14 July 2009 
The President has said he would not allow taxes to be raised on anyone with less than $250,000 of income.
Today for the first time we see the legislative language for and a summary of the health care reform bill that House Democrats intend to try to pass before the August recess. The following is based on an initial quick scan of the bill and studying a few key sections. I have been wondering how the drafters were going to solve the problem I am about to describe. As best I can tell, they didn’t solve it.
As expected, the House bill would mandate that individuals and families have or buy health insurance.
But what if they don’t buy it?
Then Section 401 kicks in. Any individual (or family) that does not have health insurance would have to pay a new tax, roughly equal to the smaller of 2.5% of your income or the cost of a health insurance plan.
[ Technical note: From the legislative language, it appears the tax = min( 2.5% * (modified AGI X personal exemption), average premium cost). In the examples below, for simplicity I assume modified AGI = AGI. ]
I assume the bill authors would respond, “But why wouldn’t you want insurance? After all, we’re subsidizing it for everyone up to 400% of the poverty line.”
That is true. But if you’re a single person with income of $44,000 or higher, then you’re above 400% of the poverty line. You would not be subsidized, but would face the punitive tax if you didn’t get health insurance. This bill leaves an important gap between the subsidies and the cost of health insurance. CBO says that for about eight million people, that gap is too big to close, and they would get stuck paying higher taxes and still without health insurance.
Example 1:
Bob is single and earns $50K per year. He earns more than four times the federal poverty level, so he does not qualify for subsidies under the House bill.
Bob works for a five-person small business that does not provide him with health insurance. His $50K wage is average for this company, which therefore does not qualify for the new small business tax credits.
This company is small enough that they do not have to pay the IRS any fee for not providing Bob with health insurance. (See the table on page 184.)
With only $50K of income, Bob cannot afford to buy health insurance. Under the House bill, he would then have to pay about $1,150 per year in higher taxes to the government. That’s 2.5% of (his income minus a $3,650 personal exemption).
I went shopping for Bob on eHealthInsurance.com. He is 50 years old and a non-smoker, living where I do in Virginia. The cheapest bare bones policy he can get is $1,620 per year. Most plans are in the $3K – $5K range. That $470 difference between the tax and the cheapest premium is more than Bob can afford on a $50K pre-tax annual wage.
To summarize, under the House bill:
- Bob is a single 50-year old non-smoking small business employee who makes $50K per year before taxes and does not have health insurance.
- Bob cannot afford a $1,600 bare bones health insurance policy, much less a $3K — $5K policy.
- Bob would get no subsidies under this bill, and his employer would face no penalty for not providing him with health insurance.
- Bob would end up without health insurance and would have to pay $1,150 more in taxes.
Example 2:
Freddy and Kelsey are married with two kids. They earn $90K per year. They earn more than four times the federal poverty level, and therefore do not qualify for subsidies under the House bill.
Freddy and Kelsey own and run a small tourist shop in Orlando, Florida. They are the only two employees. Their wages exceed the amounts that would qualify them for small business tax credits under the House bill.
Because their business is so small, the House bill would impose no financial penalty for not complying with the employer mandate. Even if they did, the tax penalty would come out of their own bottom line, since the two of them are the business.
Freddy and Kelsey are both 40 years old. They have a 15-year old son and a 12-year old daughter. None of them smoke.
Shopping on eHealthInsurance, the cheapest plan I could find for them is a high-deductible PPO plan with a $6,000 annual deductible. That would cost them more than $3,800 per year. And it’s a bare-bones plan.
They can’t afford that. Maybe they are recovering from a hurricane, or dealing with the real estate collapse in Florida. They are also saving for their kids’ college, which is only a few years away. Even with $90K of income, money is tight for a family of four.
If they cannot afford the (at least) $3,800 in health insurance premiums, then the House bill would make them pay more than $2,050 in higher taxes.
To summarize, under the House bill:
- Freddy and Kelsey are a 40-year old couple with two kids. They own and run a small tourist shop in Orlando, Florida.
- They are the only employees, and earn a combined $90K per year.
- They cannot afford even an inexpensive health insurance plan, and so the House bill would make them pay $2,050 in higher taxes.
These two examples show the difficulty of making an individual mandate work. To get people to comply with the mandate, you have to impose a significant tax penalty on those who don’t comply. This will change the calculation for many who were previously uninsured – they will buy health insurance, because the delta between the cost of having insurance and the tax penalty cost of not having it has shrunk, so they might as well buy it.
The bigger this gap, the fewer people will switch. And for those who do not or cannot comply with the mandate, they end up in the worst of all worlds – uninsured and paying higher taxes.
From CBO’s new tables, it appears that about eight million U.S. citizens would fall into this category. I expect that very few of these people would have more than $250,000 of income, the no-tax-increase line defined by the President.
I expect the House Democrats will emphasize that their bill would result in 97 percent of U.S. citizens having coverage. Those other three percent, however, really get shafted, and that’s about eight million people.
