ACA, "No thanks I'll just pay the penalty"

[Ser Scot A Ellison]

From CNN:

http://money.cnn.com/2013/09/20/news/economy/obamacare-penalty/index.html?hpt=hp_t2

 

From the article:

"I would love to have insurance, but we just don't have the money," said Sandra Czop, 58, of Bloomingdale, Ill. "We need that $100 to put food on the table. We have no money to put gas in the car."

Czop, a mortgage loan officer whose business is down 60% and whose husband is unemployed, summed up the sentiments of many readers. Though subsidies are available to those earning less than 400% of the poverty level, the premiums are still too high for many Americans.

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For 2014, the penalty is either $95 per adult or 1% of family income, whichever results in a larger fine. (Income is defined as total income above the filing threshold, which is $10,000 for an individual and $20,000 for a family in 2013.) That's still a lot less than premiums, which are generally $200 to $300 a month for a silver plan.

So a person making $50,000 would not be eligible for a subsidy and would pay full price for a plan. If he declined to get insurance, he would only be subject to a $400 penalty for the year.

A couple earning that amount would receive a roughly $1,300 subsidy, leaving them to pay about $4,750 in premiums for the year. But that compares to a $300 penalty.

If too many people take this tack the ACA has too fail. The point is to spread the cost of healthcare by requiring everyone to have insurance or face these penalties. If people just pay the penalites because they are cheaper than insurance what happens?

Does the political will exist to make the penalties stiffer to push people into the healthcare pool?

[SkynJay]

Here I am going the other way. I have a plan through my employer, but will seriously look at the exchanges.

But I would wonder if perhaps the insurance companys will get wise to this and start offering a true castastropy only insurance plan that comes in at just under what the penalty would be. As in, no actual care options but protection against...what? I will stop speculating there because I couldn't guess at the details that would make it feasable. Just that someone is probably already looking into it.

[Littlefingers In The Air]

It goes to show you just how much people are suffering. Penalizing someone for what they choose to so with their own homes finances is preposterous.

[fuseprime]

If people just pay the penalites because they are cheaper than insurance what happens?

Does the political will exist to make the penalties stiffer to push people into the healthcare pool?

I hate to take such a cynical approach to this, but I'm going to anyway.

NOTHING will happen. The government will just end up keeping the law in place, because it's still a cash cow. I mean....look at toll roads. I know in my state, the Garden State Parkway was supposed to have temporary tolls in order to pay for itself. They Parkway has been paid for about forty years, and the tolls are still there.

I think, if the penalties ever do increase it'll be subtle and marketed the way Port Authority raised its tolls.

[Fez]

If too many people take this tack the ACA has too fail. The point is to spread the cost of healthcare by requiring everyone to have insurance or face these penalties. If people just pay the penalites because they are cheaper than insurance what happens?

Does it? If enough people did, the exchanges might, but there's a lot more to the ACA than just expanding coverage to more people. That's arguably the biggest, most important part, but not nearly the only one.

Does the political will exist to make the penalties stiffer to push people into the healthcare pool?

Unnecessary. There will always be examples of people who do choose to take the penalty, but we already have the example of Massachusetts showing that most people won't. There, the penalty was just $295/person (there might have been an income indexing option as well, I'm not sure), and yet nearly everyone uninsured purchased insurance (96% of the state has coverage, compared to the US average of 84%, Hawaii is second best at 92%).

And remember that the ACA's penalty gets larger, 2014 and 2015 are just phase-in years (also, the article's math is wrong, a family of two earning $50,000 combined would face a combined penalty of $1,000 in 2014), while in most states the bronze-level exchange plan for most people will cost under $100 a month (and quite a bit less than that for some). So by 2016, the penalty starts being pretty darn close to the cost of premiums; if not outright higher.

Here I am going the other way. I have a plan through my employer, but will seriously look at the exchanges.

But I would wonder if perhaps the insurance companys will get wise to this and start offering a true castastropy only insurance plan that comes in at just under what the penalty would be. As in, no actual care options but protection against...what? I will stop speculating there because I couldn't guess at the details that would make it feasable. Just that someone is probably already looking into it.

Catastrophic plans are already allowed through the exchanges (and outside them), however there are regulations in place preventing them from being complete ripoffs. They'll cost about $40/month for people under age 30.

[Sci-2]

Obama won't raise the penalties, as I can't see the Dems allowing that.

Maybe Hilary will scrap the whole thing and start over after the 2016 election. ;-)

[NestorMakhnosLovechild]

It goes to show you just how much people are suffering. Penalizing someone for what they choose to so with their own homes finances is preposterous.

It's not preposterous at all - you may have a moral objection to it, but as a practical solution to a problem it can often be a wildly effective solution.

