Millions choose to pay Obamacare fines rather than enroll; Simple solution–higher fines or…

Peggy_Marco / Pixabay

The architects of the Affordable Care Act thought they had a blunt instrument to force people–even the young and invincible–to buy insurance through the law’s online marketplaces: a tax penalty for those who remain uninsured.

#Obamacare has a way to force people to buy insurance: a tax penalty for those without it Click To Tweet

It hasn’t worked all that well, according to The New York Times, and that is at least partly to blame for soaring premiums next year on some of the health law’s insurance exchanges.

The full weight of the penalty will not be felt until next April, says The Times, when those who have avoided buying insurance will face penalties in the neighborhood of $700 a person.

But even that might be insufficient: For the young and healthy who are desperately needed to make the exchanges work, it sometimes makes more sense for them to pay the Internal Revenue Service than an insurance company charging large premiums, with huge deductibles.

“In my experience, the penalty has not been large enough to motivate people to sign up for insurance,” said Christine Speidel, a tax lawyer at Vermont Legal Aid.

Some do sign up, especially those with low incomes who receive the most generous subsidies, Ms. Speidel said. But others, she said, find that they cannot afford insurance, even with subsidies, so “they grudgingly take the penalty.”

The IRS says that 8.1 million returns included penalty payments for people who went without insurance in 2014, the first year in which most people were required to have coverage.

A preliminary report on the latest tax-filing season, tabulating data through April, said that 5.6 million returns included penalties averaging $442 a return for people uninsured in 2015.

With the health law’s fourth open-enrollment season beginning next Tuesday, Nov. 1, consumers are fretfully weighing their options, says The Times.

When Congress was drafting the Affordable Care Act in 2009 and 2010, lawmakers tried to adopt a carrot or stick approach: subsidies to induce people to buy insurance and tax penalties “to ensure compliance,” in the words of the Senate Finance Committee.

But the requirement for people to carry insurance is one of the most unpopular provisions of the health law, and the Obama administration has been cautious about enforcing it. The IRS portrays the decision to go without insurance as a permissible option, not as a violation of federal law.

The law “requires you and each member of your family to have qualifying healthcare coverage (called minimum essential coverage), qualify for a coverage exemption, or make an individual shared responsibility payment when you file your federal income tax return,” the IRS says at its website.

Some consumers who buy insurance on the exchanges still feel vulnerable. Deductibles are so high, they say, that the insurance seems useless. So some think that whether they send hundreds of dollars to the IRS or thousands to an insurance company, they are essentially paying something for nothing, The Times points out.

Obama administration officials say that perception is wrong. Even people with high deductibles have protection against catastrophic costs, they say, and many insurance plans cover common health care services before consumers meet their deductibles. In addition, even when consumers pay most or all of a hospital bill, they often get the benefit of discounts negotiated by their insurers.

The health law authorized certain exemptions from the coverage requirement, and the Obama administration has expanded that list through rules and policy directives. More than 12 million taxpayers claimed one or more coverage exemptions last year because, for instance, they were homeless, had received a shut-off notice from a utility company or were experiencing other hardships.

“The penalty for violating the individual mandate has not been very effective,” said Joseph J. Thorndike, the director of the tax history project at Tax Analysts, a nonprofit publisher of tax information. “If it were effective, we would have higher enrollment, and the population buying policies in the insurance exchange would be healthier and younger.”

“If you make the penalties tougher, you need to make financial assistance broader and deeper,” said Michael Miller, the policy director of Community Catalyst, a consumer group seeking health care for all.

Steve’s Take: With the exception of the “repeal and replace” camp, practically everyone agrees that insurance companies are a necessary ingredient in the exchanges for the ACA to function the way it was intended.

And, for insurance companies to remain in the exchange, they need more healthy people, fewer sick people or a combination of the two. Both sides of the aisle agree that insurance companies should not be able to reject people with pre-existing conditions, which means sick people in need of care will remain, according to Forbes. That means a stronger mandate is required to get healthy people into the insurance pools. Unfortunately, neither party seems to be discussing this possibility.

Obamacare architect Jonathan Gruber joined CNN on Wednesday morning to say the best way to fix the failing healthcare law he engineered would be to increase the “penalty,” reports The Federalist.

