21

Is it mandatory to have health insurance?

Assuming that I contribute $200 monthly, which for 12 months is costing me around $2400, and don't use the insurance, then having only FSA with a fixed amount would save a lot on my pay check.

So, can having only FSA be considered as a replacement for health insurance?

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    Be aware that with an FSA, you lose any money you put into it at the end of the year. – jpmc26 Jan 7 '18 at 16:48
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    They aren't many treatments which cost less than $2400/year, especially not in the US. Many actually cost more than $2400 a day. – Eric Duminil Jan 7 '18 at 17:18
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    "Assuming that I…don't use the insurance" — that's an awfully risky assumption. – Kevin Jan 7 '18 at 19:06
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    Also, I have a good investment for you: roulette! If you assume you never pick the wrong color, the ROI is simply extraordinary. – Eric Duminil Jan 7 '18 at 20:54
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    "I don't use the insurance" - that's the idea with insurance. You want to not use it. – Martin Bonner supports Monica Jan 8 '18 at 14:51
60

The individual mandate is still in effect for 2018, which means you have to have qualifying health coverage or pay a fine--I can't find the penalties for 2018 but for 2017 it was the greater of 2.5% of your total household adjusted gross income, or $695 per adult.

The new tax law does repeal the individual mandate starting in 2019. However, it would be extremely wise to maintain health coverage even then. Not having health insurance, no matter how young and healthy you are, is the fastest way to accumulate thousands or even millions of dollars worth of debt. Any serious health issue could easily wipe out your FSA several times over. It is simply not worth the gamble. $2400/year is well worth it.

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    "or even millions of dollars worth of debt" ...does insurance actually pay for that much? I vaguely seem to recall hearing that there are generally caps around a million dollars or something. – Mehrdad Jan 7 '18 at 10:47
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    @Mehrdad this depends very much on the policy. – arp Jan 7 '18 at 12:14
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    @arp: Hm, interesting... so your reply prompted me to do a search, and I found a link saying the opposite of what I thought: "The current law prohibits health plans from putting annual or lifetime dollar limits on most benefits you receive." So I guess for most benefits it doesn't depend on the policy? Depending on how they interpret "most" I guess... they say it includes "essential" health benefits. – Mehrdad Jan 7 '18 at 12:31
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    @Mehrdad I seem to remember the ACA did away with lifetime limits. My cousin came down with pancreatic cancer and eventually succumbed to it before the ACA, but not before hitting a 750k lifetime limit on her insurance and leaving her husband with hundreds of thousands of debt. – maple_shaft Jan 7 '18 at 14:41
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    @Mehrdad the ACA did away with lifetime limits, but the current party in power has made repealing the ACA one of their top priorities, and while they are unlikely to completely succeed, it seems unwise to count on any given provision remaining in force forever. (In particular, the repeal of the individual mandate makes it likely that insurers will withdraw from no-longer-profitable markets...) – arp Jan 7 '18 at 17:26
18

I see this sort of misconception flying around. "Well the health insurance takes my money, makes a profit, and pays me only if I need it, otherwise I 'lose' money. Clearly, I would be better off saving my money." This sort of reasoning completely misses the point of insurance.

Suppose you plan to pay $2,400 a year for either insurance or as savings in an account, and suppose you have a 10% chance of needing a $24,000 treatment, per year. It would seem reasonable to think that, in the long run, your savings plan will cover your costs, without losing money to the profit/overhead of an insurance company. That's wrong.

This would be the case, if:

  • you have the ability to go into an unbounded debt
  • you "play the game" forever

Only then, does the expected value of the savings match the expected cost of the treatments. But these aren't criteria you could satisfy, which means that you cannot effectively replace insurance with savings accounts.

For one, you could get ill in your first year, and only have $2,400 out of the $24,000 you need. You already lost. You need a clean record for the first 10 years, or you'll need to withdraw loans or file for bankruptcy, both of which are incredibly common for those uninsured.

