Adverse Selection in ObamaCare and RomneyCare
The Wall Street Journal’s Joseph Rago recently wrote an indictment of the Massachusetts health reform, generally viewed as the model for recently enacted federal health reform. One of the criticisms he notes is that people in Massachusetts who do not have employer-based benefits can wait until after they have become sick to apply for health insurance via the Commonwealth Connector. This is because the fine levied by the state for not having health insurance is rather trivial.
Many fear that this will also happen under ObamaCare. As of 2016, unless a person has qualifying coverage from his employer or through an exchange, the IRS will levy a penalty of the greater of $695 or 2.5% of a taxpayer’s household income. On its own, this would hardly seem enough to dissuade people from waiting until after they have become sick to buy increasingly expensive health insurance. Furthermore, people with incomes under 133 percent of the Federal Poverty Line (FPL) will now be eligible for Medicaid, which means they will be exempted from the penalty, as will anyone whose health insurance costs over 8 percent of his gross income.
Responding to Mr. Rago, Professor Jonathan Gruber of MIT asserted that ObamaCare will not suffer the same adverse selection as RomneyCare, because ObamaCare limits people who wish to apply for coverage in an exchange to an annual open-enrollment period. This is true: The U.S. Secretary of Health & Human Services has the authority to define annual open enrollment periods, as well as special enrollment periods similar to those that currently exist under the Health Insurance Portability and Accountability Act (HIPAA)]. Furthermore, people with incomes up to 400 percent of the federal poverty level are eligible for refundable tax credits to subsidize their premiums. John Goodman has concluded that households with incomes up to $80,000 will receive bigger subsidies in the exchanges than under employer–based health benefits. So, the combination of limited open enrollment and huge subsidies for buying health insurance via an exchange surely mitigates adverse selection.
On the other hand, ObamaCare will give a three-month grace period before levying fines on people without coverage. If the affected persons find the open enrollment too difficult to navigate, political pressure may force the Secretary to make the window very wide. (This is the case in Medicare Advantage. Although the open-enrollment period for the following year’s coverage is from November 15 to the end of the current year, beneficiaries have the free option of switching again until March 31 of the new year. If this is what ObamaCare’s open enrollment will look like, every individual will have up to six and a half months to gain some benefit from adverse selection: Either waiting to buy health insurance or switching to a richer plan after becoming sick.
Very good post. I think there is going to be a great deal of gaming of the system.
VEry good analysis. And correct, in my judgment.
What Gruber ignored is that the problem is getting worse year by year. In other words the amount of gaming keeps increasing as people learn by doing.
I think this is a serious problem, but have any of you noticed that it seems to be interesting only to economists. Noneconomists never even bring it up.
I predict that Obamacare, if it survives, will adopt the type of penalty used with Medicare Part B. People eligible for Medicare are free to decline coverage, but if they later decide to accept Part B the premium is increased by 10% for every year they skipped coverage. There is no upper limit on the penalty and it continues for life.
Must be nice to live in a world where fines of more than $1,000 are “rather trivial.” (See http://www.massresources.org/infopages.cfm?ABPageID=93&MainParentID=93#howmuchpenalty for amounts)
And as there is nothing stopping the legislature from raising them, they have been going up rapidly since the law passed.
Ouch! That’s not a “trivial” criticism to be sure, from Linda Gorman. In 2009, the penalty for not carrying insurance was $1,068 for those at or above 300% of FPL, which was $32,496. That’s 3.28%. And the law (Chapter 58 of the Acts of 2006) refers to “gross household income”, which means the Authority uses individuals’ pre-tax income to determine penalties.
I see why Linda Gorman is unhappy with my adjective “trivial”. I meant it only relative to the true cost of health insurance. The fact remains that the Commonwealth Connector, like ObamaCare, will surely lead to a death spiral of taxation and subsidy, because it is politically impossible to levy a penalty or fine that approaches the real cost of health insurance.
Also, Yelowitz & Cannon provide compelling evidence that the Massachusetts reform has caused people to falsely report that they have health insurance, to dodge the fine.
There is no penalty for being uninsured if you belong to one of the longstanding Christian “medi-sharing” plans. I think there are only three, Christian Medi-share, Samaritan Ministries, and the Christian Brotherhood Newsletter. Something Obama apparently overlooked. Amish and Muslims are also exempt.
Is my choice whether to pay a medical insurance premium of say, 1,500 a month for my family or to pay a penalty to the state of 1,000?
Even if the penalty is monthly, if I have the right to drop and later rejoin the plan, I simply consider the 1,000 penalty as a 33% discount to my premium for so long as I am not enrolled.
In effect, I’m still “insured” because I can re-enroll whenever I want. I just have a way to get a discount. If I need expensive services, I’ll enroll, pay the full premium while I’m being treated, and when my treatment winds down, drop out again and reclaim my 33% discount.
Does this describe the choice I have?