The reality is that people who choose not to have health insurance "with their own home finances" often end up having their losses socialized anyway, because hospitals can't refuse them emergency room treatment. In order not to have a system that is not dysfunctional in the sense that "private financial decisions" don't end up with "socilized losses" you either need (1) socialized insurance costs or (2) to allow hospitals to let people die on their doorsteps of treatable ailments because they can't afford to pay.

[TrackerNeil]

If too many people take this tack the ACA has too fail. The point is to spread the cost of healthcare by requiring everyone to have insurance or face these penalties. If people just pay the penalites because they are cheaper than insurance what happens?

Well, keep in mind that, by paying premiums, people get something, whereas by paying the penalty they get nothing. Americans are not stupid, and most people prefer to get something for their money.

However, I think you've raised an important question, and right now we don't know the answer. The news coming in is pretty positive and premiums on the exchanges are lower than one would expect, probably because consumers can now choose more easily between plans. It may be that the penalties will have to be raised at some point, but we'll know more in a year or two.

[Ser Greguh]

As a gambler this sort of thinking is absurd to me. Apples to oranges at the most basic level, unless people are assuming that no insurance plan will ever pay back for them, ever (which is, actually, what most people are thinking; absurd, solipsistic delusions of immunity).

All insurance is a wager. A negative-expected-value (-EV) wager for the consumer and a positive-expected-value (+EV) wager for the insurance company, at the most basic level, but still generally preferable for both parties because the insurance companies transfer the marginal utility of the money being wagered onto their own, larger, less delicate economy of scale. If you have a lot of money, then a disruptive health event just costs you some of that money, and doesn't affect your long-term potential. But if you don't have a lot of money, the debt of treating that event (and/or long-term health-effects resultant from substandard care) winds up costing you far more than the juice you pay when writing an insurance check. And the probability of that level of disruptive health event, multiplied by the losses incurred when that event occurs (both in terms of immediate costs and long-term effects), makes it a very good bet in the grander scheme of things. Those who don't get insurance are generally practicing preposterously bad Bankroll Management, even when the cost of that insurance has a direct effect on their overall quality of life.

It's basically the same reason why professional poker players are willing and eager to take a piece of one another's action when it comes to high buy-in tournaments, and most would readily be willing to pay some juice to do so (i.e. swapping action with a lesser-but-still-profitable player), (what, you didn't think all those scruffy-faced, comfortably-dressed twentysomethings ponied up the $10k for the WSOP Main Event all by themselves, did you?) Because of the high degree of randomness involved for any one player, and the substantial percentage of most players' bankroll that that $10k represents, it's a smart call for most even if it means sacrificing a little EV. Because if you go it alone, failing to cash for 10 straight $10k-buyin tournaments is more than possible, but failing to profit when spreading your action amongst 100 profitable players would be essentially unheard of. Pooling risk isn't just a psychological variance-reduction mechanism, it tangibly and positively affects your long-term EV by limiting Risk of Ruin (which is a very real statstical / gambling concept with a rigorous mathematical basis).

But people don't think like this, particularly when it comes to something as sanctified as their own health (witness the prolificity of people bragging about how they haven't been to the doctor in years, as if sacrificing the most cost-effective possible health care for the least cost-effective health care possible is something to be proud of), they are goaded by their pride into taking foolish risks and some are even willing to pay a government-imposed penalty so that they might continue their own foolish behavior.

[Ser Scot A Ellison]

SerG,

It may be foolish but for some if they are healthy, and can get insurance as soon as they get sick, and it costs more to pay for insurance than to pay for the penalties they may go formthe penalties because they can get insurance when they get sick.

For the penalties to work they have to be more than the cost of insurance.

[Fez]

For the penalties to work they have to be more than the cost of insurance.

Again, they don't. They weren't in Massachusetts and yet were still highly effective.

And in quite a few cases, the penalty will be higher anyway (at least compared to bronze plans). So its somewhat of a moot point.

[Merentha]

It goes to show you just how much people are suffering. Penalizing someone for what they choose to so with their own homes finances is preposterous.

You're right. Lets scrap the mandate and the exchanges. We can replace it with a publicly funded system akin to Canada's Medicare.

For the penalties to work they have to be more than the cost of insurance.

No, they don't. They have to be high enough to convince people that paying a moderate amount for no gain is an inferior option than paying a slightly larger amount for a significant gain. Now, I agree that there are many people who cannot afford to pay the slightly higher option at all, and that IS a problem.

[Ser Scot A Ellison]

Fez,

We will see. In fear that, with the knowledge they can't be denied coverage coupled with penalites that are much lower than the cost of insurance, many will go naked. That's a problem. Raising the penalites such that they are effective would be a political nightmare.

