There has been an all out assault on young people to make it harder for Obamacare to succeed. I have seen some commercials paid for by the foundation sponsored by the Koch Brothers, who made their billions in the coal industry, which is a little ironic since coal mining and burning could not be confused with preventive health measures. As someone who has an actuarial background, I find the advice to not insure a risk such as this to be imprudent, without full knowledge of a personal risk assessment. Let me explain.
To begin with, not all risks should be insured or insured with exposure on the first dollar lost. To identify your own risks, I would ask you to draw a square and then draw the letter “t” across the segments of the square to create four quadrants inside. On the bottom axis, I want you to write the words “Likelihood of the Event Occurring in the Next Few Years” and across the upward axis, write the word “Cost Impact of the Event.” In the upper right hand quadrant, write the letters “HH” for high likelihood and high cost impact and in the bottom left quadrant write the letters “LL” for low likelihood and low-cost impact. In the quadrant above LL, write the letters “LH” for low likelihood and high cost impact and in the bottom right quadrant write the letters “HL” for high likelihood and low-cost impact. My artistic friend Z is probably loving this exercise.
Now start placing your risks in these quadrants. Anything you place in the LL quadrant most likely need not be insured. If you don’t own a boat or a motorcycle, as extreme examples, then you don’t need boater or motorcycle insurance. Conversely, anything that you place in the HH category will require two key questions to be asked. If the risk is high, the first question is should you be doing this activity which exposes you to the risk? The second question is if due to a passionate hobby (mountain climbing, skydiving, e.g.), due to profession (airplane pilot, e.g.), or due to where you live (near a flood plain or exposed to forest fire, e.g.), how much can you afford to pay for the insurance? The latter question is important, as you will likely need to get a policy that has limits to make it affordable – such as a high deductible or cap on the amount payable. In some places, the private insurance is so unaffordable that it is reinsured by a state-based high risk pool – people who built houses close to the shore, e.g. So, you will need to judge the trade-off between cost and exposure to loss.
Anything you place in the HL meaning it has a high likelihood, but low-cost would lead you to question whether you need insurance as well for those activities. I hedged on this a little, as there are some less costly risks imbedded within a greater risk, that have a high likelihood of occurring. A good example is when you have a teenage driver added to your automobile policy. The risk of accidents increases, so you want to insure the greater cost of a serious accident, but hedge the smaller cost of fender-benders with a higher deductible. Saying it a different way, I would add my child to the policy, but increase the deductible from $500 to $1,000 to avoid the re-rating of the policy and the nuisance of filing a claim. This would make the now higher costing policy more affordable, as well.
The items that are the best candidates for insurance fall into the LH quadrant. The risk is low, but the cost is high. The easiest example is buying life insurance during your working years. When you begin having children, the cost impact to your family of a premature death is huge – not having your income. The same could be said for disability insurance, as there is greater chance today you may survive a serious accident or medical issue, but in so doing, place a huge strain on your family’s budget. If you are a mother or father, these two types of insurance are a must. The homeowners insurance falls into the same quadrant for two reasons – the loss of property due to fire or damage and the liability insurance that works in tandem. Without insurance, a claim can bankrupt you.
For our young readers, health insurance falls into this last category. The beauty of most health insurance policies as will be offered under Obamacare is the preventive aspects of care, which fall in the HL quadrant by themselves. The insurance company wants you to seek preventive medicine for yourself to make sure you are doing things necessary to take care of you. Plus, there is an avenue for treatment of small maladies without going to the higher costing emergency room. Yet, these preventive services are not the key reason to buy healthcare insurance. The reason is insuring the low likelihood, but very high cost impact of a healthcare claim. Being in a car accident, having a bicycle or swimming accident, being too near a discharged weapon, having a diagnosis of leukemia, cancer, morbid obesity or heart disease, are the reasons to have healthcare insurance. The likelihood is low, yet the cost of a healthcare claim can be huge easily running into the tens and hundreds of thousands of dollars. And, the number one cause for personal bankruptcy at 62% is lack of healthcare insurance per the American Journal of Medicine in 2009.
Please refer to the attached post I penned last summer, “Healthcare is more than a pawn, it is a problem.” http://musingsofanoldfart.wordpress.com/2012/08/08/healthcare-is-more-than-a-pawn-it-is-a-problem/ where I reference this survey among other things.
The main reason young people are told not to sign up for insurance is they are subsidizing the higher risk claimants – of course you are, in the same way a healthy person subsidizes a less healthy person. In an employer plan, it is not uncommon in any given year for 15% of the participants to drive 80% of the claims cost of the healthcare plan. Not all of the remaining 85% are necessarily young adults – they are people with little or no claims. And, the 15% is not always the same people. That is the principal of insurance, spreading the risk. Yet, that does not stop the need to insure your greatest loss potential – i.e., what must you avoid.
However, the Obamacare exchanges will be offering a number of different policies, that will allow you to find a suitable premium for your budget with a higher deductible to truly insure the higher cost items that would bankrupt you. The higher deductible claims will only be assessed on non-preventive healthcare needs, as the insurer wants you to do preventive visits. I would add if you walk into a doctor’s office or hospital without insurance, you will tend to be charged full market cost, rather than the discounted cost negotiated between insurer and medical provider based on volume of customers.
I am not telling people what to do. I am encouraging people to assess their risks and ascertain what insurance is needed. I do think it is imprudent to advise young people not to sign up for healthcare insurance in and of itself. I do find the motivation of some who are using this message for a political purpose to be offensive, and to be frank, arguably unethical. If someone chooses not to be insured and has a claim that they cannot afford, then they will realize too late that a political motivated advisor has sold them a bill of goods.
You be the judge. You decide on what to insure and how much exposure you want, based on a trade-off of cost and deductibles, out-of-pocket limits, etc. But, use the framework above or something similar to decide the most suitable path forward for you.