A recent Gallup survey found that only three in ten uninsured Americans “are somewhat or very familiar with the exchanges.” This is a serious problem for a number of reasons, e.g., it is important that large numbers of young, healthy individuals sign up for insurance coverage to help create stable insurance pools. But it is also a political problem for the Obama administration and its allies, because if efforts to attract young, healthy uninsured individuals onto the exchanges fail (the “carrot”), the federal government will have to rely more heavily on the individual mandate penalty (the “stick”). It’s not unreasonable to believe that the first many uninsured Americans will hear of the exchanges will be when they face a penalty for having failed to secure insurance coverage.
Last month, Ezra Klein of Wonkblog offered a primer on the individual mandate penalty:
The individual mandate’s penalty is not $95 in year one. It’s $95 or 1 percent of your taxable income, whichever is greater. So if you make $80,000 in taxable income, the penalty is $800.
And it grows each year. In year two, it’s $325 or 2 percent of your taxable income. In year three, it’s $695 or 2.5 percent of taxable income. After that, it effectively holds steady.
In all cases, the key is that people pay whichever penalty is larger. That means that it’s the percentage penalty that will really matter for most people. Someone paying the $95 penalty is making $9,500 or less in 2014. That’s a very low income. That $95 floor is there to encourage people to sign up for Medicaid (in states where Medicaid isn’t being expanded, people making that little money will be exempted from the mandate on affordability grounds).
So that’s the first point: The mandate’s penalty is larger than many people think in 2014, and it gets even larger in 2015 and 2016. If you’ve got $76,000 in taxable income in 2016, you’re paying a $1,900 penalty.
Yet Anemona Hartocollis of the New York Times reports that state and federal health exchange officials have placed very little (if any) emphasis on the penalties, as they’ve preferred to go with more soothing messages, at least at this stage. Another issue she raises is that the penalty raises a number of administrative complications:
But there is also the dirty little secret of the penalty: It is a bit of a chimera, because the federal government cannot use its usual tools like fines, liens or criminal prosecutions to punish people who do not pay it. The penalty is supposed to be reported and paid with the income tax returns of those who do not buy insurance, but the government has not said how it will collect from those who owe it but do not pay it, though the law allows it to deduct from any income tax refunds.
Moreover, there is a real danger that at least some consumers will decide that the insurance options available to them are actually less attractive than paying the penalty:
And for many healthy middle-class people, a side-by-side comparison might suggest that it would be more cost-effective to pay the penalty than to buy insurance.
In 2014, a family with two adults and two or more children, for example, would pay $285 or 1 percent of the family’s income over the $20,300 filing threshold, whichever is greater; those jump to $2,085 or 2.5 percent by 2016 and rise with inflation after that.
For instance, a family of four making $59,000 a year could face a choice between a $387 penalty the first year or, in a typical “silver” or midpriced policy offered on the California exchange, a premium of nearly $4,800 after the federal subsidy, with a $4,000 deductible, according to the Kaiser Family Foundation subsidy calculator. There is variation from plan to plan, but the deductible typically would not apply to doctor visits, preventive care, lab tests or generic drugs, although some regular co-payments would apply.
Klein brings up the valid point that even if the penalty is relatively small, consumers will generally prefer to pay for something than nothing. The possibility Hartocollis invokes is that at least some consumers will find the policies on offer to be a very bad deal even when compared to paying for nothing, fairly or otherwise. James Capretta’s concept of default insurance plans also entails providing uninsured individuals with unattractive high-deductible plans, only these plans would have be even less attractive. Yet because these low-cost plans are financed by a tax credit, they are effectively invisible to consumers who choose to pay no attention to the risk of catastrophic medical expenditures.
The constituency that will face the mandate penalty is relatively small, and it’s not particularly politically influential. But if the penalty is ever enforced, it is easy to imagine that it will engender a backlash. Populists on the left might capitalize on it as much as populists on the right.