[Ser Greguh]

SerG,

It may be foolish but for some if they are healthy, and can get insurance as soon as they get sick, and it costs more to pay for insurance than to pay for the penalties they may go formthe penalties because they can get insurance when they get sick.

For the penalties to work they have to be more than the cost of insurance.

Um, no. Not even remotely true, by the most charitable possible interpretation. This would only be the case if writing an insurance check were always the exact same thing as setting that much money on fire. But that's not the case, because the insurance check gives the possibility of a payout, while setting the money on fire does not.

Which is why it's a wager, and why the (relatively simple) gambling concepts I discuss above are perfectly applicable. At the basic, algebraic, linear level, it's not a question of which costs more, it's a question of which has the lower expected value. (x*y)-z, where x is the percent chance of a payout, y is the average value of a payout, and z is the initial investment. When paying a penalty, this simplifies to simply (-z) because x=0. When paying for insurance, x and y are nonzero and positive, which changes the equation.

And, as I describe, there are concerns beyond the hyper-simplified EV calculation that have to do with bankroll management, variance reduction, and risk of ruin, which make insurance plans tangibly +EV long-term for the vast majority of people even without the possibility of a penalty. The only people who don't need insurance are the very rich (who can withstand the swings of medical costs), and most rich people still see insurance as worth it for the peace of mind alone.

And yes, the ACA makes it more possible to "game the system" by the removal of restrictions on pre-existing conditions, but this is very, very limited (can't exactly plan ahead for that car wreck, now can ya), and only slightly affects the base EV equation.

[TrackerNeil]

SerG,

It may be foolish but for some if they are healthy, and can get insurance as soon as they get sick, and it costs more to pay for insurance than to pay for the penalties they may go formthe penalties because they can get insurance when they get sick.

Actually, they can't. The exchanges themselves have an enrollment period, to prevent people from signing up in the emergency room. Miss that window and you're screwed. There are about a dozen "qualifying events" that can enable you to enroll outside the window, but "I was a dumbass and went uninsured" is not one of them.

BTW, Jonathan Bernstein takes aim at the ridiculous anti-ACA ads.

[Sci-2]

Ah, thanks for that Gerguh.

Always nice to see the discrete math classes paying off.

[Fez]

Fez,

We will see. In fear that, with the knowledge they can't be denied coverage coupled with penalites that are much lower than the cost of insurance, many will go naked. That's a problem. Raising the penalites such that they are effective would be a political nightmare.

I don't know how many times I can say, but: THEY WON'T!!! And we have actual evidence that they won't as opposed to just your concerns that they will.

Beyond that, for many people the penalty's cost will approach the cost of insurance.

Beyond that, as Ser Greguh has rather excellently explained, the two aren't comparable expenses since one essentially throwing money away and the other is exchanged for a service (i.e. coverage).

ETA: In sum, the penalties will be effective as is (particularly once 2016 hits) and do not need to be changed.

[Ser Scot A Ellison]

SerG,

You're missing my point. Costs and value are subjective. To a healthy person the value of a health insurance policy may be less, to them, than the cost impossed by the penalty. This is true, in part, because they know they can't be denied coverage any longer. As such they chose to wait until they get sick to get insurance.

Part of the purpose of the penalties is to get healthy people into the pool to lower costs for sick people. If too many people see insurance as costing more, subjectively, than the value they get from health insurance costs will continue to go up. As such, penalties (to be effective) need to be stiffer.

[TrackerNeil]

You're missing my point. Costs and value are subjective. To a healthy person the value of a health insurance policy may be less, to them, than the cost impossed by the penalty. This is true, in part, because they know they can't be denied coverage any longer. As such they chose to wait until they get sick to get insurance.

Part of the purpose of the penalties is to get healthy people into the pool to lower costs for sick people. If too many people see insurance as costing more, subjectively, than the value they get from health insurance costs will continue to go up. As such, penalties (to be effective) need to be stiffer.

Your first point I have already responded to, in a previous post. As to the second, if saving money is so important, why don't more Americans opt out of their employer-provided coverage? Many can, and yet most don't seem to. I don't have data on this, but that's probably because, by and large, Americans understand that health insurance is a good thing. Yeah, there's some grumbling about the mandate, but the fact is that most Americans don't know what the ACA really does and aren't affected by it much anyway. So I think we really should not connect diffuse and uninformed dissatisfaction with the ACA with the way people will actually behave once the ACA is fully in effect.

[Sci-2]

Part of the purpose of the penalties is to get healthy people into the pool to lower costs for sick people. If too many people see insurance as costing more, subjectively, than the value they get from health insurance costs will continue to go up. As such, penalties (to be effective) need to be stiffer.

I think Gerguh addressed this?

It's in the last paragraph of his first post.