Buying Insurance vs. Paying a Fine: What's the Tradeoff?

| Tue Jun. 26, 2012 6:05 PM EDT

Since the healthcare mandate is on everybody's mind today, Ezra Klein asks a good question: does the mandate even matter?

[If you choose not to buy insurance] you have to pay a penalty of $695 a year (that’s the 2016 number; after 2016, it rises with inflation) or 2.5 percent of your annual income, whichever is greater....[But suppose] you simply refuse to pay the mandate. What can the government do to make you pay?

Well, unlike if you refuse to pay your taxes, it can’t throw you in jail or put a lien on your home or other property (page 336 of the legislation). It can potentially reduce your tax refund, but that’s really it. If you’re not getting a tax refund, you’re free and clear. Given these specifics, it’s worth asking why anyone thinks the mandate will work at all. And it’s worth saying that some don’t.

So the fine is small and the government can't do much to collect it anyway. But in practice, there's an even more important question: how many people would fail to buy insurance and be forced to pay the fine in the first place? On the left, a fair number of people think that ACA's subsidies are stingy enough that poor families simply won't be able to afford insurance even if they want it, which would mean paying the fine instead. But is that true?

What follows is back-of-the-envelope stuff, but I think it's in the right ballpark. Let's take a family of four where the policyholder is age 35 and has an income of $40,000. How much would insurance cost them? According to this handy calculator from Kaiser, here's what that family would have to pay (converted into a monthly premium):

  • Premium cost: $925
  • Federal tax credit: $760
  • Net cost of policy: $165

However, this overstates things because it's based on the cost of a "silver" policy. But you don't have to buy a silver policy. You can pay more and get a gold or platinum policy, and more importantly, you can pay less and get a bronze policy. Bronze policies don't provide great coverage, but they do provide the basics and they also cover health emergencies. It's a reasonable option for someone who just can't afford more. By my rough calculation, a bronze policy would cost about $125 less than a silver policy. This means that the net monthly premium for our family of four would be about $40. That's not much — and it's half the cost of the fine.

But how about a family of four with an income of $50,000? After subsidies, their cost for a bronze policy would probably come to about $166 per month. That's more than the fine ($166 vs. $100) but not a lot more. How many families earning $50,000 would forego health insurance for a net cost of $66 per month? Not too many, I'd guess, even if the insurance policy is mediocre.

As for families making more than $50,000, hardly any of them are uninsured in the first place. This paper estimates only about 1.6 million uninsured adults with incomes consistently above $50,000. It's just not a big number.

You can play with these numbers endlessly, and if you choose the worst possible set of circumstances you can always come up with an example or two of people who would be forced to pay a fair amount of money for health insurance they'd rather not have. But here are the basics for a family of four:

  • Under $30,000, families qualify for Medicaid and pay nothing for insurance.
  • Under $37,000 or so, most families can buy a bronze policy for free.
  • Between $37,000 and $45,000, the cost of a bronze policy is quite small, and certainly less than paying the fine.
  • Above $45,000, the cost of a bronze policy is a bit more than the fine.
  • Above $50,000, the cost of a bronze policy is significantly more than the fine, but there aren't very many uninsured families in this category.

The numbers work out differently for single people, but singles under 30 also have the option of buying only catastrophic coverage. We don't know yet how much policies like this are going to cost, but certainly substantially less than a bronze policy. For most under-30s, this means they have the option of free or nearly free coverage all the way up to a fairly high income level.

There are a lot of numbers in this post. Sorry about that. And I don't mean to imply that the mandate is meaningless: in fact, it probably has both an objective and a subjective effect. Objective because it makes the financial case for buying insurance stronger, and subjective because most people prefer to obey the law. Still, it's not overwhelmingly important. My personal preference would be for true national healthcare, and failing that, for higher subsidy levels under Obamacare. Nonetheless, the truth is that Obamacare makes insurance available to all poor families and most working class families either free or at very small cost. It's a pretty good deal. The mandate is a backstop, and it's one I support both on a substantive policy level and as a matter of constitutional law. But the subsidies and the insurance regs are the heart of Obamacare, and they always have been.

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