Two Types of Uninsured

As of this week, we have officially entered a new phase of the rollout of the Affordable Care Act.

Up until now, the arguments have largely been ideological and based on educated guesses. Critics and supporters alike have had little in the way of objective data with which to make their points. Regular readers of this column know I fall firmly into the first camp, and have from the beginning. But applying logic to how the law would likely play out and seeing how it would actually play out are still not quite the same.

The data we have waited for has finally begun to arrive, however. Earlier this week, administration officials released the latest enrollment figures for health insurance purchased through the government exchanges. Unsurprisingly, the numbers show that older, and potentially sicker, Americans make up more than half of those who have enrolled in the first three months of the program. Administration officials reported that 55 percent of them were between the ages of 45 and 64. Only 24 percent were between 18 and 34.

Brendan Buck, a spokesman for House Speaker John Boehner, R-Ohio, said, “There’s no way to spin it: youth enrollment has been a bust so far,” The New York Times reported. The law’s detractors point out that, if the demographics don’t change, the law will quickly become financially unsustainable.

Even Obama administration officials could not do much beyond promise that they would become more aggressive about youth outreach efforts, and claim that the numbers were “solid, solid news” for the Affordable Care Act. The fact that people can sign up at all might be seen as a step in the right direction, after the disastrous fumble that was the launch in October. Still, these numbers underscore the law’s most fundamental problem.

There are two kinds of uninsured people: those who were uninsured because they could not get insurance due to a pre-existing condition, and those who did not want insurance at the price it was offered because they gave higher priority to other uses for their money.

Obamacare guaranteed that the first group would flock to its plans with the requirement that insurers not turn away those with pre-existing conditions or other risk factors. This might have worked if the second group, largely younger and healthier, had also flocked to the program to subsidize group one.

The problem is that the second group, for the most part, hasn’t shown up. The law’s penalties, as I have written before, are largely toothless. And as health insurance gets more expensive, even a larger penalty will remain substantially less than the cost of a year’s worth of premiums. Some people like their odds of remaining healthy; others are just healthy enough that, when they must choose between competing priorities, insurance is one that they let slide. The Affordable Care Act is not forcing them to do otherwise, and this will mean that insurance is only going to get more expensive.

It is also worth noting that nearly 80 percent of those who selected a plan qualified for federal subsidies. This suggests the converse; those who don’t qualify for subsidies largely stayed away. In addition, as The Washington Post’s Sarah Kliff observed, insurance rates are set on a state level, so the ratios state-by-state are even more important than the national figures.

Insurance works because a large pool of insured can affordably pay for the subset of those who actually get sick. If we know that insurers can’t turn us away when we are already ill, the incentive for paying while healthy declines. As fewer healthy people pay in, the cost goes up, making insurance even less attractive for those who don’t yet need it. The law is speeding up this process, and we can see it in action.

The administration will almost certainly try to delay the inevitable consequences of this “adverse selection,” the term actuaries use when insurance is bought only by those who are unusually likely to need it. Officials will doubtless pressure insurance companies not to raise premiums as soon, or by as much, as the companies would otherwise prefer. But eventually, insurance companies will have to raise those rates to survive. Either that, or the law will somehow have to change to get the voluntarily uninsured on board. Simply raising awareness among healthy young people – many of whom are grappling with student loan debt and an unemployment rate still substantially higher than that of the general population – will not be enough.

A large group of people don’t want this insurance, and it is unlikely they will want it more as it becomes more costly. The sick and the subsidized will keep signing up, while the healthy or unsubsidized stay away. This lopsided state of affairs can’t last. But if we don’t want it to end with the health insurance industry crumbling, we will have to arrange things so that the group who doesn’t want this insurance does not have any option other than to take it.

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About Larry M. Elkin 564 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

Visit: Palisades Hudson

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