Health Care and ‘Adverse Selection’

A headline in today’s Wall Street Journal caught my eye: “Lawmakers Call for Delay in Penalties for the Uninsured.” Basically, in 2014, if you don’t have health care coverage, you’ll be fined. But, because of the healthcare.gov web site problems, which are making it difficult to enroll for a plan, some lawmakers think it would be fair to delay the penalty.

Why does this matter?  Well, as I read it, the Affordable Care Act (known as “Obamacare” to his opponents), is a very large income-transfer system. To extend health care coverage and subsidize its costs to the needy and sick, the government is paying for it by increasing taxes on the wealthy and encouraging young-and-not-sick people to enroll in a health care plan and pay insurance premiums.

Hence, the penalty if you don’t have a plan. In this system, you have to “pay and play” and cannot opt out. The wealthy and the young are funding a system to care for the poor and the sick.

The penalty phases in as a flat fee or a percentage of your income, and it escalates over time.  Here’s the schedule:

2014 = greater of $95 per person per year or 1% of your income
2015 = greater of $325 per person per year or 2% of your income
2016 = greater of $695 per person per year or 2.5% of your income

IMO, this is a very sophisticated way to avoid what economists call “adverse selection.” Our health care system will suffer from adverse selection if only the ill and poor are enrolled. The system will only work if we’re all in it. We need takers and givers for the system to be self-funding.

I’m hoping the politicians can balance the appropriate incentives to make this new law work. It is the law of the land, and whether you like it or not, it’s here. But, if adverse selection sets in, we’ll have an incredibly out-of-control entitlements program that will only worsen the deficit.

You cannot forever spend more than you make. That’s the road to bankruptcy.

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