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The economics of Obamacare from the customer’s perspective

April 1st, 2014 · No Comments

– Robert Light

Much ink and bits have been written about the economics of Obamacare from the taxpayer’s perspective – but little has been written about Obamacare from the perspective of a consumer. In the “real world”, before you create a product, you spend a lot of time understanding your customer – what will motivate him to part with his money and buy your product? The Obama-nics sit and wonder – why aren’t there millions of people signing up for Obamacare – it’s such a great deal??

As of the almost-not-quite-deadline-with-possible-extensions date of March 31, 2014 – Obama claims to have 7 million people signed up for Obamacare – 80% or more had coverage previously that was canceled due to Obamacare itself… so we can be glad that a whopping 1.4 million people have health insurance now that didn’t have it before. The problem, of course, is that we still have 30-40 million uninsured individuals.

We need to recall the fact that the main goal of Obamacare was to get everyone “covered” so that hospital emergency rooms would not be used as doctor’s offices and preventable illnesses can indeed be prevented by patients who have the resources to see a physician.

It will be many months before we have a real breakdown on how many of those new enrollees have actually paid for their insurance and how many are enrolled due to the expansion in the Medicaid program…. but for now, we can safely assume that a pitiful few people actually have insurance now that didn’t have it before. In short, the customer isn’t “buying” – even with financial incentives and penalties.

The question is “why?”…..why didn’t people sign up in droves – it can’t totally be blamed on a messed up website.

The answer lies (as it usually does) in economics. People look at their upside and their downside and make an decision based on the value they perceive in signing up…and the threat they perceive in not signing up.

Healthcare insurance is not like fire insurance – where the MOST you can loose is the value of your home and possessions. With healthcare, the most you can loose is: absolutely everything…. as you will literally pay every dollar you have – every asset you can pawn to get well.

Healthcare insurance, like all insurance is a mechanism to monetize “risk” – I can sell my risk to the insurance company by compensating them with my premium payments. In exchange, if I get sick, they promise to pay my medical bills (after the deductible). In essence, they are limiting my healthcare risk to the amount of the deductible and any copay/coinsurance that is involved – they take all the risk beyond that amount….and they get your premium dollars to take that risk.

The critical element is that we should not forget about Medicaid – that nice free, catchall program to make sure that those with no assets and not enough income can get healthcare.

Given the fact that the worst-case scenario is that a person ends up on Medicaid: health insurance is really just limiting the risk that your assets and your income will be consumed by medical expenses.

Now we can start to understand why people are not flocking to buy an Obamacare policy – because it will consume their resources to the tune of several hundred to a thousand dollars per month and they are still on the hook for most of their medical expenses up to their $12K deductible limit. The average family will pay $3-20K/year on insurance and then still be on the hook for the first $12K in expenses. If they don’t get covered – they get hit with a modest fine and their assets and much of their income is at risk.

However, in the event that they loose their assets and income – they then become Medicaid recipients – and voila – their healthcare payments are covered.

So the person with $10-20K of assets (which is the bulk of the demographic that Obamacare is focused) seems to be saying that they will risk their modicum of assets so they can avoid spending $3-20K/year in premiums for an event that may not happen….at which point they are going to loose the bulk of their assets to the deductible before any insurance kicks in.

In short, if you don’t have assets to protect, what’s the point of paying a huge chunk of your income to protect them?

In summary, Obamacare is not there to insure payments for healthcare – it is there to insure the assets of people so that they are not wiped out during a medical catastrophe. With Medicaid catching those who are wiped out, the ‘risk’ to the person is not worth the price of the (discounted) premiums – and people aren’t willing to part with their money to buy the product.

The cost-benefit is not motivating and hence people are not buying.

ADDENDUM:
After writing the above column, I think I’ve stumbled upon the ultimate scam – by the insurance companies.

Think about this scenario for the millions of fiscally marginal folks who buy an Obamacare policy and can barely pay the premiums.

They buy a policy… the insurance company gets its premiums (either from the customer or from the government)… and then the customer incurs a catastrophic medical condition…forcing him to pay $12K/year in deductibles which most can’t afford. This $12K/year hit pushes the subscriber into the poverty level where Medicaid then takes over and pays the really big medical bills.

The insurance company gets the premiums and gets paid for assuming the risk – but do not have to pay out because much of this crowd will be forced into Medicaid and hence free the insurance company from paying out.

How’s that for a major (totally legit) scam?

Tags: Healthcare · Political · Taxation · Uncategorized

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