Suppose you make it through your first 10 years, and you're in the clear. You've got enough to cover you, right? Well what happens if you get sick on the 11th year, and again on the 12th year? Once again, you're screwed.

Insurance exists to mitigate the damage of probabilistic but unpredictable events on its beneficiaries. It addresses the first issue, by pooling premiums into a pool which can be used to insulate people from "going negative." It is technically possible for enough beneficiaries to all get sick at once so as to deplete the insurance company's pool, but they calculate the capital they need to hold to make this astronomically unlikely. You don't have the ability to do this, as an individual.

Furthermore, even everyone could somehow spontaneously accumulate enough money to cover a health disaster, there are economic reasons why you wouldn't want your population to be doing so. It's a tragedy of the commons. It's beneficial for every individual to do for themselves, but detrimental on a societal level. The kinds of holdings you need for medical funds have to be reliable, and liquid enough that you can access them at a literal moment's notice. So this isn't some long-term, efficient investment we're talking about here. Liquidity and reliability come at a cost of RoI.

Economies benefit from the circulation, not hoarding, of wealth. In my opinion, is does not seem like a viable idea to replace insurance with individual savings accounts.

7

It is risky to not have any sort of coverage. If you are young and do not have many assets to your name, you can plan on bankruptcy as a de facto "catastrophic plan", but in some cases this might result in not having access to good medical care (like if you get cancer or need a transplant or some major surgery).

A FSA really has nothing to do with this issue; it's just a way to save a little on taxes for expenses you know you will incur. However, generally speaking it is a good idea for young, healthy people to choose a cheap (i.e. high deductible) plan, and use HSA/FSA. HSA is much better if you can get it.

The individual mandate complicates things by imposing another cost - $700 for most - on not having insurance. This may be loosely enforced this year and may not be enforced at all next. YMMV, this is politically contentious issue.

There is another option that you might want to be aware of though: short term insurance. Ostensibly it is for covering gaps in insurance, like between jobs. But since it is non-ACA compliant, it can discriminate against preexisting conditions. What that means for a young, healthy person is that they can have SIGNIFICANTLY lower premiums, since they are not supporting a pool of old/chronically sick individuals.

You can pay as little as $10 a month for a catastrophic plan, which will give you peace of mind and comparable coverage to your catastrophic obamacare plan. But the government doesn't want it to be used this way, so they limited it to 3 month policies, which is annoying.

  • 1
    "... limited it to 3 month policies ..." - If you want the catastrophic plan "continuously" (or as nearly continuous as possible), can you just renew your policy (same provider/plan) every 3 months? or do you have to switch providers/plans every 3 months? – Kevin Fegan Jan 8 '18 at 2:29
  • "You can pay as little as $10 a month for a catastrophic plan" Assuming, of course, you don't have any preexisting conditions. – JAB Jan 8 '18 at 2:35
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    @JAB Of course, if the OP had preexisting conditions, they probably wouldn't be assuming they're not going to use their health insurance at all. – Anthony Grist Jan 8 '18 at 16:58
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    you can plan on bankruptcy as a de facto "catastrophic plan" Yikes, #JustAmericanThings. But really though, this is a nasty way of coupling tragedies. If you get sick, not only do you have to worry about your health, but the longstanding (7 years) consequences of bankruptcy. Especially if it's during your 20s-30s, when you'll likely need good credit for a mortgage/car loan/rent, this can be absolutely devastating. – Alexander - Reinstate Monica Jan 8 '18 at 17:05
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    @Alexander Many of us Americans still have the old fashioned notion that you should be allowed to do stupid things and that you should be the one to suffer the consequences of doing them, unless some kind soul willingly bails you out. In other words, take responsibility for yourself and your actions. Also, no one seriously advocates using bankruptcy as a plan for dealing with medical debts. – jpmc26 Jan 9 '18 at 0:24

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