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Weighing the risks of going without health insurance

The deadline for states to decide whether they'll run their own insurance exchanges is looming.

This story appears in The New York Times 'Your Money' section on Wednesday, Nov. 20, 2013.

For many people, complying with the new health care law will become a financial decision: Should I buy the insurance, or simply pay the penalty and take my chances?

Affordability, of course, will be a significant factor, especially for younger people with stretched budgets. Going without insurance is obviously a huge gamble, and probably a risk that many people would rather not take.

But many consumers, particularly younger ones, may ultimately decide to consider their odds: A person 25 to 34 years old (insured or not) had a 5 percent chance of incurring medical bills of at least $27,000 in 2011, according to the Kaiser Family Foundation. The chance of ending up with a bill that exceeded $13,000 was 10 percent.

“Most medical bills are racked up by a relatively small percentage of the population, whether you’re young or old,” said Larry Levitt, a senior vice president and co-executive director of the Program for the Study of Health Reform and Private Insurance at Kaiser. “The real point of insurance is to protect against these catastrophic medical events, which few people could pay for without coverage.”

An estimated six million people are projected to go without that protection and pay the penalty in 2016, according to an analysis last year by the Congressional Budget Office and the Joint Committee on Taxation, though a majority of uninsured people will be exempt from the penalty because of hardship, low income or other reasons. An estimated 17 million people who are uninsured or buy coverage on their own will be eligible for subsidized coverage, according to Kaiser.

If you expect to be among those who are required to buy insurance but are contemplating going without, you will probably want to consider what sort of costs and risks that decision may entail. A simple comparison — to insure or not to insure — makes it clear that paying the penalty may be less expensive than buying a policy for many young, middle-class people who manage to avoid serious illness or injury.

In the 2014 tax year, individuals pay whichever is more: $95 or 1 percent of the portion of their modified adjusted gross income that exceeds the federal income tax filing threshold of $10,150. So in 2014, an uninsured person with an income of $50,000 would pay a penalty of about $400. Someone earning $100,000 would pay about $900. The fine rises each year until it hits $695 per adult or 2.5 percent of income in 2016, according to CCH, a tax and accounting service.

If a young man — 28 to 30 years old — bought a typical silver plan on an exchange, he would pay roughly $2,800 in annual premiums, on average, according to the Kaiser Family Foundation’s subsidy calculator. But premiums vary: In New York City, for instance, he would pay more than $4,600 in premiums. (Younger people tend to pay more in New York State because premiums are not adjusted for age; in other states, older people can pay as much as three times as much as younger people.)

Still, premiums are only part of the equation. Silver plans generally cover 70 percent of a typical population’s medical costs. There are also deductibles and co-payments and coinsurance to pay. But if you buy a plan on any of the exchanges, annual out-of-pocket costs cannot exceed $6,350 for individuals and $12,700 for a family of two or more in 2014, according to Healthcare.gov, unless you use out-of-network providers.

The New Math of Health Care:
The New York Times, in collaboration with American Public Media’s Marketplace, examines the soaring out-of-pocket costs of staying healthy, end-of-life care, and strategies for picking doctors and health plans. Read the whole series.

Insurance may become a more attractive option once you begin to factor in the cost of treating ailments as ordinary as a back injury, which is one of the top five reasons for an outpatient visit, even for someone from the ages of 25 to 34, according to the Agency for Healthcare Research and Quality. These people might have herniated discs or cervical spine disorders, among other problems.

Consider a young uninsured man living in New York City who earns $50,000, which means his income is slightly too high for subsidized coverage. If he received treatment for his back, he would, on average, be billed about $4,890 in 2014, according to an analysis conducted by Milliman, a consulting and actuarial firm, using data from the latest Medical Expenditure Panel Survey. That includes the cost of treating his back, as well as other typical medical and prescription expenses during the year. Add in the $400 penalty, and his total outlay for the year reaches about $5,290.

But if he bought the silver plan with the cheapest premiums on the New York health insurance exchange, his overall costs would be slightly less, or $5,133, according to Milliman’s analysis. That includes about $4,311 in annual premiums and $821 in out-of-pocket costs. (Again, a young person may pay even lower premiums in other places).

A catastrophic plan, which has high deductibles and low premiums, purchased on the New York exchange would cost the young man with a compromised back $4,940, still less than remaining uninsured (about $2,200 in annual premiums and nearly $2,740 in out-of-pocket costs). Catastrophic plans, which are available to people under 30 or those suffering a hardship, generally require that you shoulder all of your medical costs until you meet the hefty annual deductible.

But there are instances where the uninsured young person — even one with a medical ailment — could potentially pay less. Milliman estimates that a young person with asthma would incur medical charges of $2,200 a year, or less than half the cost of buying the cheapest silver plan in New York.

Of course, landing in the hospital even for just a few days — about $11,600 a night for a medical or surgical stay, Milliman estimates — could push any person, young or old, to the financial brink, though a consumer could potentially negotiate those rates down.

Running this sort of cost-benefit analysis is by no means exhaustive and is meant only to provide an unscientific glimpse into what it might cost one person with or without insurance. Even the cheapest plans will cover certain essential services, including free preventive care, which could save people money over the long run. “People with insurance are less likely to postpone needed services,” said Dan Bailey, a consulting health care actuary and fellow of the Society of Actuaries.

In fact, some experts said that young people didn’t skip coverage because they believed they were invincible. Instead, they’re likely to buy insurance when they can find an affordable option — or, at least, find someone like their parents to pay their way. Three million more young adults have gained insurance under the law’s provision that allows young adults to stay on their parents’ policies until their 26th birthday, said Sara R. Collins, vice president of the health care coverage and access program at the Commonwealth Fund.

Many people may qualify for federal subsidies that will pay for a large portion or all of the monthly cost of some health care plans on the exchanges.

Other uninsured people will avoid the penalty because they qualify for an exception: For instance, you are not required to buy insurance if the cost exceeds 8 percent of your income.

“A large share of young adults currently uninsured will have incomes so low that they will not be subject to the penalty,” Ms. Collins said. She was referring to the exemption for people with incomes below the filing threshold (in 2013, that’s $10,000 for individuals and $20,000 for couples). They would be eligible for Medicaid.

There is still some question over how the government will enforce the penalty, which the Supreme Court determined is a tax. The Internal Revenue Service is not allowed to resort to its usual tactics, such as using levies or liens, to collect the tax from people who do not pay it, nor can it criminally prosecute them. The I.R.S. can withhold money from people who are owed a refund, but it is not clear what happens when people aren’t owed anything.

There are still millions of people who are expected to pay the penalty and take their chances. “Getting struck by lightning is an insignificant risk,” said Stuart D. Rachlin, a principal and consulting actuary at Milliman, who calculated that the average American under the age of 65 had a 10 percent chance of incurring more than $30,000 in medical charges, including drugs, in a year. “To me, a 10 percent risk is a meaningful possibility.”

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Your analysis should also include the value of the free preventative care available through insurance under the ACA.

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