Correcting Krugman: Health Care Exchanges Need Healthy People, It Doesn’t Matter If They Are Young

I generally agree with Paul Krugman’s columns, and this is the case with his recent piece on Republican efforts to kill Obamacare. However, there is one point where I have to take issue. Krugman tells readers:

“G.O.P. sabotage disproportionately discourages young and healthy people from signing up, which, as one commentator put it, ‘drives up the cost for other folks within that market.'”

The problem with Krugman’s comment is the “young” part. The exchanges need healthy people, it doesn’t matter whether or not they are young. In fact, it is much better for economics of the exchanges if the healthy people are older, they pay much higher premiums.

The best way to understand the point is to think of the premiums as a tax. Old-timers like myself (ages 55 to 64, the oldest pre-Medicare age cohort) pay premiums or taxes, that are three times as high as young people. While people in this oldest age grouping are on average in worse health and have higher costs than younger people, a very large minority have trivial medical costs, just like most young people.

The exchanges come out much more ahead with a healthy older person than a healthy young person since they pay three times as much in premiums and cost the system no more money. There is an issue that the pricing is skewed somewhat against the young (true actuarial risk should put the premium ratio around 3.5 to 1, rather than 3.0 to 1), but this is of relatively little consequence for the finances of the exchanges.

It’s not a big deal in the scheme of things, but the inclusion of “young” in this story can be misleading. The key to keeping the exchanges working is getting healthy people to sign up, full stop.

This originally appeared on Beat the Press.

Dean Baker is the senior economist at the Center for Economic and Policy Research in Washington, DC.