If you live in the United States, starting in 2014 you will be required to purchase health insurance or pay a fine. The question is: will young adults opt-out and pay the fine?
This is one of a number of economics-related lessons that can be taken away from the Health Care Reform law. Today I will discuss this along with another one, higher (unsustainable?) government spending, as well as a few other things we will see as a result of reform.
Get Insurance or Pay Fine?
In Capsules, the Kaiser Health News blog, Susan Jaffe raises this very question:
If young adults can’t afford health insurance policies available in 2014 under the health care law, state insurance officials are worried they won’t buy them. And that could drive up the cost of insurance for the mostly older, sicker people who do purchase coverage.
That’s a potential problem even in states like California and Rhode Island, which are moving ahead to carry out the law, state officials told representatives of the Obama administration Friday at a meeting of the National Association of Insurance Commissioners. They said they’re concerned that young people facing insurance “rate shock” may opt to pay a relatively modest penalty — $95 in the first year — rather than pony up thousands of dollars to purchase coverage.
Whether we recognize it or not, every single day people run opportunity cost equations in their head. When it comes to whether or not to purchase health insurance under the new Health Care Reform law, Young Adults will compare the cost of premiums versus the cost of paying the fine for not having insurance. Among economists and casual observers, there are many who think that the fine is too low.
Also factoring into this equation is that insurers can’t deny coverage people based on pre-existing conditions, and under the new law no one is supposed to go bankrupt from medical bills. Young Adults – or people in general – may forego purchasing health insurance until something happens where they absolutely need medical care. When that scenario arises, they will simply log in to their state’s health care exchange and purchase insurance. Since you are guaranteed coverage, why purchase until you really need it?
Higher Government Spending
If you expand health coverage to millions of additional individuals, including some who are unable to afford care in the first place, someone is going to have to pick up the tab. In this case, it’s going to be the government and in turn, taxpayers. We can argue about whether or not health insurance is something that should be a priority for our nation, and whether or not there are other solutions besides government subsidizing health insurance, but in the end the reality is that there will be higher spending.
A basic law of economics is that we live in a world of scarce resources. There are not enough resources to fulfill every individual’s every need and want. On an individual scale, people need to pay off their debt and do not have an unlimited credit line like the federal government. If the government is going to take on this higher spending, they are going to have to either increase the amount they are bringing in via taxes, decrease spending elsewhere, or both. As most of you know, the federal government hasn’t lived within their means for quite some time…and one day they will have to deal with their spending problem whether they like it or not.
I am not faulting Republicans or Democrats in this case – Republicans argue that we can’t afford the Health Care Reform. In reality it’s not necessarily that we can’t afford it, it’s that we can’t afford everything in our current budget PLUS the health care reform bill. But then again, we can’t afford our current budget even without Health Care Reform and both parties have had bipartisan support for spending borrowed money. There isn’t an unlimited amount of money or resources, and at some point spending will need to prioritized.
What else will we see as a result of Health Care Reform?
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One thing we will certainly see is more resources being poured into the health insurance/health care/medical device industry. As I just mentioned, these additional resources will have to come from somewhere; money (which really is simply a representation of value) does not come out of thin air.
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We will see a shift over the next few years of decreased employer-sponsored coverage and increased coverage through the state health care exchanges.
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Finally – and this is more my opinion than anything – a few aspects of the health care law will remain in place regardless of which party has power or what changes politically: coverage for dependents up to the age of 26; not allowing refusal of insurance because of pre-existing conditions; subsidized health care coverage.
There are a lot of expected and unexpected consequences of Health Care Reform. Some of these consequences are good and will prevent things like bankruptcy from a medical procedure related to a pre-existing condition; others are bad like spending that hasn’t been accounted for.
Needless to say, it will be interesting to see how reform plays out and how people react to the changes.
To my American readers: will you opt out of health insurance in 2014?
To Everyone: Where would you rank health care subsidization on our/your nation’s priority list?
Or a really fun question: If you had the ability to choose…what cuts would you make to the federal budget?
