Risk Pools and Elasticity?

What do millennials and wonky terms like “risk pools” and “elasticity” have to do with lowering healthcare costs?

Someone reminded me the other day of a Lisa Benson cartoon titled “Obamacare Risk Pool”, in which a young guy (looks like a millennial) is standing on the edge of a swimming pool and looking timidly at the other bathers in the pool. The bathers are a group of septo- and octogenarians swimming among sharks and calling out to the millennial “come on in … the water’s fine”.

Regardless of your views on the merits of the marketplace or government solving our runaway health insurance costs, or the merits of the individual mandate, we can all agree that a well-functioning health insurance market depends on a broad risk pool, where there is an even distribution of young and old, healthy and sick people. A well-known factor creating uncertainty for the healthcare insurance market and driving up premiums is adverse selection: young, healthy workers don’t participate in employers’ health insurance plans, but sicker workers do, causing the premiums to go up. A less talked about factor is price elasticity. This rather dry term from your high school economics class is the sensitivity of a buying decision to an increase or decrease in price. When demand for a particular good or service changes a lot in response to only a small change in price, we call it “price elastic”. A finding that the actuarial firm, Milliman, reported in 2011, is that health insurance is price elastic – susceptible to variations in the price of insurance – especially among younger, healthier people. It follows that most young people (Millennials), who are healthy, see little risk of getting seriously ill and incurring big medical bills, and have many alternate demands on their limited budgets.  They are much less likely to try and stretch their limited budgets to buy healthcare insurance than middle aged or older people, who may have the beginnings of a chronic health condition, or have encountered their fair share of unexpected illnesses or accidents. For those older bathers depicted in Lisa Benson’s cartoon, and swimming in the “risk pool” with those sharks, possessing health insurance is a necessity. Their demand for health insurance is “inelastic” to rising insurance premiums.  And they need millennials to come swimming!

Peter Erwin, Ph.D.
Vice President Federal Health Transformation Services