Individual Health Insurance Mandate Penalty, Too Low to Move Consumers?

Friday, May 03, 2013

 

Beginning January 1, 2014, the Patient Protection and Affordable Care Act (PPACA) will require virtually all Americans to obtain and maintain health care coverage.  Coverage may be provided through their employer, a publicly funded health care program, private insurance via a state or federal government run exchange or a private carrier.  Employers have already begun reporting company provided health care on employees’ 2012 W-2’s issued in January 2013.  Individual taxpayers will begin reporting health care coverage or the lack of coverage when they file their 2014 1IRS 040 in 2015.

 

The concept behind an individual health insurance mandate is straight forward; if everyone has insurance, the risk and therefore the costs are spread across ALL taxpayers and just not those who have employer, private or public coverage.  The US Census Bureau estimated in 2011 that some 49 million persons do not have employer, private or public health insurance coverage and that approximately 260 million Americans had coverage.  The individual health insurance mandate is directed at those without coverage.

 

Since a number of the 49 million persons who do not currently have health insurance will fail to pay for some or all of the cost of their health care needs, the resulting cost is shifted to those who do pay or is written off as a business loss, thus absorbed by taxpayers in general.  In theory, eventually ALL health care consumers, including their employers end up paying higher direct costs or higher insurance premiums, co-insurance payments, co-pays, and deductibles to offset some or all of these unrecoverable unpaid medical expenses.

 

To encourage taxpayers who do not have health insurance coverage, the PPACA assesses a penalty on those who fail to obtain coverage beginning in 2014.  The initial penalty is $95 but increases over time and is indexed to the cost of living after 2016:

 

● 2014, $95 per adult/$47.50 per child, family max of $285 or 1% of income, whichever is greater.

● 2015, $325 per adult/$162.50 per child, max of $975 or 2% of income, whichever is greater.

● 2016, $695 per adult/$347.50 per child, max of $2,085 or 2.5% of family income, whichever is greater.

 

The penalty is capped so that it will not exceed the cost of an individual ($4k -$4.5k) or family ($12k -$12.5k) Bronze plan through the exchanges in 2016.

 

At issue, will the initial and subsequent PPACA penalties actually motivate individuals to obtain coverage?  Loss aversion tells us that consumers fear losing more than they treasury gaining something of value.  So will a health care consumer fear losing the $4,000 to $5,000 for expected annual cost of individual health insurance coverage more than gaining the value of having health care coverage?