Why Are Health Insurance Rates Going Up? Simple Economics.

Rates for healthcare plans under the Affordable Act (ACA) are projected to go up by double-digit rates in many areas.  You can find information for your specific area by going here:  https://ratereview.healthcare.gov/.  While there will be likely be many explanations for these increases such as greedy healthcare executives or a vast right-wing conspiracy to scuttle the healthcare law, the reason really comes down to simple economics.

Let’s say that five people have health insurance.  Two of the people use $10,000 in healthcare each year.  Two of the people use $5,000 per year.  The last person doesn’t use any care each year.  The insurance company would pay out $30,000 in coverage each year (two times $10,000 plus two times $5000).   If everyone paid the same premiums regardless of how much  care they used, the insurance company would need to charge at least $6,000 per person ($30,000 divided by five people) or they would be losing money.  They might charge $6500 each  person so that they would make a $3,000 beyond costs to pay for costs and to provide a small profit at the end of the year for their trouble.

 The trouble with this scenario is that the fifth person is paying $6,500 for the coverage, but he never gets sick and therefore never gets anything for his money.  If he is allowed to drop the coverage, he might decide to drop out.  The cost to the others would then go up to $8,250 per year since they would need to pay for the costs of the healthcare provided.  The two people only receiving $5,000 in coverage might then decide to drop out as well since they are paying more than they’re receiving.  This would make the cost to the two individuals remaining go up to $11,500 per year.  Note that they are only receiving $10,000 in coverage but are paying $11,500.  They still need to pay for the policy infrastructure and give a profit to the insurance company, so they end up paying more than they would if they were just to pay for their healthcare on their own.  Remember that with insurance you need to pay the costs plus administrative fees and profits.

 What if you forced the individuals who would otherwise drop out to remain in the program and pay their premiums?  Well, since they were being forced to buy coverage, they would justifiably increase the amount of healthcare they were using.  They might go in for a physical and some blood work each year, or maybe a couple of times a year, since they were paying for it anyway.  They might go in when they had a cold or a minor condition that they would just buy over-the-counter medications for otherwise because they were paying for it anyway.  This would push the costs to cover everyone up, causing premiums for everyone to increase.  Again, individuals would end up paying more than they would have if they had just paid for the medical series themselves.

The ACA forces people to buy coverage, but not really.  The idea of the law was that, by forcing younger, healthier people to buy coverage and pay for more healthcare than they were likely to use,  the costs for the older, sicker people would decrease.  Tax subsidies, paid for by the general population, would also be used to reduce the costs for the older, sicker people.  Our fifth person in our scenario would be paying his premiums and paying for the care of the two individuals who were only paying $6500 per year but using $10,000.  That fifth person would need to hope that there were people around to pay for him when he was older and started using more healthcare since he would be paying out money when he was young even though he was not sick, making it difficult for him to save up for when he needed more care later in life. 

The penalty from the ACA, however, is not that large.  Only a few hundred dollars a year, or 1% of income.  Many younger people figured out that they could pay out thousands of dollars in premiums for care they would not use, or they could just pay a few hundred dollars.  Because fining the young voters who elected the Democrats who put the ACA in place was not a smart move near the 2014 elections – right at the time the penalties were supposed to be enacted – there were even liberal waivers granted so these individuals didn’t even need to pay a fine at all.  This meant it cost nothing to not comply, so many people just went without buying coverage.

As a result, the only people who enrolled are the older, sicker people who use more healthcare than they pay for.  These indiviauls might use $100,000 per year in healthcare, but only pay $12,000.  This meant that the health insurance companies, who were counting on a lot of healthy people paying premiums and using little care, were stuck paying out a lot more than they were receiving in premiums.  Luckily for them, there were provisions in the law in which the taxpayers would reimburse them for their losses.  That backstop runs out, however, so insurance companies are now raising rates to account for the older, sicker pool of individuals in the health exchanges.  This means that insurance premium costs are increasing by 20% or more in some states.

So what is the solution?  You need to get everyone who can pay for healthcare, if they put saving for healthcare ahead of other things like smart phones and vacations, to do so.  Most individuals could easily cover the healthcare costs of their own families if they were putting away 5% of their paychecks and saving up the money for when they were older and using more healthcare.  Think about the $10,000 in insurance payments you currently make (between you and your employer) if you have coverage.  If you saved that money instead, you’d have enough for a major surgery in just five years.  Saving and investing over a working career, even with a surgery here and there along the way, you’d easily have enough money for healthcare in retirement and for a nursing home at end-of-life (or even a live-in nurse).

There would be a few people who were unfortunate.  Those who got cancer early in their working careers or who were born with diabetes, for example.  If most people were saving and paying for their own healthcare, however, doctors and hospitals could treat these few unfortunate people for free or very reduced costs.  Costs in general would also be lower without the costs of administering the health insurance plans.  As a last resort, public healthcare could be provided via clinics and government hospitals.  Of course, given the quality of care at the Veteran Administration hospitals seen today, most people would work hard to avoid having to use this option.

Contact me at vtsioriginal@yahoo.com, or leave a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.


  1. So what should the strategy of a young person under 30 be? To simply have the ability to use a hsa I Have to have a hdhi plan, the cheapest hsa qualified plan is 180 a month. You would think they would encourage a HSA at any plan rate, at least for a certain income bracket!
    I believe the penalty raises to 2% this next year, what would be the most financially savvy course of action for somebody young, with a net worth of 20-30k?

    • Well, there’s two answers, one from a national standpoint and one from a personal standpoint.

      From the national standpoint, you should point out to your friends the reason the healthcare law doesn’t work (as explained in this blog) and how things would be better if most people saved when they were young (so that they would be able to pay for their own healthcare when they were older and used more care) and just had major medical insurance for the unexpected major events. You should then vote for people who would seek to change the law and encourage your friends to do so also. Given Twitter and Facebook, along with many other peer sharing sites, it would be easy to get the word out. You should also write and call your Senators and Representative and ask them to change from the Affordable Care Act to a system where everyone contributes to private HSAs so that they have money for medical care when they get sick so it isn’t a big deal. As you said, everyone should have an HSA option. The more of your friends you can get to call and write, the more likely it is you can change things.

      From a personal standpoint, while you’re trying to change the country, you need to choose the best option for yourself. With a 20-30k income, your should get a large subsidy under the ACA. Supposedly the amount you pay for health insurance should be limited to a percentage of your income. You should buy the cheapest plan you can, then save up money on the side to pay the high deductible and out-of-pocket costs should something actually happen. You should also be working to learn new skills and move up the income ladder and out of the $20-30k pay range. The best way to do that is to figure out what skills are needed most by your employers and others and learn those skills. Also, be saving and investing so that you can become financially independent in your forties.

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