Monday, October 28, 2013

Another Market Force within Obamacare

It's been quite some time since I've had the time on my hands, or the ambition to write about any politics here.  I've recently started my own company, and so have a bit better outlook on life in general, and a bit more time on my hands now that I manage my own time as I please.  With that, I've been doing some thinking on this roll-out, or lack thereof, of Obamacare, and I've found something in all this that I'm interested to write about that I think happens to be an angle not many other people are seeing in it.

A great many commentators have been expounding on whether or not Obamacare will collapse under its own weight due to lack of people being able to sign up for it, or people just not signing up and taking the penalty instead.  This may very well end up being the case.  From what I can tell from researching rates over the past week or two, we're all either looking at incredibly high premiums compared to what we're used to, or else incredibly high deductibles compared to what we're used to.  I will note here that I make too much money to qualify for subsidies under the law, so I can't and won't bring those into my discussion of the rates, which works for me, as I wish to focus on this purely as a market analysis anyway, without the government distortion.  With such high premiums, accompanied by de facto poor service in the form of high deductibles, the number of "eff-you" types who will forego coverage for the penalty would seem to be high.

The long view of this idea that Obamacare will collapse under its own weight due to lack of participation, is that with the market unable to support the healthcare needs of the many sick and old, on the backs of the few healthy and young, the left wing will at some point execute the complete takeover of the healthcare system in the form of single payer.

I'm not immune to thinking this myself, and certainly feel that this would be the worst case scenario, resulting in rationing of healthcare, and DMV-like service in the hospitals themselves, not just on the website where you're supposed to be able to sign up for your coverage.

All of this said, I've been spending a good part of the last week or so researching the available plans, and I'm seeing something else happening, that may be more catastrophic both to insurance companies, and the government, than anyone has thought to this point.


Yes, the thought has been that most likely scenario in all of this is that a great many people will forego insurance for the penalty.  However, as Megan McArdle recently pointed out, this will not be so easy.  The penalty is a nominal $95, or 1% of your gross income.  This is next year's figure, and I am sure it will increase over time.

Now, if a person makes $100,000, then the $1,000 penalty tax that has to be paid is really a pittance compared to the amount this person would have to shell out in health insurance premiums, so let's go hypothetical and imagine that the penalty is made high enough to prod people into actually buying insurance, and every single person in the land has to buy insurance, and does.  This hypothetical leads us to examine what policies will be bought en masse across the country.


For the purposes of this post, I am going to use information from Blue Cross-Blue Shield of Illinois, both because this is my insurance company and I am most familiar with them, and because when I compare estimates on (sans subsidy), they are easily the most inexpensive across the board.

Here are the results for plans for my wife and me from Blue Cross-Blue Shield.

Looked at in this manner, we are seeing what the maximum outlay might be if shit really hit the fan and deductible payments were maxed out.  What I look at most closely, however, being a younger, healthy person, is how much money here remains in my own control.  This is where having an HSA kicks in.  Basically, if I am able to afford to stash away the maximum tax-deductible HSA contributions for two years, without having to dip in to the HSA account to pay deductible fees, I am basically no longer coming out of pocket on deductibles in the future.  Granted, of course, I will likely have some small amount of medical expense, so that not everything I pile away into the HSA will stay there over the course of two years, but let's even say in 2.5-3 years, my HSA has enough money in it that if I get hit by a car, I'm not diving into my checking account to cover deductible payments.

This being the case, the market force at play within Obamacare is one that should be driving all the young, healthy people onto low-premium, high deductible "Bronze" level plans, that they can tie to a Health Savings Account.

This is the arrangement I've had set up for myself for three years now, and only the deductible and premiums are really changing here for me.  I will be very interested to see what comes of this system over the course of the next year.  The mandate has the opportunity to force young, healthy people to actually think about their insurance coverage for the first time that I can recall.  From a personal standpoint, I've always had insurance, either through my parents, or through school, or through work.  Three years ago, I became an independent contractor, and had to buy my own insurance.  This was the first time I actually ever looked at any of these plans beyond what the deductible was and what the copay was.  Now millions of other people are going to be in that boat as well.  Unless somebody that is young is also sick with, perhaps, diabetes or some type of other length of life disease, where it will make sense to have more of a "maintenance plan" type of insurance, there really is no conceivable reason why a young person would choose anything but the low premium, high deductible, HSA combination.

And so my question is, what happens then to the structure of this program?

If everyone who is healthy enough to forego a "maintenance" insurance plan chooses to do so (and why wouldn't they?), my early assumption has to be that the insurance industry will be unable to support the older sicker people based on the lack of premium revenue.  The whole idea here was to force everyone to buy insurance, raise premiums, and use the higher premiums on healthy people to pay for sicker peoples' maintenance insurance.  But if younger people in general go the route of paying the bare minimum into the insurance pool as possible, instead contributing to their own HSA accounts, and the deductibles be damned, doesn't this eventually pull just as big of a Jenga piece out from the foundational levels of the scheme as people just not signing up anyway?

I do recognize that the more immediate problems with the system, such as not being able to sign up, and having no real financial reason to sign up due to the extremely low penalty, are likely to drive this train off the rails much sooner than my scenario.  However, I also think that my scenario is another one that dooms this system as well.  Ironically, however, taken to the next logical step in the long view, the market response would be to increase deductibles further, meaning that people would be much, much more inclined to begin actually shopping for their healthcare, rather than just showing up and expecting to be serviced for no charge, meaning that in the long run, prices to the consumer might actually come down as the healthcare industry would finally again be required to service the consumer rather than throw a fat bill at the insurance company's wall to see what sticks.  Over the long term, proponents might actually trumpet to the heavens that the program has worked!

But I wouldn't give our government the credit for such foresight or patience as to wait for all of that to come to fruition.  If they had the foresight or patience for that, they'd have simply written a program that majorly incentivized people to get onto HSA's, and opened up the insurance markets across state lines, giving people more freedom and choice.  But the government response to a market response of insurance prices going up will surely be one instead of further control, perhaps to put some kind of fiat cap on deductibles, and eliminate HSA eligible plans, putting us all on more expensive maintenance insurance, leading to the necessity to increase the subsidy to lower income citizens, or perhaps even broadening the criteria for acceptance onto Medicaid (which is already looming large as a major wrench in the works).

Ultimately, this would also mean the healthcare industry will continue to overcharge for services, since there will continue to be no price feedback from the actual consumer.

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