Politics & Policy

What to Do with the Uninsured

Some Democrats would fine the uninsured. There is a better method of persuasion.

The version of Obamacare offered by the Senate Health, Education, Labor, and Pensions (HELP) Committee has a number of controversial provisions. Conspicuous among them is a proposed fine of as much as $1,000 a year on individuals who refuse to purchase health-insurance coverage as the bill mandates.

The antecedent of the individual mandate is the Massachusetts health-care reform of 2006. That measure — spearheaded by Republican then-governor Mitt Romney, and lauded by Ted Kennedy, who is now the chairman of the HELP Committee — contained a universal individual mandate to purchase state-approved insurance coverage. Or else what?

Romney had proposed a self-insurance option, whereby an individual could post a $10,000 bond to cover unanticipated medical costs. Liberal Democratic legislators rejected that option, leaving only a penalty for failure to enroll.

In 2008, Massachusetts started levying fines on non-compliers. The amount of the fine is half the cost of the premium of the cheapest approved plan in the person’s region of the state, up to approximately $1,000 a year.

The Obama-Kennedy individual mandate is perhaps the first attempt by the federal government to require individuals to buy a particular product, or suffer a fine.

The problem this measure aims to solve is real: People incur medical expenses that exceed their ability to pay, leaving others (medical providers, insured patients, taxpayers, and so on) holding the bag. However, there is a better way to deal with this problem.

The operative principle should be personal responsibility. The responsible thing to do is to buy health insurance to cover most of the costs of illness or injury.

Unfortunately, state governments have made health insurance unaffordable for many consumers. They have done this by piling on costly mandates, requiring guaranteed issue (applicants cannot be turned down because of a pre-existing health condition), imposing community rating (everyone in a particular region pays the same premium, regardless of personal history), and outlawing low-cost policies that have high deductibles or offer only catastrophic coverage.

Faced with the steep cost of insurance, many people — especially healthy young people — choose to go without. Fine — but if they then incur high medical expenses, they ought to accept the primary responsibility for paying for the services they have received.

Consider this proposal: If an uninsured person incurs medical expenses and leaves an unpaid balance, the provider must try for 90 days to collect. At that point the unpaid balance is posted to an account in the patient’s name, managed for the government by a credit-card company. Each year the account manager reports to the patient his or her balance, on the equivalent of an IRS 1099 form. When preparing that year’s taxes, the individual must include a stated fraction of that amount in his or her gross income. (The same result could be achieved with an inverse tax credit.)

The fraction reported would be graduated according to the patient’s income and the amount of the balance due. For a high-income taxpayer with a low account balance, the amount subject to tax the first year might be 100 percent of the balance. For a taxpayer with minimal income, the balance would carry over undiminished to the following year.

Thus the uninsured patient would be required to pay off the unpaid balance via income-tax payments year after year until it is retired. Whether the account balance would be adjusted upward annually to match the depreciation of the dollar, whether interest would be charged on the average balance, whether the IRS would have a claim on a decedent’s estate for the unpaid balance, and whether such liabilities would survive bankruptcy are questions for policymakers to decide. A further question is how much of the tax payment collected the government would deduct to cover administrative costs before remitting the remainder to the providers who weren’t paid for their services.

In sum, the proposal says to the person who prefers not to obtain insurance: “Your government will not fine you for failing to buy health insurance. But if you are unlucky enough to run up a big medical bill that you can’t pay from your assets, you will be paying a piece of it off every year at tax time, possibly for the rest of your life. Are you sure you wouldn’t prefer to invest in a high-deductible insurance policy with limited mandates, with a cap on out-of-pocket payments, and with your own tax-free Health Savings Account?”

It will be objected that it might be years — if ever — before an ordinary individual could pay off a large hospital bill through annual income-tax payments. That’s true. But the proposal at least fixes the economic responsibility for paying for services received upon the person benefiting from the services, and it sets up a virtually effort-free mechanism for paying.

To the extent the government returns the tax collections from this provision to the unpaid providers, the proposal will also reduce the otherwise unavoidable cost shift to insured patients via higher premiums.

This plan is a clear conceptual alternative to the government forcing every citizen to buy government-approved insurance. The uninsured patient will be spared an oppressive government mandate to buy coverage. But the patient will know that if he or she suddenly requires expensive medical care, the consequence of having failed to enroll in suitable coverage will be reduced after-tax income. That will emphasize that the unpaid bill remains the patient’s responsibility, not society’s.

No scheme is perfect. If expenses are incurred, somebody has to bear the burden. But by obviating the argument for an illiberal individual mandate, such an income-tax-based recapture plan has a lot to recommend it.

– John McClaughry is president of the Ethan Allen Institute in Vermont.

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