A new health care bill American Health Care Act passed in the House. Just like the new tax plan outline, who knows whether it will pass in the Senate or what will change.
From the previous post Health Insurance As A Tax we came to know that health insurance isn’t really insurance when you pay the same premium whether you are healthy or sick. It’s more of a forced subsidy from the young and healthy to the old and sick for the greater good.
Because people are self-interested, the young and healthy won’t just volunteer the subsidy if they are left to their own devices. They have to be coerced.
Health Insurance From Employer
To those who get health insurance through their employer, the coercion takes the form of a part of their total compensation being held back from them no matter what, just like a tax. If they don’t sign up for health insurance, they still forfeit a part of their total compensation anyway. Within the employer’s walls, everyone gets universal health insurance, funded by a “tax” on everyone.
The ACA uses the individual mandate penalty fee as the coercion. For well known reasons (relying on self-declaration, no teeth in enforcement, penalty amount too small), that coercion is very weak. The penalty, if you pay it at all, is only a small fraction of what you otherwise would have to pay for insurance. As a result, not enough young and healthy sign up for health insurance from the ACA.
The House bill to replace the ACA uses late enrollment penalty as the coercion. It says if you have a lapse of 63 days or more in the previous year you will pay 30% more for one year when you sign up. Compared to the self-declared penalty fee for not having insurance, the late enrollment penalty is much easier to enforce. At the time you sign up for insurance, if you don’t show evidence you had continuous coverage you will pay more.
Is this 30% penalty for one year strong enough to make people sign up right away? We can infer from Medicare, which also uses late enrollment penalty to make sure healthy seniors sign up even when they don’t feel they need it.
Medicare Part B
Medicare Part B covers doctor visits, lab tests, surgeries, and supplies. Enrollees pay only 25% of the total cost of the program. Currently the premium is $134/month for most seniors. You would think the value alone would make people want to sign up at the first chance. Besides, people over 65 have a stronger incentive to sign up because they need more health care services.
To make sure that people don’t wait until they really need services, Medicare Part B imposes a late enrollment penalty. The penalty is 10% of the premium for each year of waiting. You pay the penalty for not just one year, but permanently. If you wait two years you pay 20% more forever. If you wait five years you pay 50% more forever.
Medicare Part D
Medicare Part D covers prescription drugs. It’s also heavily subsidized by the government. The current average premium is about $35/month. Even so, to make sure those seniors who don’t take much prescription drugs sign up and pay their small share when they are first eligible, Medicare Part D imposes a late enrollment penalty of 1% of the premium for each month of waiting (12% penalty for each year of waiting). Again, the penalty is permanent. If you wait you pay more forever.
Paying only a small fraction of what it really costs plus the permanent late enrollment penalty makes seniors enroll in Medicare Part B and Part D right away even when they feel they are still healthy at 65. The premiums paid by the healthy 65-year-old’s go toward subsidizing the sick 85-year-old’s.
Stronger Force Needed
When people over 65 need a late enrollment penalty this strong to make sure they pay their small share, 30% higher premium for just one year on the young and healthy won’t cut it. In order to have the desired effect, the late enrollment penalty has to escalate the longer you wait and it has to be permanent, just like in Medicare.
When you want the old and sick to afford insurance, you have to make the young and healthy pay, either in taxes or in premiums or both. There is just no way around it. Think someone young and healthy who makes $60k with benefits versus another person who makes $70k without benefits. A large part of the $10k difference goes to cover other old and sick employees at that employer. The person making $70k without benefits is used to getting 100% of the income in cash. They need a stronger incentive to part some of it for the benefit of the old and sick in the society.
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Olivier Schreiber says
You should submit your article to fee.org
They would love it.
I absolutely agree. The same 10% penalty applies for re-enrolling after failing to pay premiums and losing medicare coverage, right? I believe that would be similar to letting coverage lapse and signing up during next enrollment period under current ACA or AHCA in future.
Harry Sit says
Most people have the Medicare premium taken out of the Social Security check so it can’t lapse. If you are paying separately you are allowed a grace period to catch up. If you blow through all the late notices and get disenrolled, the late enrollment penalty would apply when you re-enroll after a grace period.
Source: Disenrolling from Part B
> Because people are self-interested, the young and healthy won’t just volunteer the subsidy if they are left to their own devices. They have to be coerced.
This is debatable. This opinion adds nothing to your otherwise great analysis 🙂
Harry Sit says
Which are you saying?
a) People are not self-interested; or
b) Even though they are self-interested, the young and healthy will still volunteer the subsidy on their own; or
c) Even though they won’t volunteer the subsidy, they should be left alone.
Are you defining self-interest as purely worrying about your own bank account? Certainly that’s a big motivator, but I think that’s far from the only thing that drives us. People are not averse to helping others. Americans give a ton of money to charity to improve the lives and health of people in developing countries. Why would we give this money to people across the world, but not to our own citizens? (and of course there is domestic charity as well).
People feel that government already takes care of the poor, sick and elderly in this country, so why give to a charity that would do the same? It is called the crowding out effect: government coercion crowds out private charity – meaning, there would be more private charity if there were less coercive taxation.
We can debate the size of this effect, the ideal balance between taxes and private charity, or our assumptions about the goodness of fellow humans. But it is a mistake to take the necessity of coercion for granted without talking about possible alternatives.
Harry Sit says
Got it. That’s basically (b) Even though they are self-interested, the young and healthy will still volunteer the subsidy on their own.
