Is Obamacare coverage worse than not having insurance? That’s the argument made by Devon Herrick at the National Center for Policy Analysis (NCPA). The article is correct on the facts, but overlooks a few important issues.
The most important problem is the failure to distinguish between insurance and prepaid health care. Insurance is purchased to shield against financial catastrophes. Homeowner’s insurance, car insurance, and so on protect income and assets against losses that would put a significant dent in a household’s financial situation. And part of any Obamacare policy does just that. (Indeed, it could be argued that with the high annual deductibles under many Obamacare policies, for many people Obamacare is, in fact, pure insurance. But there are other issues with that argument. Keep reading.)
Prepaid health care is the part of an insurance premium that goes toward covering routine medical expenses such as physical exams, vaccinations, most drugs, and so on. Most health insurance premiums include payments for both insurance and prepaid health care. However, the buyer pays a single premium without knowing how much is insurance.
A market solution to the health insurance problem is pretty straightforward. Each household estimates the upper limit on what they can afford to lose. They then buy a pure insurance policy with that amount as the deductible. Ideally this would be a per-event deductible rather than an annual limit. But separating health care events can be tricky. If you fall and break your hip, then break your arm because you’re not very good on crutches, is that one event or two? Nevertheless, having made the estimate (most likely assuming an annual deductible), you can then shop around for insurance.
One issue in insurance markets is taxation. This remains an issue today. If you have employer provided health insurance, the premiums are a deductible expense for your employer. The every-changing tax laws make it difficult to say anything about the deductibility of premiums paid by individuals. But there was at least an attempt to smooth out this inequity.
Luckily, there’s a solution to this that has already been tried: health savings accounts (HSAs). I had one of these for about five years. Deposits are made to the account by your employer and are paid out of before-tax income. In other words, these deposits are effectively tax-deductible. There is typically a business administering the plan and collecting a small fee. In my case it was $1 per month. Plan members submit receipts to the administrator and are reimbursed for out-of-pocket expenses. While this does not solve the problem of whether the insurance premiums are tax-deductible, HSAs at least offer a measure of equity.
How much should you deposit into your HSA? A simple answer is the amount of your annual deductible. But this depends on your degree of risk aversion and marginal tax rate. If you’re only slightly risk-averse, you may choose to deposit less than the annual deductible, keep the income to spend, and assume the risk created by the difference between the annual deductible and your HSA balance.
The experiment with HSAs in the U.S. had inconclusive results. One problem was the legally-mandated cap on annual contributions. If memory serves, the limit was $5,000 per year. Many people – those with significant assets and risk aversion – would have preferred catastrophic coverage and a larger HSA balance. An example would be an insurance policy with a $20,000 annual deductible and a $20,000 cap on the HSA.
But the mere existence of any cap on the HSA balance implies government control. Why not just let buyers make their choices and keep the government out of this decision entirely?
When You’ve Got Nothing, You’ve Got Nothing to Lose
One point made in the NCPA article is that people with no assets and little income would almost certainly be better off not buying Obamacare, even with the subsidies available to them. Here’s what the article says:
Earlier this year a report from the University of Pennsylvania (gated but discussion here) found all but the most heavily subsidized Obamacare enrollees would generally be better off financially if they forgo coverage and pay for their own medical care out of pocket. The group whose incomes fall between 1.38 and 1.75 times the poverty level will spend about three times the amount on premiums for a Silver plan as their out of pocket health care spending had they remained uninsured. For those earning more than 250 percent of poverty, most will be worse off financially compared to having remained uninsured. By design Obamacare is a bad deal for most people! Basically, except for the unlucky few who experience catastrophic health complaints, the vast majority of Obamacare enrollees would be better off uninsured.
From an efficiency standpoint, paying for routine medical bills out of pocket costs less than paying bills through an insurer who is, in turn, funds medical claims from premiums. In the process of trying to make medical care cheaper for those with pre-existing conditions, Obamacare has made most enrollees worse off than prior to the Affordable Care Act. Paradoxically, they are even worse off than being uninsured.
The only problem with the U. Penn analysis is its focus on the average. The whole point of insurance is to take care of costly, expensive events that are several standard deviations from the mean. Stating that, “The group whose incomes fall between 1.38 and 1.75 times the poverty level will spend about three times the amount on premiums for a Silver plan as their out of pocket health care spending had they remained uninsured.” Ignores risk entirely.
When You’ve Got Everything, You’ve Got Nothing to Lose
There’s a second group that should not buy an ACA policy: the extremely wealthy. These folks can self-insure. Imagine the type of catastrophic care policy Bill Gates or Larry Ellison might buy: annual deductible of $5 million, HSA annual contributions of $5 million. That HSA will be even more attractive to the wealthy if the contributions are made out of before-tax income.
One problem for insurance markets is asymmetric information. The most extreme example is life insurance policies. Most, perhaps all, life insurance policies include a suicide exclusion clause. You cannot buy a life insurance policy then kill yourself, giving your heirs a big payday. When I bought my 20 year decreasing payment policy, suicide was excluded from coverage for the first two years.
Now we have an example of asymmetric information working in the other direction. The insurance company knows – or can make a pretty good guess at – how much of your premium is insurance and how much is prepaid health care. That information is very difficult for most policyholders to calculate. In this case the insurer has more and/or better information than the insured.
There is a great deal of good, logical economic analysis in the NCPA piece. My purpose here has been to expand on a few points. I also wanted to point out a market alternative to Obamacare.