On Monday, the Department of Health and Human Services released the first nationwide demographic data on those purchasing insurance through the various health care exchanges around the country. The data largely affirms what many had suspected; that the young, relatively healthier members of the public so far are not buying into the system.
Most estimates, especially those from the Congressional Budget Office, stated that the exchange plans needed approximately 39-40% of their enrollees to consist of people in the youngest age group (18-34 years of age). This was for a very basic reason: to enable the financial sustainability of these plans, you needed younger (READ: HEALTHIER) patients to pay into the system, so those older (READ: LESS HEALTHY) patients could be subsidized at lower premium rates.
The data so far should prove worrisome. 59% of those enrolling so far are age 45 and above. Only 24% are age 34 and below.
To give some perspective, a study by the Kaiser Family Foundation done several months ago ran several different scenarios to calculate the cost breakdown of what would happen with different demographic results. Their chosen ‘worst case scenario’? 25% of the pool would consist of young patients…which is actually a higher number than the demographic distribution as of today.
The Kaiser study is quite useful in calculating what the cost of such a failure in getting young people to buy into the system is. For every 10% less than the 40% target, Kaiser estimates the cost of premiums overall would increase by 1-2%. At first glance, this doesn’t seem to be very significant. However, once you realize that health insurers on average have a profit margin of around 4%, this could account for up to half of the total profits from health insurers. And obviously, insurers won’t put up with that, meaning those costs will be passed on to the public.
Jonathan Cohn of The New Republic continues to argue that this is along the same pace as Romneycare in Massachusetts. And in fact, a superficial examination of the data supports his argument. In Massachusetts, as the state approached the deadline, more and more youths purchases insurance plans. This gives hopes to liberals that we will continue to see an upward trend nationally as well.
Here are the problems however.
First, note the actual number of youth enrollees in Massachusetts. The maximum monthly percentage of new purchasers of insurance maxed out at 34%. That is not only below the target of 40% set by the CBO; that is far below the number that the ACA would now need to meet their demographic goals. By my rough calculations, approximately half of all new purchasers on the exchanges from January 1st through March 31st of this year would need to be age 18-34. That seems highly unlikely, using Massachusetts as an example.
Additionally, unlike in Massachusetts, where there was one distinct deadline, in Obamacare there are really two practical deadlines. The first was January 1, 2014; this is because people who had insurance previously and wanted to continue their insurance needed to make sure they made their purchase already. That would also explain the December surge of young buyers that the HHS claimed today.
The problem for ACA proponents is the second deadline, which has now been delayed until March 31st. The second deadline is a legal deadline, after which you are technically in violation of the law. And theoretically, at that point you would be responsible for paying the Obamacare penalty (tax) based on your income level.
There are a couple of problems with the second deadline. The first is that unlike in Massachusetts, it may actually be in the financial best interest of some young people to pay the penalty (let us put aside whether or not it is a rational decision to go without health insurance; we are talking about a cost decision). With premiums (even with subsidies) running several hundred dollars a month, a young person with income of less than $24,000 could easily pay the $95 penalty and be free of any other financial obligation.
Furthermore, many people doubt the IRS has the current capability of even levying the fine. There has been some confusion on this point, but the head of the IRS in congressional testimony late last year admitted that if you were not receiving a tax refund from the IRS, they have no mechanism to levy the penalty at this time. So many youths simply could not be fined even if the IRS chose to do so.
Additionally, because of President Obama’s varying Obamacare delays, including delaying the individual mandate next year for people who had their insurance cancelled, it is fair to say much of the public doesn’t really believe there will be any practical penalty for not purchasing health care in 2014 if they choose not to.
Health care expert Bob Laszewski, in an interview with liberal blogger Ezra Klein, made the point quite clearly:
EK: That brings up two issues. The first is the individual mandate, which begins this year but is a much bigger penalty in year two, and then even bigger in year three. So one question here is how well that works.
RL: I have an interesting answer for that. I think the mandate is almost worthless because the word is getting around that they can’t really collect it. And by year three, it’s really a lot of money. I think there’ll be real pressure to just get rid of it. I don’t think you can force people to buy this insurance. If they don’t want it there’ll be a political groundswell to get rid of it. So in my mind the individual mandate is kind of irrelevant to this.
All that said, let me make a couple essential caveats to this discussion.
The first caveat here is that age is a poor substitute for what is actually most important: the health of these patients. The risk pools need healthier people to pay into the system in order to pay for those that spend the most health dollars, i.e. the unhealthy. In general, that means younger patients paying for older ones. Although using age demographics is a decent substitute for this, it is an imperfect one.
Second, the ACA is a completely new system. We have no idea if there is any historical analogue that can correlate. We use Massachusetts and their experiment with Romneycare simply because there is nothing else even closely resembles Obamacare.
Third, and this is very important to remember, is that we are really not talking about a single national system, but 51 state and local systems. Each state is their own microcosm. Avik Roy had a nice breakdown:
The states with the biggest skews toward older exchange participants were West Virginia (total skew: 66 percent), Maine (65 percent), Wisconsin (64 percent), New Mexico (61 percent), and Ohio (60 percent). The states with the lowest skews were Massachusetts (28), Utah (29), Kentucky (39), Maryland (39), and Virginia (40).
Whether this becomes significant or not in the long-term is uncertain. But the larger skewing you see toward the elderly population, the more likely they will see a net effect on future premiums.
On a side note, there is some positive data for Obama and his allies. A surprising 60% of all plans purchased on the exchanges are Silver level…meaning people are paying more to upgrade their plans, and pay less out-of-pocket later. This is a political win for Democrats, who thus will not have to be responsible for as many people complaining for hefty out-of-pocket costs in 2014.
One data point that can be a positive or a negative depending on your point of view is the fact that 79% of all purchasers are subsidized. This aligns with the CBO estimates, which roughly predicted a ration of 6:1. I personally view this as a long-term negative, as this will drive up the debt on the Federal level, and in three years when the Federal guarantee of subsidization of state Medicaid program ends, this could put a huge burden on the states. Liberals view this as a major victory, as they feel that insuring these people with tax dollars is beneficial to the country at large.
But the headline today is about the demographics. What does all of this ultimately mean? The most likely result of all this is that the risk pools for the exchanges will be mild to moderately worse than anyone predicted a few years ago. No matter how much certain liberals would like to spin that this is on a similar pace as Massachusetts, the overall numbers tell a different story. We are looking at risk pools that are worse than predicted; the CEO of Humana, Bruce Broussard, admitted as much at the JP Morgan Health Insurance conference on Monday.
Will this put Obamacare into a death spiral? Unlikely. As I have said for months, the death spiral is highly unlikely. Additionally, because of the risk corridor program within the Affordable Care Act, the government will, for all practical purposes, ‘bail out’ the insurers if the risk pools cause too much of a negative effect on profits.
So what we are looking at is more upward bending of the cost curve, as these costs are passed down from the insurers to the public, with premiums increasing at a 1-2% rate higher than baseline expectations. And that means that going forward, premiums for most Americans will be higher than if we had never passed Obamacare in the first place. The American people can decide if that extra cost was worth it or not.