If the President were to sign such a bill into law, I cannot figure out how his team could reconcile this consequence with his pledge not to raise taxes on the middle class.
But without the tax penalty, the mandate isn’t effective, and the number of resulting uninsured goes way up.
The House bill drafters have made a hard policy choice. It is important that Members of Congress and the public understand the benefits and the costs of the approach they have chosen.
Update
Thanks to a friend for pointing this out: We know the President understands this point. Here is then-Senator Obama in a debate with then-Senator Clinton on February 21, 2008, opposing her proposal for a universal individual mandate to purchase health insurance (emphasis added):
SENATOR OBAMA: Number one, understand that when Senator Clinton says a mandate, it’s not a mandate on government to provide health insurance, it’s a mandate on individuals to purchase it. And Senator Clinton is right; we have to find out what works.
Now, Massachusetts has a mandate right now. They have exempted 20 percent of the uninsured because they have concluded that that 20 percent can’t afford it.
In some cases, there are people who are paying fines and still can’t afford it, so now they’re worse off than they were. They don’t have health insurance and they’re paying a fine.
(APPLAUSE)
In order for you to force people to get health insurance, you’ve got to have a very harsh penalty, and Senator Clinton has said that we won’t go after their wages. Now, this is a substantive difference. But understand that both of us seek to get universal health care. I have a substantive difference with Senator Clinton on how to get there.
(photo credit: speaker.house.gov)
If you want to sit and play with hypotheticals, what if Freddy has a heart attack and requires bypass surgery? In spite of their 90,000$ income, they can’t afford 3,800$ in medical premiums to cover even high-deductible insurance — how will they afford to be forced into bankruptcy from medical bills?
If you believe in our system, that medical care and private insurance provides health care efficiently, then 3,800$/year of insurance should be worth more than 3,800$/year in utility. If so, the 2000$ would be viewed as a penalty for irresponsibility.
I fail to understand the argument that 470$ per year is more than a single male making 50K a year can afford. There are plenty of people making much less to begin with.
Maybe I am just biased from reading previous opinions from this blog, but I find it hard to believe the message is that health care reform should be stronger than the bill released from the house today — that it should be rewritten so as to insure the remaining 8 million who refuse coverage.
@Doubting – As someone who has family in England, let’s say Freddy has to pay 171/2% VAT on everything for all the years of his life, $10 per gallon of gas and fees and fines on everything so he has no money. Then he has a heart attack. He goes to the Emergency Room and lies in the ambulance for 10 hours and then gets in the Emergency Room and has to wait for another 4 hours. They can’t get him bypass surgery for 6 weeks. He doesn’t have six weeks and dies. Welcome to your future!
Where is health care in all this debate? I read the comment preceeding as a suggestion that without health insurance the cost for his treatment is somehow greater than without insurance. As Elizabeth Edwards has shown us health insurance does not mean health care. Has anyone addressed this issue in the cost saving portion of the debate. Health insurance does not equate to the cost reductions that seem to be indicated certainly in Mrs. Edwards case.
Keith- another example, and this isn’t a hypothetical: when I went back to grad school several years ago, I was stunned at the monthly charges of the college health program versus when I worked, they were much higher. Individual insurance was even worse. So I looked at my savings, talked to a friend who was a doctor, and figured that I could personally afford to pay for a “worst case” scenario (breaking a leg while skiing or mountain biking) as well as out-of-pocket expenses for routine visits to the dentist. So for two years in grad school, I had no health insurance. It was a relatively rational decision- at age 28 I was pretty low on the actuarial charts for major problems.
Why shouldn’t someone in that type of circumstance have the option of not having insurance? More generally- why is the government trying to second guess people’s personal decisions on whether to have health insurance or not?
Good analysis, Keith. Now, can you please address something that’s gotten very little coverage?
All the news and analysis is aimed at the tax side of the health plans. I would like to know more about the subsidies for those under the qualifying line.
Let’s say Bob earned $40,000…or $30k. What kind of subsidy will he get? What if he doesn’t work at all?
What if Bob makes $150k, but is divorced and paying $60k support payments for his two children? The wife doesn’t work, can live off the support payments. If the family has no health insurance, will the wife get subsidies (she shows no “income”)?
Keith, maybe the people in your examples should have to pay a fine to compensate the public for the free emergency room care they will inevitably use.
JeanneB
Its all sleight of hand–this “plan” is all full of bugs–and to the designers all these bugs are really “features.” The whole idea is to mandate an unsustainable system that will result in a “crisis,” the solution to which will be a single-payer (the government) system. Let no crisis go to waste. And if you don’t have one–create it.
If the designers of this reform are really that organized, and nonprofit universal health coverage for our medical needs was the result…good deal
Aren’t we missing a crucial component here? What about the public option in the house plan? Wouldn’t your hypothetical examples have access to that plan and wouldn’t it be less expensive than today’s private options?
