Update: This story was originally published March 21. It was updated on June 26, 2017, with details of the Senate health care bill.
The Affordable Care Act’s tax penalty for people who opt out of health insurance is one of the most loathed parts of the law, so it is no surprise that Republicans are keen to abolish it. But the penalty, called the individual mandate, plays a vital function: nudging healthy people into the insurance markets where their premiums help pay for the cost of care for the sick. That has required Republican lawmakers to come up with alternatives, which were included in the House bill that passed in May and updates to the Senate draft bill released Monday.
The GOP approach is called a “continuous coverage” or “creditable coverage” penalty. It would apply to people who buy insurance if they have gone 63 consecutive days without a policy during the past 12 months. In the Senate bill, they would have to wait six months before they could buy insurance. The bill that passed the House took a different tack: It did not include a waiting period but required insurers to increase premiums by 30 percent, and that surcharge would last for a year. While the ACA assesses a fine for each year people don’t buy insurance, the GOP plan would punish those who decide to purchase it after not being in the market.
Much is at stake. If the GOP’s approach fails to prod enough healthy people into buying insurance, rates for everyone else in the insurance pool will rise, destabilizing promises by President Donald Trump and GOP leaders to make their Obamacare replacement more affordable. The nonpartisan Congressional Budget Office projects that millions fewer people will buy insurance if the individual mandate is repealed and replaced with a continuous coverage surcharge as the House proposed.
The budget office expects that the Senate’s six-month waiting period would “slightly increase the number of people with insurance.” Nonetheless, CBO projects that at least 22 million people will lose insurance under either the House or Senate bill because both proposals scale back government assistance to people buying insurance and limit Medicaid coverage.
Why do people allow their insurance to lapse?
Some simply can’t afford the premiums, like Sheila Swartz. She and her husband, Don, who has a heart condition, dropped their policy in December after learning monthly premiums were going to increase by about $140 to $530. “You can’t get blood out of a turnip,” said Swartz, who lives outside Nashville, Tenn., and works as a house cleaner. “If you can’t afford that premium, you can’t afford that premium.”
Others stop paying premiums when they lose a job or are hit with unexpected costs in other areas, such as major home or car repairs. “If you have to pay rent or health insurance, you are probably not going to choose health insurance,” said Bruce Jugan, a health insurance broker in Montebello, Calif.
Some people try to game the system, taking the calculated risk of going without insurance until they get sick or know they need expensive medical care, such as for maternity or an elective surgery.
Both the Affordable Care Act and the GOP proposal include a deterrent by limiting people from enrolling anytime they want. People must wait for annual enrollment periods, usually in the final weeks of the year, meaning that some people might have to wait months before getting coverage. (People still can get insurance during special enrollment periods if they lose a job, get divorced or have another specified major life change.)
How tough is the GOP penalty compared with the individual mandate?
Under the ACA, the average individual mandate penalty in 2015 was $442, according to the Internal Revenue Service. The House penalty would vary based on cost of premiums but generally would be more expensive than paying the mandate’s penalty. A 40-year-old with annual premiums of $4,328 would pay an extra $1,298 because of the House surcharge.
“It’s got teeth,” said Cheryl Damberg, a Rand Corp. economist. “In some ways, it’s a more punishing penalty, and it’s going to hit people who are least capable of financially affording it.”
Seth Chandler, a law professor at the University of Houston Law Center who has been critical of the Affordable Care Act’s insurance markets, said he is skeptical the House surcharge is high enough to make people enroll. “I am concerned that the Republicans are succumbing to the same softness of heart as the Democrats succumbed too when they set the individual mandate [fine],” he said. “If you start to see insurance companies object or drop out of the markets, that’s a sign this thing is miscalculated.”
Two conservative economists at the American Enterprise Institute, Joseph Antos and James Capretta, argue the penalty is “far too small” to be effective. “Healthy consumers are likely to take their chances,” they wrote. “With the repeal of the individual mandate, and the retention of the ACA’s insurance rules, the overall effect would be significant market turbulence, starting immediately in 2017.”
The CBO predicted that there would be a brief increase in the number of people holding insurance in 2018, as roughly 1 million people buy coverage to avoid the surcharge. In most years afterward, however, about 2 million fewer people would buy policies, either because of the surcharge or because of the requirement they provide documentation proving they had been insured. The CBO said healthy people in particular would be more likely to avoid buying policies.
The House plan has some parallels to Medicare’s late enrollment penalty, which is applied to premiums for people who did not sign up upon turning 65. But Christopher Koller, a former Rhode Island health insurance commissioner, doubts the GOP penalty would be as effective. “Medicare is an entitlement with the force of government behind it,” said Koller, now president of the Milbank Memorial Fund, a foundation in New York that focuses on healthy populations. “You get lots of notices about what your obligations are as you approach that age.”
What about people who can’t afford premiums?
The House surcharge contains no hardship exemptions, unlike the individual mandate, which allowed people to escape paying a penalty if premiums would have eaten up too much of their income (8.16 percent in 2017).
In 2015, 5.6 million people paid the individual mandate penalty, but another 11 million claimed a hardship exemption, according to the IRS.
Lower-income people are going to have even more trouble buying — and keeping — coverage under either of the GOP plans, experts said. The ACA’s premium subsidies are based on income, and millions of people on the poorer end of the spectrum do not have to pay anything for premiums if they choose the cheapest plan. The House plan would offer a flat tax credit that adjusts only for age. The penalties would make some even more reluctant to buy insurance — especially if they are relatively healthy. The Senate plan retained income-based subsidies, but they are smaller than those under the ACA and are tied to plans with higher co-payments and deductibles.
“I think we would just end up with a lot more uninsured people, and they would clearly be the type of people who are less able to navigate and less able to afford insurance,” said Geoffrey Joyce, director of health policy for the University of Southern California Schaeffer Center for Health Policy & Economics.
Republican lawmakers say their plan rightly places the responsibility on individuals. It is a view shared by some health insurance brokers like Helena Ruffin, a broker in Playa Vista, Calif. She said that a continuous coverage requirement like the one proposed by the House would “limit those people who are not playing by the rules.”
“I am favor of the penalties,” she said. “Whether or not people are going to pay attention is another story.”