Adverse Selection and the American Care Act

Testing the Implications of the Roberts Opinion

Claire LeavittBoston University

6 April 2014

THE ACT: ProvisionsTHE ACT: Provisions

Individual mandate Individual mandate ““Guaranteed issue”: Guaranteed issue”:

Prohibits insurance companies from Prohibits insurance companies from denying coverage based on denying coverage based on preexisting conditionspreexisting conditions

““Community rating”: Community rating”: Prohibits insurance companies from Prohibits insurance companies from

setting premiums based on setting premiums based on preexisting conditionspreexisting conditions

THE RULINGSTHE RULINGSNational Federation of Independent Businesses v. Sebelius National Federation of Independent Businesses v. Sebelius

June 2012June 2012

A majority of the Justices agreed that A majority of the Justices agreed that the mandate fell outside the mandate fell outside Congressional powers under the Congressional powers under the Commerce & Necessary and Proper Commerce & Necessary and Proper ClausesClauses

5-4 in favor of the mandate’s 5-4 in favor of the mandate’s constitutionality under Article I constitutionality under Article I (Congress’s taxing power) (Congress’s taxing power)

THE OPINION: Penalty = THE OPINION: Penalty =

Tax?Tax? IntentIntent: Mandate’s absence of : Mandate’s absence of

malicious intentmalicious intent

ScopeScope: IRS granted power to : IRS granted power to collect “penalty” without punitive collect “penalty” without punitive actionaction

SizeSize: Proposed penalty is : Proposed penalty is relativelyrelatively low low

THE OPINION: Penalty = THE OPINION: Penalty =

Tax?Tax?

““For most Americans the amount due For most Americans the amount due will be far less than the price of will be far less than the price of insurance, and, by statute, it can insurance, and, by statute, it can never be more. It may often be a never be more. It may often be a

reasonable financial decision to make reasonable financial decision to make the payment rather than purchase the payment rather than purchase

insurance….”insurance….”

THE OPINION: Penalty = THE OPINION: Penalty =

Tax?Tax?““Individuals making $35,000 a year Individuals making $35,000 a year are expected to owe the IRS about are expected to owe the IRS about $60 for any month in which they do $60 for any month in which they do not have health insurance. Someone not have health insurance. Someone with an annual income of $100,000 a with an annual income of $100,000 a

year would likely owe about $200. The year would likely owe about $200. The price of a qualifying insurance policy price of a qualifying insurance policy is projected to be around $400 per is projected to be around $400 per

month.”month.”

Family Income

Maximum % of income to be

spent on insurance (per year)

Dollars to be spent on insurance(per year)

Insurance cost as percent of penalty

Likely Decision

$35,000 3.97% $1,388 67% BUY

$40,000 4.96% $1,982 95% BUY

$45,000 5.94% $2,672 128% DON’T BUY

$50,000 6.77% $3,385 162% DON’T BUY

$55,000 7.52% $4,135 198% DON’T BUY

$60,000 8.23% $4,937 236% DON’T BUY

$65,000 8.85% $5,751 276% DON’T BUY

$70,000 9.47% $6,626 318% DON’T BUY

$75,000 9.50% $7,125 342% DON’T BUY

$80,000 9.50% $7,600 365% DON’T BUY

$85,000 9.50% $8,075 387% DON’T BUY

$90,000 9.50% $8,550 410% DON’T BUY

$95,000 No maximum Full cost 400+% DON’T BUY

$100,000 No maximum Full cost 400+% DON’T BUY

Source: Thomas Lambert 2013

PENALTY VERSUS INSURANCE DECISIONS FOR VARYING INCOMES

HYPOTHESESHYPOTHESES

HH11: Individual-level : Individual-level economic/political decisions economic/political decisions made via rational, cost-benefit made via rational, cost-benefit analysesanalyses

HH22: Strategic model for Supreme : Strategic model for Supreme Court decision-makingCourt decision-making

RESEARCH DESIGNRESEARCH DESIGN

Test of HTest of H1 1 via survey experimentvia survey experiment

Qualtrics-designed; distributed via Qualtrics-designed; distributed via Amazon’s MturkAmazon’s Mturk

$.25 per survey$.25 per survey Participant sample requirements:Participant sample requirements:

Currently living in the USCurrently living in the US Uninsured (as of 31 March 2014)Uninsured (as of 31 March 2014) Over age 18Over age 18 N=374 (usable, of 2,000 respondents)N=374 (usable, of 2,000 respondents)

RESEARCH DESIGNRESEARCH DESIGN

TreatmentTreatment: Financial information : Financial information (average cost of Bronze Plan (average cost of Bronze Plan premium premium andand penalty) to enable penalty) to enable cost-benefit calculationcost-benefit calculation

ControlControl: Brief description of ACA : Brief description of ACA requirements; no financial inforequirements; no financial info

Treatments randomly assigned for each of Treatments randomly assigned for each of SIX income bracketsSIX income brackets

Survey HypothesesSurvey Hypotheses

HH00: There will be a significant difference btw. : There will be a significant difference btw.

the treatment and control groups for income the treatment and control groups for income brackets for which Premium > Penaltybrackets for which Premium > Penalty

HHaa: There will be no statistically significant : There will be no statistically significant

difference btw. the treatment and control difference btw. the treatment and control groups for all income bracketsgroups for all income brackets

Sample AttributesSample Attributes

Sample AttributesSample Attributes

Difference-of-means across income Difference-of-means across income

groupsgroupsIncome Bracket

N (treatment)

N (control)

NMean

(treatment)

Mean (control)

Welch’s t-

statistic(d.f.)

P-value

Less than

$11,00062 64 126 .645 .67

.31(123)

.75

$12,000-$20,000

60 59 119 .8 .85.67

(119).5

$21,000-$30,000

23 21 44 .82 .52-2.19(37)

.035*

$31,000-$40,000

24 23 47 .71 .911.82(39)

.076--

$41,000-$60,000

16 13 29 .875 .77-.7

(22).48

More than

$60,0005 4 9 .4 .5

.26(6)

.8

N = 374; -- = p<.10; * = p<.05

Logit estimates of IVs on Purchase Logit estimates of IVs on Purchase

DecisionDecisionVARIABLE CONTROL TREATMENT

Intercept.83(.5)

.47(.45)

Party (Democrat/Other)1.45**

(.5) .56

(.41)

Race (White/Non-white)-1.25*(.53)

-.14(.52)

Basic Knowledge-.7

(.43) .29

(.38)

Advanced Knowledge-.05(.21)

.05(.22)

Income.28

(.16) .05

(.13)

N=184 N=190

N = 374; -- = p<.1; * = p<.05; **=p<.01

ResultsResults

No evidence that suggests full financial No evidence that suggests full financial information (enabling rational cost-benefit information (enabling rational cost-benefit calculation) affects purchase decisioncalculation) affects purchase decision

No solid evidence of traditionally-defined No solid evidence of traditionally-defined politicization, suggesting the uninsured may politicization, suggesting the uninsured may opt out of purchasing coverage for unknown opt out of purchasing coverage for unknown reasonsreasons

Thanks for your attention.

Claire LeavittBoston University

6 April 2014