And what of health insurance exchanges? Wouldn’t this, in theory, allow more transparency for consumers and greater competition among private insurers and help to drive down cost?
It seems like you are scoring this plan against a fairly screwed up current system…of course, not quite sure how to score against a hypotheitical better system in the future…
Finally, I have to agree with above posts…If individuals are given the choice between paying a tax or purchasing insurance and they decline insurance, then the individual is making the choice to accept a tax increase. You mean to tell me Bob can’t find $40 in his monthly budget to allocate to his health? He will have to pay much, much more than that if he has to be hospitalized for major illness (which unfortunately becomes much more likely at Bob’s age)…
“It was a relatively rational decision- at age 28 I was pretty low on the actuarial charts for major problems. Why shouldnt someone in that type of circumstance have the option of not having insurance? More generally- why is the government trying to second guess peoples personal decisions on whether to have health insurance or not?”
You’ve just described a major portion of TODAY’S uninsured. Politicians bemoan these (young healthy) people being (voluntarily) without insurance as a crisis in “health care,” but the truth is they want them forced into the risk pools BECAUSE they use much less than they pay for in any level-rate scheme. Free money.
I am unable to identify the Constitutional provision that says the federal government has the power to say a citizen must have health insurance. Laws that mandate auto and fire etc insurance are state laws. Can anyone explain that?
Virginia’s premiums are relatively low (probably require some demonstration of insurability). Try finding insurance in New York City at age 28 for under $7,000 per year. That’s the community rating/no prior exclusions provisions at work.
By the way, the “exempted 20% of the uninsured” quote is way off – the number of people in Massachusetts qualifying for exemption from the mandate is relatively small, mainly older people not eligible for subsidized coverage for whom individual insurance expensive, relative to income
@mark -
Social Security isn’t a constitutional provision either…why don’t you find a lawyer to take up your case to stop your forced payment into this federal program? Good luck with that…
@Tully -
You are correct…If a risk pool just includes those who will need to use the insured service (i.e. older and those with pre-existing conditions) than costs skyrocket and either premiums adjust accordingly or it is a huge money loser for whomever insures (public or private)…so you need something close to an individual mandate to make the financials work…
Sadly, this is only about one thing, elections: “Them evil Republicans will take away your health care if you vote for them. Women, gays, and minorities will be hit hardest.”
Keith, maybe the people in your examples should have to pay a fine to compensate the public for the free emergency room care they will inevitably use.
a) It’s not inevitable; many people have enough integrity to schedule a normal office visit for non-emergency care and most people don’t have actual emergencies every year and b) if you’re any semblance of honest, hospitals will work out a payment plan for you if you don’t have the full amount upon discharge (I know a woman who has been paying $15/mo for her breast cancer treatment for twenty years). If Bob has a legitimate after-hours emergency, that $1,150 Congress wants to fine him for the crime of not purchasing insurance could be applied to that bill, whereas if its confiscated from him the hospital that treated Bob won’t see a dime of it.
@Vitam -
And why not reinstate slavery so every welfare and medicaid parasite can reimburse society? In your example you seem to forget those people are already paying taxes to subsidize those that do not .
Most people who are not sick do not need medical insurance. it is chepart mfor them to pay out of pocket for routine doctor visits and care.
The money they save by doing without the insurance is far greater than any benefit derived. Most folks would be better off with a medical catastrophe insurance that has a high deductible and pocket the savings in to an HSA. But that is too simple and gets the socialist out of the loop.
The real question is why is this even considered constitutional on its face? Where in the constitution does the government even have the potential authority to even consider implementing this monstrosity? Every one has a right to health care, that is access to care but not the right to demand someone else be obligated to pay for it. What this country needs is political reform, limiting the vote for members of the house of representatives to people who are actuall net taxpayers and keep the freeloders from voting for the body where spending measures must first be proposed.
Interesting writeup Keith.
“Arent we missing a crucial component here? What about the public option in the house plan? Wouldnt your hypothetical examples have access to that plan and wouldnt it be less expensive than todays private options?”
Well, I guess there really is one born every minute. Look at how much money is poured into Medicare and Medicaid, and how much of that actually gets to the healthcare provider. Our system simply cannot work as it does now on that level of payment to providers – so either it collapses, services go down and wait times skyrocket, or the price to the taxpayer goes way, way up. It’s one of the three, and it is unavoidable.
doubting – I think you missing the overall point. Health care is a product people choose to purchase, not a constitutional right or law(yet). There are 45 million uninsured. 28 million are 20 somethings who choose not to buy it, 10-12 million are illegal aliens, and the remainer probably just can’t afford it. My personal experience and opinion is that NOBODY knows what anything actually costs in the medical field because it is paid for through 3rd party collectivist insurance plans provided by employers. If individuals had to pay more than a two-digit co-pay everytime they went in for the broken fingernail you would see a more responsible system with much competition driving the price down.
Thanx Keith.