Rabu, 11 Juli 2012

Should You Drop Your Personal Health Insurance Under ObamaCare?

Now that the Patient Protection and Affordable Care Act (PPACA), more commonly known as "ObamaCare", has been declared to be constitutional, we thought we might revisit a topic we had originally considered after it was signed into law: Does it make more financial sense for you to pay for health insurance or to pay the ObamaCare mandate tax instead?

Chance of Going to Hospital
Age Group Female Male
Less than 1 1 in 3 1 in 2
1 - 10 1 in 10 1 in 8
10 - 20 1 in 9 1 in 10
20 - 30 1 in 4 1 in 8
30 - 40 1 in 3 1 in 6
40 - 50 1 in 4 1 in 4
50 - 60 1 in 3 1 in 3
60 - 70 1 in 2 1 in 2
70 and Older 4 in 5 (1 in 1.25) 4 in 5 (1 in 1.25)
Ideally, ObamaCare is intended to provide health insurance coverage to all Americans, regardless of their current state of health. Unfortunately, the new law provides powerful and perverse incentives that can encourage healthy individuals to drop their current health insurance coverage altogether.

Here's how that works. Under the law, individuals who have health insurance coverage either through their employer or on their own are excused from having to pay a tax that is based upon their household income. Those who do not have health insurance however will not be able to avoid having to pay this tax, which will be enforced by the IRS.

We should note that those who have health insurance aren't exactly coming out ahead. Even for Single coverage, the cost of health insurance is several times greater than the amount of the tax they would otherwise have to pay, which is what sets up a really perverse incentive for individuals to consider.

Because the law also requires health insurers to provide immediate coverage to individuals even if they have a pre-existing condition, an individual could reasonably choose to drop their insurance coverage, pay the much less expensive tax instead, and pocket the difference as savings until they actually might need coverage, with insurance companies compelled by law to provide insurance to these individuals on demand.

In a sense, that choice is no different than deciding whether or not to play the lottery based on the odds of winning, with the price of a ticket being represented by the tax and the grand prize being the potential savings and the odds determined by the probability of needing health insurance.

Income, Health Insurance Costs and Probability Data
Input Data Values
Annual Income
Cost of Health Insurance Policy
Health Insurance Policy Type
Odds of Needing Health Insurance

[1 in ...]

Does It Make Sense to Keep or Drop Current Health Insurance Coverage Under "ObamaCare"?
Calculated Results Values
Annual Tax for Being Uninsured After 2015 (the Price of a "Lottery Ticket" Every Year)
Likely Accumulated Savings from Dropping Coverage Over Several Years (the "Prize for Winning")
One Year Cost of "Losing the Lottery" (Tax Penalty + Cost of Health Insurance)
The Bottom Line

But would dropping insurance coverage actually make sense for healthy individuals? To find out, we've built a tool to run those kinds of numbers!

For 2011, the Kaiser Family Foundation's annual survey of Employer Health Benefits reports that the average annual premium for an individual health insurance policy in 2011 was $5,429, or $15,073 per family.

That contrasts with a potential penalty tax of the higher of either $695 per individual (or $2,085 per family) or 2.5% of annual income, which will go into effect in 2016 (HT: Bob Vineyard). So the only question left is "what are the odds of one needing health insurance on short notice?"

We'll define those odds as the chance that an individual will need care in a hospital. We found the statistics for Australia, which breaks those odds down by age and gender, and which we'll assume are similar for individuals in the United States.

Playing with the numbers in our tool, what we find is that the less likely an individual will need medical care, the more it is to their advantage to drop their current health care coverage and become uninsured, buying it only if it becomes necessary, then to drop it again once its not needed.

We also find that it takes a very high level of income to justify continuing one's health insurance coverage. In both cases, the worst off an individual would be is if they must pay both the tax penalty and the annual health insurance premium year they require it. But then, if enough people drop their coverage to pocket the savings, look for health insurance premiums to rise at rates even faster than they do today!...

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