Myth: The Fate of Obamacare is In Millennials' Hands


Very serious people are very worried. They are very worried that millennials won't sign up for the Affordable Care Act (ACA), causing the whole bill to crumble in a "death spiral." This "death spiral" theory has caused a "war of the inane ad" to win over the Millennial generation, a war that has been widely lampooned for its absurdity (because most ads are so sane and reasonable). And the recent Obamacare enrollment numbers caused more very serious concerns.

But the entire problem, like many of the problems very serious people identify, is entirely mythical.  

The idea behind the "death spiral" is deceivingly simple. Health insurance at its most basic involves paying into a pool of money and then taking out when you need care. People who are young are less likely to need care than people who are old. That is, they are less likely to draw from the pool than older people. Normally this would be fixed by the fact that people pay different premiums based on their likeliness of falling ill. However, the ACA regulates how much insurance can discriminate when setting premiums, creating an adverse selection problem. Those who are most likely to need insurance are more likely to get insurance than those who aren't as likely to need it. If large numbers of young invincibles decide to opt-out of the system, then the "goes ins" will be less than the "goes outs," causing the pool to collapse.

The theory sounds simple and intuitive. But it suffers from some flaws. First, young people may feel invincible, but they are still courting bankruptcy if they choose to go without insurance. Humans are risk averse (which is why insurance exists in the first place) and thus weigh the small chance of a very frightful possibility (bankruptcy) and are likely to err on the side of caution. Second, not getting insurance entails a penalty, a small one certainly, but a penalty for which the young person receives nothing. Third, most young people aren't super-rich, and they are therefore eligible for subsidies. 

But the real problem is that while the ACA regulates premiums, it isn't so onerous that insurers cannot adjust their rates to reflect the fact that young people tend to be healthier. The Kaiser Family Foundation found, "Enrollment of young adults is important, but not as important as conventional wisdom suggests since premiums are still permitted to vary substantially by age." Instead, it is healthy people of all ages that need to sign up. The ACA prevents insurance companies from using gender or health condition to set rates. It also limits the ratio that companies can vary rates based on age, meaning that young adults will pay slightly more than their fair share.

How do they know? They ran a simulation estimating the effect on the market if young people (between the age of 18 and 34) made up 25% of the enrollees. This is essentially what's happening right now, young people make up 24% of enrollees. That's low, 50% below their share of the potential market, but according to the analyisis, not catastrophic. They cite two reasons. First, young people tend to sign up late, and 58% express a desire to covered in 2014. Second, even if this scenario holds, "overall costs in individual market plans would be about 2.4% higher than premium revenues." Insurers would have to raise premiums, but "a one to two percent premium increase would be well below the level that would trigger a 'death spiral.'" 

The real question, the authors argue, is, "From the perspective of keeping insurance premiums stable, how enrollment is distributed by health within each age group is, in fact, more important, since premiums cannot vary at all by health status under the ACA. In other words, the goal is to enroll healthy as well as sick young adults, and also healthy older adults." The reason is that insurance companies can still charge you a higher premium if you are young than if you are old. Since they can't ask about your pre-existing conditions, it won't be as easy to adjust premiums based on an individual's healthiness. 

There are also built-in mechanisms to prevent "death spiral," like "risk corridors" and "risk adjustment" and "reinsurance." Long-story short: if not enough young, healthy people sign up, the government will pick up part of the tab, preventing a spiral. Do insurers think they'll get enough premiums to cover their costs? Yes, and they have what Nassim Taleb calls, "skin in the game."

So, we millennials have to get over ourselves. We don't hold the fate of the ACA in our palms. The ACA will depend on healthy people of all ages signing up, which makes the "death spiral" theory harder to swallow. A young person may go without health insurance knowing that if worst comes to worst, they can fall back on their parents. A middle-aged person, even a healthy one, has to worry about her family. So the ACA isn't entirely out of the woods yet, but the Obama administration can certainly relax knowing that the success of his signature program doesn't depend on a fantastically bad advertising campaign.