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No, we’ve already got our insurance. Being self-employed AND having little ones made it really no option for us.
In terms of what to cut…oh boy! If you watch Bill Maher at all he equates our current budgetary issue like a meal. Defense, Social Security & other entitlements are the meat & potatoes. Everything else is the sprig of parsley. He says when cutting the budget all that’s talked about is cutting the parsley! That said, I’d set my gaze directly at defense spending.
@FrugalRules Defense and entitlements NEED to be on the table. Between those and our interest payments, a majority of the budget is spoken for. And I’m not even including the expenses related to Health Care Reform in that equation!
Great question.. Also, will hospitals begin to turn away those who *do* opt out? After all, it is their financial responsibility to have insurance now, right?
@seedebtrun Another commenter said that doctors may limit what services they offer, so that very well could become a reality. Also, doctor’s offices could very well become the main source of referral to the exchanges. If people say they don’t have insurance they will likely explain to them that they just need to log on to x website and fill out the information.
I have only ever lived in nations where health care was publicly provided. In NZ they have a public and private system, which was interesting and while in Canada many people view it as a potential way to improve our current system, in NZ they generally complained of many of the same things. That said, for my economic status, the two-tiered system would likely serve me better personally. I really struggle comprehending the idea that health care would be something you may not have access to. That’s not necessarily just a judgement (though it is in part), I just can’t wrap my head around the different mental state that it entails. (Note: not all health care in Canada is completely free, many things cost some money and most provinces have an explicit tax line for it somewhere.)
Given your previous post and the comments regarding how often people fight charges/”force billers to be responsible” perhaps the increased involvement and call to stop ridiculous charges will in fact lead to less gouging for all? That said, those who are proactive currently are likely already insured, so there is a selection concern? However, there are likely those who will be proactive but will only have insurance after this… .so who knows?
@Ugifter I don’t see the charges going down because even though there will be more volume, a lot of the bill will be picked up by the taxpayers. Especially if someone has very affordable subsidized insurance, there really is no incentive for them to shop around for care or to try and find the most cost-effective treatment. I think it’ll be a growing expense and the US has to figure out where this fits into its “budget” (if you can even call it a budget!)
I think reform will help a very few people who can afford insurance who have pre-existing conditions and were denied before, a very small majority. To really help the budget, the government needs to look at Medicare and Medicaid and make some serious decisions about end of life care, people who are in poor health by their own doing, and allowing carte blanche for young people on welfare and Medicaid who keep having children on the government’s dime. My suggestion would be to add some charges or copays to Medicaid for things like going to the emergency room for non emergencies like an ingrown toenail. (Happens lots). Medicare should require that you decide what you want your end of life care to be when you sign up and are in good health. If you look at spending, a huge chunk comes from hugely expensive measure done to those who are most likely going to pass withing a few weeks anyway. We need to give people who are terminal the choice of opting out of treatment. If there is no cure, you shouldn’t be required to have all kinds of MRI’s and medicines other than pallative care if that is your choice. Doctors shouldn’t have to worry about getting sued if someone does opt out of treatment. Also, if you are hugely obese and smoke, drink excessively, or use drugs, you should have to pay more for Medicare premiums. It’s not a prefect solution by any means, but we have to start somewhere.
@Eyesonthedollar You make a good point: the incentive system is all messed up in health care. Unfortunately I don’t see that changing anytime soon. There are some incentive programs for discounts on premiums, but it COULD be taken a lot further. Unfortunately any politician who says Medicare is on the table for reform/change is taking a HUGE risk because seniors vote and any threat to their care will not be looked kindly on.
I think it is sad that this is an on-going issue in the US and as I commented somewhere else before it makes me wonder how many people are ill and do not seek medical attention because of the costs. For example, a person with diabetes needs supplies, insulin, pills and so on. I’ve watched shows were Americans with diabetes say that they haven’t tested their sugar levels in years because they can’t afford to. That makes me cry.
