Monday, October 28, 2013

Why Obamacare won't work

The whole premise of Obamacare is that it will get healthy young people to pay more than they should for health insurance to subsidize the medical care of older, sicker people. That goal is falling apart before our eyes. Apparently, young people, even those who voted for the idealistic mirage of Obama, are not willing to roll over and be the victim of his redistributionist utopia.

Headlines are dominated by stories of the ongoing disaster of the mismanaged web site development and weekly reports of hundreds of thousands more people dropped from their existing coverage due to Obamacare. But behind that, the fundamental infrastructure of Obamacare is failing to materialize. The bill, drafted in secret, rushed through Congress, and passed in spite of the author's acknowledgement that it was not written correctly, is still full of defects. But those defects only exacerbate the fact that the concept behind the bill was fatally flawed from the beginning.

The law does not require states to establish an exchange. It was assumed that states would be eager to set up an exchange, but clearly they were mistaken. Even rats know to jump off a sinking ship, not onto it. The subsidies, which are a key part of the redistribution effort, can only be distributed through state exchanges. States which don't have an exchange can not, according to the law, get those subsidies. The Obama administration is trying to find a way to give the subsidies to the 26 states sensible enough to not establish an exchange, but it is not clear that there is a legal way to do it.

But more devastating than that is the fact that young, healthy people are not eager to self-destruct for the greater good. How quickly that idealism fades when you recognize that you are expected to pay for it all.

To understand how the new law is working, lets examine the case of Joe. Joe is 26, single, and self-employed. He doesn't make a whole bunch of money, but he is doing alright, earning around $50,000. Joe bought his own individual medical insurance, a low cost catastrophic policy intended to protect him in case he got really sick.

Last week, Joe was one of several million people who got a letter from his insurance carrier indicating that his policy is being cancelled. It doesn't meet the requirements of Obamacare insurance. He can buy a different policy, or go to and buy insurance there.

Joe compares his options, and is surprised to find that the cheapest policy he can get costs almost twice what he was paying last year. And that policy still comes with a $6,000 deductible. Sure, it will pay for his yearly checkup, but he paid that last year out of pocket. It was $150, which is nothing compared to the increase in his monthly premiums.

Joe realizes that he would have to run up more than ten thousand dollars of medical bills before this insurance would be advantageous to him. His actual costs have never exceeded $500.

Joe looks into the fine for not buying insurance. It is $95 or 1% of his income, whichever is greater. Well, one percent of his income is a lot less than it would cost to buy insurance. So that seems like a good idea. But what if he gets seriously sick? He's pretty young to get cancer or heart disease, and he is very healthy, but things happen. Well, the pre-existing condition requirements mean that even if he has some long-term ailment, he can still buy insurance.

So there is really no reason for Joe to pay $400 per month for medical insurance which only benefits him after he pays an additional $6,000 to cover the deductible. He can pay for his routine medical bills out of pocket and come out way ahead. If he gets injured, emergency rooms can't deny him treatment. And if he gets really sick, he can buy always insurance.

Cost of buying insurance:
$4,800 in premiums

Cost of not buying insurance:
$150 for doctor visit
$500 Obamacare fine

As long as he doesn't have more than $4000 in unexpected medical costs, not buying insurance is money in the bank.

But it gets better. Obamacare specifies that the IRS can't do much to get the money that they say Joe owes for not being insured. They can't seize the money or put a lien on his property to get it, and they can't even garnish his pay to collect it. The only way they can take it is if they owe Joe a refund. In that case, they can subtract it from his refund. All Joe needs to do is make sure that he withholds less from his pay check than he actually owes in income taxes. Then, every year Joe will owe the IRS on April 15, and they will not be able to take the Obamacare penalty from him.

This makes it a total no-brainer. Joe is much better off to self-insure for the smaller medical costs, and only buy insurance if something huge happens to him.

It turns out that there are millions of people in Joe's situation, and the deal cut with the insurance companies was that they would sign up for overpriced insurance in droves, to pay for the costs of accepting older patients and patients with pre-existing conditions. Every day more and more of these people are figuring out that Obamacare is a raw deal, and they are not buying it.

Without them, Obamacare will collapse.

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