A Tale of Two Penalties

As I write this, I have C-SPAN on in the background for two reasons: First, all of the paint had already dried. Second, I wanted to listen to the House of Representatives debate and then vote on the American Health Care Act (AHCA). We now know that there will NOT be a vote on Thursday, and while the chatter seems to suggest that the vote will come Friday morning, my own sources on the Hill are indicating that the legislation is likely to be pulled altogether because it lacks the votes to pass the House. While that certainly puts a dent in the prospects of Obamacare repeal, it doesn’t mean that it’s a done deal. For starters, the Senate might introduce its own bill, and there’s nothing to preclude the House–and Speaker Ryan–from going back to their own drawing board. That said, it seems a safe bet that repealing the individual mandate will remain a central focus of any such efforts. In this post, I want to comment briefly on the individual mandate as it exists under Obamacare and the alternative that is being proposed by the GOP through AHCA.

For starters, the individual mandate was deemed necessary because of other provisions of Obamacare. Namely, since the law allows anyone to purchase insurance regardless of preexisting conditions, it is essential to incentivize individuals to purchase coverage when they are well, rather than waiting until they get sick. Otherwise, the cost of health insurance would increase in unbelievably dramatic fashion–perhaps even leading to a collapse of the insurance market altogether. Think of it this way: You don’t purchase homeowner’s insurance after your house catches fire. If everyone did that, it would be prohibitively expensive. In fact, it wouldn’t even be fair to consider it insurance, because it wouldn’t be about risk at all, it would be based on shielding oneself from an unfortunate reality. That is why Obamacare created the individual mandate. Now, one criticism, and I believe it is a fair one, is that the penalty associated with mandate non-compliance was too low. In 2017, the penalty is the higher of $2,085 per family or 2.5% of modified adjusted gross income. That’s it. Under Obamacare, if you don’t obtain health insurance, and aren’t exempt from the mandate, that’s the penalty you owe. The clock starts over the next year, and you are still able to access Medicaid or subsidized plans through the health insurance marketplace (depending on your income, employer-based options, and state of residence). Of course, plenty of people don’t like being forced to buy an expensive product they don’t want, or pay thousands of dollars for not having coverage. That said, what exactly are Congressional Republicans proposing as a replacement?

In AHCA, no one is required to purchase health insurance–even though the ban on preexisting conditions would remain law. If the GOP doesn’t do something to incentivize healthy people to purchase health insurance, you can expect the same sorts of problems I described in the previous paragraph: Prices will go up, the market will destabilize, and a death spiral would likely become inevitable. So the GOP concocted a solution: A 30% premium surcharge on people who purchase insurance after experiencing a gap in coverage for two months or more. The surcharge would only last for 1 year. On the one hand, that seems like a strategy for having their cake and eating it too. They give people the “freedom” to go without health insurance, but they also provide–through the surcharge–an incentive for people to purchase coverage. In fact, the surcharge is arguably as stiff–if not stiffer than the Obamacare penalty. There’s just one catch, and it’s a big one. It has to do with the timing of the penalty vis-a-vis the decision to purchase insurance.

The individuals who are not currently covered fall broadly into two categories: low-income people without truly affordable coverage options who are not exempt from the mandate, and young healthy people who do not feel the need for insurance. In either case, these individuals are deciding that they do not want to purchase insurance, because it is too expensive, and they opt to pay the penalty–or hope the IRS doesn’t enforce it, which seems to be the case currently. In short, the Obamacare penalty is not sufficient to incentivize these people to buy coverage. Now consider the GOP proposal. It doesn’t make the cost of coverage for a comparable plan any cheaper. On the contrary, it is likely to raise it. If costs do go down, it will be because the insurance is less robust (e.g., it does not cover essential health benefits). This means that people would have insurance, but that the insurance wouldn’t be very good. While this may convince some people to purchase insurance, I’m not convinced that many people–especially the young healthy folks–will be compelled to do so. Instead, they’ll just remain uninsured. Then, if they ever do start to seriously consider purchasing health insurance, the GOP plan will make them pay a 30% surcharge for a year. Think of it in concrete terms: If the person does the math and decides not to buy a plan for $300 a month, why will they think it’s a good idea to buy that plan for $390 a month the following year?

In short, the Republican solution to the individual mandate does not incentivize people to purchase health insurance so much as it creates a barrier to entering the insurance market for individuals who have failed to purchase coverage in the past or happen to lose their coverage for more than 63 days for any reason–like moving, changing jobs, getting fired, etc. The bottom line is that this is a poorly conceived piece of policy nested within a much larger disaster of a bill. The AHCA itself may not survive the week, but efforts to repeal the individual mandate are likely to persist, and I thought you should know that not all ways to skin a cat are equal.

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