@TacklingOurDebt Well…they will be able to afford it now because insurance is subsidized if you don’t make enough money. If you make less than 10 or 15k/year you get insurance for a grand total of $35/year.
Very interesting to think about. For me, I’ve seen one too many friends get injured (literally and, thus, financially) during a time period when they didn’t have insurance. So for now, I don’t think anything would sway me to go without.
But if premiums go up like they say they will (and are), who know what most young adults will choose.
@Joanna@OurFreakingBudget I would never go without insurance; I see it as important as food and shelter :0 Ultimately, though, if people think about it and realize they COULD just sign up online literally minutes before going to the doctor’s office, people may opt for that….especially if premiums skyrocket.
Your article reminds me of my former pipe dream – run the Romney campaign health care response.
Over the summer the Supreme Court ruled that the Federal Government could impose a tax but not a penalty, and that a tax was smaller than a penalty. A state based universal health plan, like the one in Massachusetts has no constitutional restrictions on the size of penalty.
A $95 tax/penalty provides zero incentive to purchase unneeded coverage. With the requirement to cover pre-existing conditions, there is little reason for many people to buy a policy. They can just wait until they need medical care, and opt in at that point while saving a bundle in the process.
This type of behavior will sink the system. It’s doomed before ever starting.
@Kevin @ Ask for Benefits Honestly, one thing that could happen is people sign up on their way to doctor’s offices. Doctor’s have incentive to sign people up when they get to the hospital because they will get paid vs. not getting paid if the person does not have insurance. Definitely some changes are needed if this law was going to work properly.
If I were young and healthy, I probably would opt out and pay the fine. Another consequence, one my doctor mentioned, is that physicians will stop providing some services and we will have to go elsewhere to get them or abstain.
@FamilMoneyValue Great….that will make it even more difficult to navigate the health care system. I guess we’ll see how it plays out.
Being in Canada, I am always just baffled at the cost and continued cost of US healthcare. Living in BC, I do have to pay a monthly Medical Services Plan premium (scaled according to income – so free for students/low income and rising to $50-something for most adults) but my employer covers the cost for me.
It’s a tradeoff I guess. You can get better healthcare in the States if you can pay for it, while most people in Canada get the same average quality of care. But, better than denying people care at all, I think.
@OutlierModel Well now in the States you can get the best care AND afford it! Premiums will rise to offset the increase in medical expense overall, but that’s a choice that our nation made…I’m still just trying to figure out how they plan on affording all these expenses.
I certainly hope your third point holds true, specifically the part about pre-existing conditions. Would you add eliminating lifetime caps to that?
I definitely wouldn’t opt out – then again, my hubby has a government job, so I highly doubt his employer will stop offering health care!
It should be interesting. People exhibit weird behavior once they have to pay a tax. My fear is the action that businesses will take to avoid paying their tax. But that’s a whole different can of beans. I’m just glad that we have insurance through my wife’s work.
It’s only in the first year that the penalty is as low as $95, so I think many of the people who elect to pay the $95 penalty might change their mind the following year when the penalty goes up.
I personally think health care subsidization is very important, but more important is bringing down the cost of health care. When I had appendicitis earlier this year, the bill was $25,000. And I only stayed in the hospital for one day! It just doesn’t seem right to me that something that 1 in 10 people will get, that will kill you if you don’t operate, costs $25,000. If I didn’t have insurance, I would have been screwed!
@Gen Y Finance Journey The penalty really doesn’t increase much, though. It might go up by $100 or so (I honestly don’t know the exact figures).
And yes, insurance is so important.
@DC @ Young Adult Money From what I understand, it will go up to a maximum of $2085 by 2016. http://www.nytimes.com/2012/06/30/us/health-care-act-questions-and-answers.html
@Gen Y Finance Journey Hmm maybe I was thinking of something different. Thanks for passing along the link!
Personally, I think the US needs to get over the lobbyists (they should be illegal!) and move towards a “universal” health care plan like Canada’s. Just bite the bullet already or being healthy will be too expensive except for the very rich.