ObamaCare's Success Is Dependent on Young Adults

August 23, 2013

If the ObamaCare health insurance exchanges are to function properly, it is crucial that a substantial number of people ages 18-34 join them. This age group that is young and relatively healthy must purchase health insurance on the exchanges in order to "cross-subsidize" people who are older and sicker. Without the young and healthy, the exchanges will enter a "death spiral" where only the older and sicker participate, and price of insurance premiums will increase precipitously, says David Hogberg, a health care policy analyst for the National Center for Public Policy Research.

  • In 2014, many single people aged 18-34 who do not have children will have a substantial financial incentive to forgo insurance on the exchanges and instead pay the individual mandate penalty of $95 or one percent of income.
  • About 3.7 million of those ages 18-34 will be at least $500 better off if they forgo insurance and pay the penalty. More than 3 million will be $1,000 better off if they go the same route.
  • This raises the likelihood that an insufficient number of young and healthy people will participate in the exchanges, thereby leading to a death spiral.

If the exchanges do not attract a sufficient number of people in the 18-34 age demographic, they will eventually enter an insurance "death spiral." This occurs when the young and healthy drop out of the insurance pool. This leads to adverse selection in which insurance is only attractive to those who are generally older and sicker. If the insurance pool is comprised largely of people who are older and sicker, then insurance prices will rise to cover their costs. That rate increase causes even more young and healthy people to drop their insurance, leaving the pools even older and sicker than before, and so on. Eventually, all but a few insurers will be forced to discontinue their business on the exchanges because they can no longer make a profit. Fewer insurers mean less competition, resulting in even higher insurance premiums.

  • A quick run of the data shows that there are about 4.3 million 18- to 30-year-old single individuals who would be eligible for the exchanges.
  • Of those about 2.9 million have a $500 incentive to avoid the exchange and about 2.38 million have a $1,000 incentive.
  • Even if we assume that those who do not buy insurance are limited to those with the $1,000 incentive, the exchanges would still come up about 780,000 short of the 2.7 million 18- to 30-year-olds needed to avoid a death spiral.

Source: David Hogberg, "Why The 'Young Invincibles' Won't Participate In the ObamaCare Exchanges and Why It Matters," National Center for Public Policy Research, August 2013.

 

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