I need to think this through on a screen. Let’s get a simple model on the buy/no buy decision. Let us make some absurd assumptions on a guaranteed issued, community rated plan. This is an absurd toy model to clarify my thinking.
1) Single insurance product only
2) No out of pocket expenses (Insurer pays 100% of every claim)
3) Contract is for a single period with future periods having their own buy/no buy decision points.
4) Risk aversion and risk tolerance can vary by individuals.
5) All premiums go straight to claims (no admin costs)
6) Premiums are All Claims/Number of people signed up
The decision is to buy a plan if the cost of premiums is less than or equal to expected medical costs. If premiums are less expensive than expected medical costs, insurance is bought. If premiums are more expensive than expected medical costs, insurance is not bought.
As you can see this sets up a death spiral as healthy people get out of the market and only sick people stay in. In the next round, the healthiest of the sick people leave the market and only the sickest of the sick stay in. Oops.
There are two levers that can counter-act or stop this spiraling. They both change the relative price of not being covered instead of being covered. Subsidies lowers the relative price spread by reducing the cost of being insured. An individual mandate penalty increases the cost of being uninsured. Both of these are attempts to move more low cost people from the no buy pool to the buy pool.
This is an absurd oversimplification but I think it is a useful oversimplification.
Once we think about assumption #6, we see that premiums are a function of other people’s decisions to buy or not buy. As more healthy people buy plans, they add incrementally less than average claims costs and bring down average premiums for everyone. One individual with absolutely no claim expenses in a year will not move the needle much, but hundreds or thousands of people with a few hundred dollars a year in claims will make premiums lower for everyone else.
Sarah in Kingston
I can’t sign up until tomorrow but some preliminary research makes it look as if our Gold plan, with no subsidy, will go up $600/month in New York. Reeling a bit from that bit of news.
DHD
Back when Obama/Romney/HeritageCare was considered a Republican idea, how did they propose setting the mandate penalty? In countries that have seriously implemented this kind of system (basically the Netherlands and Switzerland I think) the penalties are quite a bit higher.
This link that purports to be good news, saying that 54% of marketplace participants can get a Bronze plan for less than the mandate penalty, actually sounds totally insane to me: kff.org/health-reform/issue-brief/how-many-of-the-uninsured-can-purchase-a-marketplace-plan-for-less…
That means that 46% of people in the individual market are directly confronted with the buy/no-buy decision, which should not even be a question at all in a rational health insurance system… not to mention that only 2% (two. percent.) of unsubsidized buyers can get any plan at all for less than the penalty. How does that even work?
But, you know, I live in Canada, so…
Fair Economist
I don’t understand the calculations for the expected removal of the mandate. The distinct majority of people covered by Obamacare are subsidized, and no matter what the mandate removal does to premiums they will be minimally affected. Rates go up for the unsubsidized, but a substantial portion of them have significant medical conditions and will continue to pay; another fraction can tolerate the increases and won’t accept the risk of going bare (remember, unsubsidized buyers are usually well above average income). As I see it, enrollment decreases from no mandate would be “only” 2 to 3 million. In addition, these are people mostly paying into the system, so the costs to the federal government should actually *increase* as a result of dropping the mandate.
Yarrow
Apparently the Senate Finance Committee discussion on healthcare is heated.
Click through for the whole delicious thread.
Arclite
HMSA had to bump premiums for ACA by 20% b/c we have no idea what is happening with CSRs.