As The Federalist’s David Harsanyi pointed out, Gruber’s choice to call it a “penalty” rather than a “tax” is interesting. When the Supreme Court ruled President Obama’s healthcare law constitutional, it did so by claiming that the amount someone is compelled to pay each year for not having insurance was a tax, not a penalty. Since Congress has the constitutional authority to levy taxes, it’s permissible (i.e., lawful) if they force people to pay higher taxes for not buying insurance, the court ruled.

Justice John Roberts proffered this explanation in his decision:

“The mandate is not a legal command to buy insurance. Rather, it makes going without insurance just another thing the Government taxes, like buying gasoline or earning income. And if the mandate is in effect just a tax hike on certain taxpayers who do not have health insurance, it may be within Congress’s constitutional power to tax.”

So why is Gruber now calling it a “penalty?” The Federalist speculates, correctly I believe, that it’s because it really is a penalty and the American people are being compelled to buy a sub-par product at a cost that will soon skyrocket. Or is it a tax, but Gruber doesn’t want to say that because supporting higher taxes is a poll-tested way to lose political arguments.

Let’s boil this down to just two “fixes” to the insurance-pool dilemma.

The much-ballyhooed predicament with which insurers are contending is that too few healthy people, and too many sick people, are signing up for the plans sold through the exchanges. For insurers, that changes everything.

Faced with higher claims per enrollee than they expected, they seek to raise their prices, which makes healthy people, especially young healthy people, even less likely to sign up the following year. If unchecked, argues The New Yorker, this process could lead to a spiral of rising prices and falling enrollment.

Plan No. 1. An obvious way to address this problem would be to drastically raise the fines (I call them taxes) that people face if they don’t purchase insurance. Under the terms of the Affordable Care Act, getting enrolled wasn’t meant to be a choice–it was a legal obligation.

For political reasons, however, the penalty for defying this “individual mandate” was set at a very low initial level, which is supposed to grow gradually. In 2015, the fines started at $325 per adult. This year, they started at $695. (The actual figure is set by formula that takes into account a person’s income.)

Since the annual cost of an insurance plan can reach $4,000-$5,000, many individuals–particularly young and healthy ones–may well be tempted to forego insurance, accept the penalty, and hope they don’t get sick.

And actually, they may not end up paying anything. If an individual doesn’t pay the fine voluntary, the only way the government (in this case, the IRS, which oversees the system) can extract payment is by subtracting the amount due from a federal-income-tax refund. If the person isn’t due a refund, he or she doesn’t pay anything.

Private insurance markets function best when there is a large and diversified risk pool. If we are going to retain Obamacare and rely on the insurance markets to provide universal, or near-universal, coverage, the individual mandate will have to be enforced. That means raising the penalties for non-compliance and actually enforcing and collecting them.

Plan No. 2. And finally, it’s time to address the stepchild of all the ACA “fixes” being bandied about but not really seriously discussed (except by Ms. Clinton in this county: “The Public Option.”

The rising cost of health care is an issue all over the world. The way most countries have dealt with it is by enrolling the entire population, or almost all of it, in a single-payer system, and using the bargaining leverage that creates (usually coupled with administrative sanction) to keep down costs.

So far, the American political system, which is highly vulnerable to seizure by powerful interest groups, such as doctors, hospitals, and pharmaceutical companies, has resisted going down this path. But this may be changing, says The New Yorker.

In addition to trying to patch up the private exchanges, Ms. Clinton has proposed to expand Medicaid further, and to lower the minimum enrollment age for Medicare, the government-run insurance system for the elderly, to fifty-five.

She has also reaffirmed her support for establishing a public option–a government-run insurance plan–which would compete with private insurance plans offered through the public exchanges. Finally, Clinton has adopted a proposal, initially put forward by Senator Bernie Sanders, to provide more federal financing for low-cost, locally-run community healthcare centers.

Neither of these two proposals implies that the United States should abolish the Affordable Care Act and adopt a British or Canadian system. Such a change would require another mammoth political fracas and a significant tax hike. Pushing for a public option on the exchanges would be tantamount to challenging the private insurers on their home field.

Steve's Take: Isn't it time we start discussing the 'public option' fix to #Obamacare? Click To Tweet

Isn’t it time we start seriously discussing this “public option” fix, at least with as much serious deliberation as the “higher fines” and repeal and replace” plans? Of course, in a little less than two weeks, these three fundamental choices may shrink to two.