“Health insurance is subject to elasticity of demand,” actuarial firm Milliman explained in a 2011 report. “Individuals and groups will make purchasing decisions based on the cost of insurance, insurance options in other markets, and consideration of the consequences of being uninsured.”

Economists use the term “elasticity of demand” to describe how responsive consumers are to changes in the price of certain goods or services. Because the “consequences of being uninsured” are much less significant for younger and healthier people, they are much more sensitive to variations in the price of insurance than older and sicker people with less avoidable medical costs. This isn’t to say that recent college grads don’t want or wouldn’t take health insurance at the right price, but merely that they’re less likely to stretch their budget to purchase health insurance than people in their 50s with diabetes and heart disease who have far higher routine medical expenses and are at a much greater risk of suffering medical emergencies. Yet the design of President Obama’s health care law ignores this very basic reality.

As conceived, Obamacare promises to extend coverage to older and sicker individuals and those with pre-existing conditions by pulling more young and healthy people into the risk pool to offset costs. Given that a) Young/healthy people are much more responsive to variations in the price of insurance, and b) attracting more young/healthy people is essential to the functioning of the insurance market under Obamacare, it would make sense for Obamacare to lower insurance rates for younger and healthier people as much as possible so that insurance is a more attractive option to them. In reality, it does the exact opposite.

Obamacare limits the amount that insurers can vary premiums by age, meaning that making insurance more affordable for older and sicker Americans will translate into significantly higher rates for young and healthy individuals. Even if this doesn’t prompt the younger Americans who are currently insured to drop coverage, as I’ve noted previously, Obamacare can’t get by merely by retaining the same level of young and healthy individuals as the current system. Instead, it must bring millions of new young and healthy people into the Obamacare-controlled insurance market. Thus, the relevant comparison to use when considering whether Obamacare will function properly is not the difference between what insurance costs in the current market and what it will cost under Obamacare, but rather, the difference between purchasing insurance and going without insurance.

Under the current system, the cost of going without insurance is $0. Once Obamacare passes, there will be a penalty attached to going without insurance. It will grow over time, but in 2014, the penalty will be $95 or 1 percent of a person’s taxable income.

Defenders of the law argue that calculations regarding the cost of insurance should also take into account the subsidies the federal government will be providing to individuals to purchase insurance on government-run exchanges. But those subsidies are significantly lower for younger Americans.

In California, which has been touted as a model for implementation of the law by Obama and his supporters, a 26 year-old making $32,000 per year or more would not qualify for any subsidies and the cheapest plan available would be $1,944 per year. The cost of this Californian going without insurance would be a mandate penalty of around $200, based on taxable income. This means that the relevant cost differential (i.e. the difference between obtaining insurance and going without it) would be just over $1,700.

In contrast, a 59-year-old with the same income level would be eligible for $4,344 in subsidies. The thinking here is that because an older person would have to purchase more expensive insurance, they should receive more subsidies so that they don’t pay more than a certain percentage of their income on health insurance. But what if the formula used to allocate these subsidies were adjusted to reflect the elasticity of demand for health insurance? What if, instead of giving the 59 year old $4,344 in subsidies and the 26 year old $0 in subsidies, the federal government offered the older Californian $3,000 toward the purchase of insurance and the younger one $1,344?

Under such a design, Americans with pre-existing conditions could still get covered and older Americans would still receive substantially more subsidies than younger Americans with a comparable income. And suddenly, the younger Californian would be able to purchase coverage for $600 per year, or roughly $400 more than the cost of going without insurance. That price would be much more likely to entice the younger person to purchase coverage.

True, this would mean that older individuals would have to stretch their budgets more than under Obamacare as currently envisioned. But that’s an argument about fairness and the intention here is to make an argument about functionality. And functionality is pretty important. If there aren’t enough young people in the system, then Obamacare will structurally collapse, and insurance rates will soar for everybody.

To be clear, I do not think it’s the role of the federal government to interfere in the health insurance market in this manner. I would much rather reforms that broke down government barriers to the creation of a true free market for health insurance than a law that creates new barriers. But if the government is going to interfere, enacting a policy that raises insurance costs the most on those who need insurance the least when the functionality of the entire scheme hinges on convincing them to purchase insurance, doesn’t strike me as a very effective way to go about it.