Generation Y and Health Insurance

FireAlarmGeneration Y has gotten a bad rap, and it really isn’t deserved.  OK, the students protesting for free tuition and a $15 minimum wage on campus obviously haven’t done the math and clearly don’t understand much about economics. (In order to get “free tuition,” they would end up paying more over their lifetimes in taxes than they pay now for tuition.  Likewise, a $15 minimum wage on campus would mean things would cost more and their taxes would be higher.)  And yes, there are a lot of young adults moving back home and playing the perpetual teenager, thanks in part to their enabling helicopter parents.  But on health insurance, and on other entitlement programs, they get it.

An issue Generation X and the Baby Boomers were facing is that they were getting older and needing a lot of medical procedures, but they hadn’t saved up any money.  Also, healthcare premiums kept going up because they were getting sicker and using a lot more healthcare.  One of the big issues was that there was very little personal responsibility for keeping healthcare costs down since the patient wasn’t paying for it.  So, the older generations got together and figured out a way to “fix” the system.

They saw all of those twenty-somethings who never get sick but who weren’t buying health insurance (since they never got sick) and decided that they could force them to buy expensive health insurance with all of the frills and pay extra for it so that the older generations could pay less than the value of the healthcare they were using.  To make it sound better, they would force the health insurance companies to allow their parents to keep the Gen Y individuals on their insurance until they were 26 (it really didn’t cost the health insurance companies much more anyway, because again, they rarely got sick).

So, it was thought that the twenty-somethings would agree to pay way more for insurance than they used in heathcare, so they would be paying for the healthcare used by the older adults.  The older Americans loved this because they would be not need to pay for all of their healthcare.  They didn’t seem to worry that they spent their twenties and thirties spending their money how they wished, and they were now denying Gen Y this same opportunity.  The health insurers loved this because they would be selling expensive, full-coverage insurance to everyone, including the people who would never use it, and everyone would be forced to buy it.

Except the twenty-somethings looked at the cost of the insurance and figured out that it was not worth the price.  It was better for them to just pay the penalties.  In fact, if they kept their income low, by not getting a real job, the penalty they would actually pay would not be that big – maybe a couple of hundred dollars per year.  That was way less than the thousands they would have been paying in health insurance premiums.  Furthermore, they could avoid the penalty entirely by asking for a “hardship waiver,” which the government was happy to provide since they didn’t want to lose votes of the Gen Y crowd.

So as a result, many of the health insurers are losing money by the boatload.  They’re needing to cover the older, sicker Americans who pay far less in premiums than they receive in benefits.  Without the younger, healthy Americans there to pay the bill, insurance companies are losing billions of dollars.  Because Obamacare requires that the insurance companies cover everyone, even if a person signs up after they get sick and then drops coverage as soon as they get healthy again, they have no choice but to take on the sicker people.  Because the law also limits the amount they can charge for that insurance, there is no way for the insurance companies to break even, let alone make a profit.

For a period the American taxpayer was bailing out the insurance companies through what were called “risk corridors.”  Basically the government agreed to pay for any losses the insurers had, after those losses were offset by gains other insurers made.  Because no one made a profit, the government (meaning the taxpayers) was left bailing out everyone.  Now the risk corridor money has run out, so insurers are pulling out of the insurance exchanges to avoid bankruptcy.  As an example, United Healthcare has announced that it may pull out of the exchange marketplace next year.

Now I doubt many Gen Y individuals sat down and did the calculations, estimated the likelihood that they would get sick, what the cost of that illness would be, and then determined if the insurance was worth the money based on a risk benefit analysis.  Instead, they just had an innate sense that what they would pay in premiums was not worth it.  They realized that the chances of getting sick are fairly low, that what they would be paying in premiums over a couple of years would be more than the cost of many of the things that could happen to them in terms of healthcare needs, and decided to opt out.  Unfortunately in many cases they chose to just ignore the issue and hope nothing happened, rather than save up some of the money they would have been paying in premiums in case something did happen, which means they would burden other healthcare users with their costs should they get into an accident or something.  This leaves us exactly where we were before Obamacare, except with a lot more government employees and rules on doctors and hospitals, narrowed networks (meaning it is hard to find a doctor), more expensive health insurance since now plans must cover everyone (and because more people drop out as the price goes up), lots of more people on Medicaid with the government already $20T in debt, and doctors leaving the profession.

So how do we get everyone covered and stop having hospital bills lead to bankruptcy to the unfortunate few who do get really sick?  Well, instead of having Gen Y pay for the healthcare of Gen X and the Baby Boomers and then hope that there will be someone around to pay for them when they get sick, we should simply require that everyone start an HSA and contribute a reasonable amount of their income each year.  Because people would be putting money away for healthcare, when they got sick they would actually be able to pay their bills much more of the time, meaning the costs would drop for everyone since those who were paying would no longer be picking up the bill for those who weren’t.

On top of this, each individual should be required to buy major medical insurance – insurance that kicks in when you go to the hospital for several days – with a premium set based on the amount of money in their HSA.  Because this insurance would only pay when they had a major event, the cost would be a lot lower than the cost of Obamacare.  They would rightly judge that $500 per year or so was worth it to avoid having a $100,000 hospital bill they couldn’t pay.

Finally, we should require doctors and hospitals publish their prices for procedures where everyone could see them so that people could comparison shop.  And these would need to be the real prices – what the insurance companies actually pay them, and not the price on the books that almost always gets sliced down.  Wouldn’t it be great for hospitals to consider what would be a reasonable price for things because they knew that people would go elsewhere if their prices were too high?  This would help solve what is really wrong with the healthcare payment system – list prices are way too high, and those without insurance are forced to fight the price down on their own when they are sick, while insurance companies pay no where near those amounts, so people are forced to buy their healthcare through insurance companies even though the cost overall is higher that way than if they were to just pay on their own and hospitals just charged the real prices from the start.

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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. 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. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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