The Downside of Financial Nudges
Why charging smokers more for health insurance costs all of us money
Posted Mar 15, 2017
Cigarette smokers have rights. No one should be able to tell an adult that she can’t spend her hard-earned money on cigarettes. But non-smokers have rights, too. Specifically, they shouldn’t have to pay to subsidize the healthcare costs of people who choose to smoke. In fact, smokers hurt non-smokers by racking up healthcare expenses brought on by the hazards of their habit.
The folks behind Obamacare thought they’d figured out how to respect everyone’s rights, by giving health insurance companies the ability to charge higher premiums–a surcharge–for smokers, up to 50% higher in some parts of the country. The idea is simple: smokers have the right to smoke, but not the right to pass on the increased cost of their healthcare to others.
The idea is also dead wrong. Higher insurance premiums price smokers out of insurance markets. When an uninsured smoker gets emergently sick, that means hospitals and clinicians don’t get reimbursed, which forces them to pass those costs on to people with insurance. When insurance companies price smokers out of their products, we all pay.
Fortunately, there’s a simple solution to the problem. To appreciate the solution, let me expand on the flaws in health insurance surcharges.
Working-age Americans are not legally required to purchase health insurance. Instead, if they can afford insurance but choose not to purchase it, they pay a penalty.
But what’s this “if they can afford it” stuff? Well, the creators of the Affordable Care Act (or the ACA, a.k.a. Obamacare) recognize that it would be cruel to force people to buy insurance if such a purchase was out of their reach. For example, if the cost of insurance is more than 9.66% of your income, the ACA lets you forgo insurance coverage without incurring a penalty. In addition, the ACA tries to make insurance affordable for more people by subsidizing the price of their insurance.
Here’s where the tobacco surcharge runs into problems. First, the surcharge makes insurance more expensive, meaning it is harder for people to afford. Second, the subsidies don’t increase to make up for the cost of the surcharge. Thus, when smokers are faced with a steep surcharge, some of them–especially younger ones who don’t yet suffer from the long-term consequences of smoking–simply decide to forgo insurance. Some of these forgoers pay a penalty, but many others don’t. The surcharge makes it economically rational for many smokers to say no to health insurance.
Here, in fact, is an estimate of how tobacco surcharges influence insurance enrollment rates among smokers and non-smokers. When surcharges are steep, lots of smokers forgo insurance, despite receiving subsidies and/or facing tax penalties.
As the figure shows, smokers are less likely to buy insurance under any circumstance, an unwise decision given the likelihood that they will incur higher-than-average healthcare expenses. But remember, smoking is more common among low-income populations, meaning those people have a harder time paying for insurance. More importantly, for the purposes of this post, when surcharges arose in 2014, there was a pretty steep decline in the percent of smokers who purchased insurance.
We should not discourage smokers from getting insurance. Instead, we should discourage them from smoking. If we want smokers to reimburse the rest of us for the cost of their habit, we should stick with tobacco taxes, a policy that reduces smoking rates without having any direct effect on people’s decisions to purchase health insurance.
It might feel right to charge smokers more for their insurance. But such surcharges are misguided. We should tax people for smoking, not for receiving health insurance.