Is ObamaCare a tax on the young?

Last updated on: October 3, 2013 at 10:51 am by Jane the Actuary

Is ObamaCare a tax on the young? 2013-10-03T10:51:00-06:00 Jane the Actuary

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OK, spoiler alert — yes.

Look, there are multiple ways of thinking about and paying for healthcare. In a place like the UK, publicly-funded healthcare is paid for out of general revenues. In a place like Germany, it’s paid for out of a special payroll tax — at the rate of 8.2% employee, 7.3% employer, up to a ceiling of about $60,000. In the US, of course, ObamaCare included all manner of tax hikes (mostly of the “soak the rich” variety, a few “sin taxes” such as the tanning tax, and various fees and taxes on health-related businesses), as well as being “funded” by cuts in Medicare, limits on medical spending accounts, and the like. But as far as I know, the benefits are really being funded out of general tax revenue — there’s no direct connection between the taxes raised as a part of this law and the benefits being paid out, nor any requirement that the benefits be scaled back if the tax revenue is insufficient or any kind of segregated account.

But part of the way that the system aims at keeping costs under control is through the 3:1 ratio of oldsters’ to young un’s premiums and the modified community rating requirement (that is, the requirement that people with health problems receive insurance at the same rate as everyone else — I believe true community rating doesn’t distinguish at all between old and young). The ObamaCare premium support system would function just as well with true actuarial rating — allowing insurance companies to price policies for old and young based on their actuarial value, in the same way as they do life insurance, for instance. (Though it would be a reasonable intervention to require insurance companies to price coverage for various specific health conditions appropriate to their risk of medical costs, rather than refuse to issue policies at all. And there should have been continuous-insurance requirements all along to provide insurance portability, but that’s another issue.)

(Everyone understands and is fine with the concept that life insurance for young people is cheap compared with old folks; how many times have you seen the commercials for life insurance for old folks, for burial costs, basically, with the widow telling her friend over coffee that she was so glad they had this insurance to cover the “final expenses,” that you can’t be turned down regardless of age, and there’s no health exam. “I’m going to call to find out about the Colonial Penn life insurance program, too,” her friend says. But no one gripes that it’s unfair that this costs considerably more than her grandchild’s policy.)

(OK, maybe I don’t watch the TV shows all the popular people watch. But, in my defense, I wasn’t watching Gunsmoke or Little House on the Prairie!)

Anyway, in such a case, the same mechanisms of ceilings how how much an indidivual or family would have to pay, as a percent of income up to 400% of poverty level, would apply. Of course, if you’re above the 400% PL threshold, and you’re a previously-uninsured 60 year old with diabetes, you’d be in trouble, but that’s the fault of the 400% PL cliff. But if these cliffs were fixed, the premium support would ensure that Americans would be protected from health insurance costing more than about 10% of their income (if I remember the sliding scale right).

But without the 3:1 ratio and the modified community rating requirement, the government would be paying a lot more. So the requirement that young people subsidize their elders shifts costs onto their shoulders. And in some cases — a young, well-paid single worker vs. an older working-class couple — this may work out to redistribution from the well-off to the not-so-much. But, on average, the young earn less than the old (or middle-aged, anyway). So I haven’t done the math, but my gut tells me that if I had the numbers at hand, this required subsidy would amount to taxing the young on account of their youth, in excess of the cost of a simple flat payroll tax.

Oh, and the pat answer that the under-26s are insulated from this because they stay on their parents’ policies? Don’t get me started at this component of the system, keeping young people dependent on their parents who should be forging their financial independence.

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