1. Income distribution. The median income in the Us is about $44K, family median is $50K. This means that although your chart has 14 income slices, only 2 of which say ‘buy insurance’, the fact is about 50% of the population would fall into the ‘buy’ category rather than the ‘don’t buy’.

2. You neglect to consider coverage as a factor. Consider the $45,000 range. It’s asserted that one shouldn’t buy insurance because insurance will cost 1.28 times the penalty amount.

Consider the penalty a fixed, unavoidable cost. At the $45,000 level the person has to ask themselves do they spend $1 on penalty and get nothing for it or do they spend $1.28 on insurnace and get actual coverage if anything goes wrong.

Taking the penalty is only sensible if the person has superhuman knowledge that they won’t get sick at all during the year. This is not a realistic way most people view health insurance.

These factors then bring down the dynamics of your model that lead you to your conculsions. For your model to work, you need lots of healthy people to opt out of insurance for the penalty and sick people to opt into insurance in order to drive the insurance industry towards bankruptcy. But where are these sick peoeple going to come from?

Nearly 50% of the population is in a state where it makes more sense to buy insurance than not. You’re going to need to find your sick people from the upper income minority.

But this is a problem for you. Upper income people tend to be healthier than lower income people. And other factors:

1. Older (sicker) upper income people are likely on Medicare already.

2. Upper income people often already get coverage from their employer, essentially a private system of ‘community rating’ where employers demand insurance companies provide coverage for a set premium for all employees.

3. A really damming factor for your case, since upper income people are in higher tax brackets, the appeal of getting insurance from work rather than cash wages increases.

4. Even upper income people who don’t think they will be sick have to worry more about wage garnishment, ruined credit and other problems that come from getting a judgement on them from unpaid medical bills.

When all this is considered, what you need to make your model work is a lot of *young*, *higher income earing* pepole who are nevertheless sick or going to soon be very sick suddenly leaping into the insurance industry. I don’t think there are enough said people out there.

Hence your chart up there predicts a person making 45,000 a year won’t buy insurance because his cost of insurance is 1.28 times the cost of just opting for the penalty.

Yet here’s the problem, since few people really are so sure they will be healthy (and the insurance industry thrives on the inability of people to correctly do actuarial calculations), there’s a huge difference between paying the penalty or paying $1.28 per penalty dollar for coverage, namely coverage! All you get for opting for the penalty, the only way you win is if you have absolutely no serious medical expenses. Ok then you get to say you only spent $1 rather than $1.28 times the penalty. If you get sick, though, then you can loose big time. So a better way to look at it would be to view the penalty as a sunk cost you’re going to spend no matter what. Do you want to spend 28% more and get coverage or spend zero more and get zero? Since the above chart is using families, I suspect the inclination to buy insurance will be even greater. People with kids or even just spouses they have to take care of are less inclined to take gambles.

As you travel up the income ladder, you are confronted with the distribution of income. Your chart is deceptive in that it assumes the many boxes going from $50K per year all the way up represent vastly more households than the boxes under $50K. About 70% of persons make less than $50K as the median income in the US is around $44K and 51% of households are under $50K. Since the chart says those under that level will probably opt to buy insurnace where are all the sick people going to come from to make the plan unworkable?

You’re in trouble here because you need upper income people to opt out of insurance in mass, unless they will get sick in which case they will jump into the insurance pool and stick the industry with their high bills. But this doesn’t seem very likely to me:

1. Higher income people tend to be healthier to begin with. So you won’t find many sick people there.
2. Older people are already on Medicare, so once you factor that out of the population of higher income people you’re left with younger high income people….a population subset even less likely to have seriously expensive illnesses.
3. Of higher income younger people, a huge portion work for large corporations already which are already provide insurance on a ‘community rating’ type system. By the time you factor this out you are left with a very small population of people who may game the system by opting to pay the penalty and enjoy health and a remainder who buy insuranace because they ‘sense’ they will incur a major medical expense. Enough to strain the insurance industry? Perhaps but probably not enough to put it out of business.

3.1 Of that very small population of young, high income, earners who opt not to buy insurance because they think they will stay healthy….income and asset protection should be added as a motivation. If you’re a young go getter making $85,000 a year, you are probably going to *not* want to worry about a major medical event causing your paycheck to get infringed or generating a massive judgement on you that will keep you from buying a house or nice car. Even if you suspect you’ll remain healthy for the foreseeable future, health insurance offers you a degree of financial protection that would not be a large factor for someone at the bottom of the income ladder.

In other words, the last person in the world who should consider participating in Obamacare is the one most likely to be a major contributor to the economy of Silicon Valley. His wise choices are to drop out of Obamacare and pay whatever tax assessed or renounce his citizenship and emigrate to Singapore, as Saverin did.

The justification for the individual mandate is to come closer to a system where the premiums one pays for health insurance are independent of those demographic and health predictors. The younger and healthier will want to avoid subsidizing the older and sicker, and thus would bail without some sort of mandate. I defer to Thom on whether the penalties suffice to induce compliance; I only question whether the underlying rationale is asymmetric information.

I probably ought to say that although I point this out, I’m probably less disturbed by the prospect of redistribution than many TOTM readers. In this case, since we’re all young once and most of us get old, I suspect that over a lifetime the subsidy effect may not be great, but we’d all like to free-ride while we’re young. Ain’t that the truth …