. This would mean that the for everyone, but for a very small minority (less than 1% of all income earners), it doesn’t make financial sense to have healthcare insurance .
So no, the law is not financially stainable since rational players will want to LEGALLY game the system.