We have charities for many health problems (American Heart Association, American Lung Association, American Diabetes Association, …). Instead of or in addition to just raising money for research, they can raise money to treat people with that illness. There’s probably a charity for each known illness. Nothing stops the charities from doing it now or before. CBO said how many million will lose coverage. Well they don’t need coverage when they can just go to those charities or set up a gofundme campaign.
Somehow I don’t see it happening. I agree it’s a debatable opinion.
Thank you for sharing your point of view. I really welcome a different train of thought. Government + Charity = Total. There may be a crowding out effect etc due to government coercion. These are truly real effects. But shouldn’t we be worried about efficacy too? If the sick person does not avail charity because of shame etc, marginal efficacy is lost. Here government coercion/incentive works better. When government establishes a definitive backstop, it becomes a safety net. Charity is just that – charity, goodness of someone else’s heart. It is not a safety net. Having universal access to affordable healthcare is a vital state interest in building the most productive workforce and well being of society. I personally do not like the over-attention to the insurance aspect of it. Insurance is not for reimbursement. Insurance is for catastrophic events.
I welcome further debate on this.
@KD: I certainly worry about efficacy. Your concern about people going without help due to shame is a real one, I’ve certainly heard it before. The size of this effect is also debatable. I do find it ironic, and sad, that people would feel shame going to their family or community for help, but somehow would find it normal and acceptable to use resources extracted by force from total strangers living thousands of miles away. This is a cultural issue. Traditionally, communities and families did care for their elderly and sick. It’s a fairly recent development that federal government took on that role. It’s certainly a complicated situation. But for some reason today many feel that that is no longer a good idea.
The other efficacy concern is that government does not spend all that money wisely. Charities could be more efficient. Much like businesses, they can experiment with different models, and successful innovations can be copied and spread, while impact of failure can be limited. These days there are better attempts to rate charities than ever before (e.g., GiveWell.org). Charities compete for donations, and both efficiency and outcomes can be measured and can be prominent factors in donor preferences. Voting with dollars is often more effective than… well, voting 🙂
Clearly we cannot switch to the charity-only model overnight, and maybe that’s not even the best model. But it is possible (and I think likely) that the pendulum is too far on the other side today.
Completely agree about insurance. It would be a move in the right direction if insurance was for catastrophic events, and also not tied to employment.
@AM: Here is my problem with voting with dollars. Consider a church. A few members pledge and donate from every paycheck and the funds are used for operational and charitable needs. Once in a while, someone shows up. “I am willing to give a large amount of dollars for the stained glass window I would like installed.” More often than not, the church accepts it, even though the greatest need is for operational purposes. This results in disaffection of those who are pledging. Now we have created a moral hazard.
Government, by design, is the efficient way – everyone has a say (or at least everyone’s interest is to be represented). It will allocate most dollars for operation as possible. Mismanagement will happen, but that does not make the platform of government bad. Asking government to be innovative in delivery of services is a tough and gargantuan ask. Innovation involves risk. When that effort fails, there are people whose lives are affected for worse.
One thing that strikes me is that US rarely adopts practices that are successful elsewhere especially with respect to healthcare. Politicians talk of healthcare as if they are inventing the wheel. It is an issue that has been successfully addressed elsewhere in the world for many decades. Not optimally but effectively.
I’m not sure how you reconcile the idea that gov’t is efficient by design, and that it is a good platform, but then immediately saying that government cannot innovate. How is that a good platform? Yes, lives could be affected by failed innovation. So we could decide not to innovate at all, or we could disperse funds and management (read: independent charities deciding what to do with their money, accountable to donors), innovate more locally and quickly, fail faster with less impact, but spread successful models.
Applied to the health insurance, this seems like it would lead to a death spiral if someone can’t afford the premiums. If they can’t afford insurance in year 1, the next year they go up 10% (or whatever) which is probably more than their raise, so they can’t afford it in year 2, either. And so on.
Also unlike Part B,
* The premiums are bigger
* The people are younger and would be stuck with the larger premiums for longer (depending on how it was written)
* As you mentioned, with Plan B, the entity collecting the money is actually issuing you a check that they can just deduct the amount from on your behalf.
I don’t understand the groupthink on Part B late enrollment penalties. Every website I checked emphasizes the cost of the penalty without factoring in the benefit of delaying enrollment.
I have a federal employee health plan for self+family as a federal retiree. I need to hold onto this plan for up to eight years, or until my youngest child turns 26. (I am married.) No private plan for my daughter (not to mention my wife) would cost less than this were I to drop my FEHB plan and sign up for Part B, and of course it’s not even close.
By not signing up for Part B on my eligibility date in 2018 (and my wife doing the same in 2024), I am saving $13,000 (on me) and $4000 (on the wife)=$17,000 by the time I would sign both my wife and me for Part B in 2026. It would then take me 10 years to break even on the $13,000 I saved, and it would take 12.5 years to break even on the $4000 my wife saved. I will be 83 at break even, my wife 77 1/2 at break even. I think I am willing to take this risk.
Am I missing the elephant in the room, or what? Nobody, and I mean nobody, compares the benefit of delaying Part B sign-up with the penalties. Yes, there are many unknowns. I don’t know whether my daughter will need my health insurance until age 26. Our health is good right now. It will deteriorate no doubt. We don’t know what will happen to basic Medicare premiums. We don’t know what will happen to my federal health plan premiums. So of course none of this can be factored in to my analysis. But where is the cost/benefit analysis on delaying signing up for Part B?