Does the House really want to raise taxes on eight million uninsured people?
14 July
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 – 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)
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@JF – So instead JF, you would rather pay 20-30% more for your health insurance through mandates and higher taxes to pay for those who can’t afford their health insurance?
Talk about rearranging the deck chairs on the Titanic.
@Brian Simpson – I would agree there is a concern there…If the cheapest plan was say $5000 and there was a large enough portion of the electorate that had the choice of a $2K tax penalty or not affording a $5K plan, you can bet there would be an hourly story on Fox News outlining the horrors of Obamacare (oh wait they already do that), but there would be actual meat behind those claims…Simply put, politicians aren’t stupid and realize that there need to be plans to meet different needs. Read a write-up of the proposed public option of the house plan. It is structured to provide 4 options from “Basic” to “Premium Plus”.
@JF – I’m not saying that it’s impossible for health insurance to be a worthwhile investment or that there aren’t times when it would be imprudent to be insured, my original point is that it should be the consumer’s choice whether or not they are insured. I am all for paying my part to public works, but as of yet health care isn’t one of them. The health industry is a heavily regulated private endeavor. Much debate could take place as to whether this regulation improves the quality, affordability, and timeliness of patient care, but I’d rather not see a full-blown discussion of the subject happen here. As for me, I know what my beliefs on the subject are.
It is obvious from these comments that a Govt mandate is unconstitutional, as is the govt involved in private banking, auto making, reproduction…etc. Lets get the bureaucrats out of the equation altogether.
Julie said,
“You are forgetting that there will be a public option available which will be less expensive than than private for-profit plans. The point of the public option is to give private insurance companies price competition. How convenient that you “forgot” this. ”
and
“Another thought: when the uninsured go to the emergency room, end up with a huge bill and cannot pay it. Guess who pays for this independent person who thinks they shouldn’t have to buy health insurance? You guessed it – all the rest of us. Paying for the uninsured who cannot/will not pay adds $1000 to everyone else’s yearly insurance bill. How fair is that?”
So if it is unfair that my insurance subsidizes the cost of healthcare for the uninsured now, how would it be fair that the public option will pick up the slack? Who do you think will pay the bill for the publicly insured folks then?
The public option won’t compete with existing private insurance; the public option will be less expensive because the rest of us will still be subsidizing those insured with the public option…and either paying for our own insurance (partially or in whole) or paying a punitive tax. Either way, we’re still on the hook for those who used to be uninsured. This time, though, it’s going to cost us well over a trillion dollars and we will have gained yet another huge government bureaucracy that can tell us how to run our lives.
Ellen asked, “But what happens when your records are just part of the national database?”
The idea of a national database is funny. Building a database is pretty easy, I guess; getting it right is much more difficult. For the sake of argument, let’s say the government gets it right. We have a shiny new national database and all we have to do is get all of our data into it. If Dr. Jones’ clinic already has all patient data in its own database, someone will need to map its existing data fields to the fields in the national database. Not a quick, easy job. Maybe Jones uses an Access db and the national db is Oracle. Maybe Jones combines first and last names in one field and the national db separates those fields. Imagine what happens in a clinic that cannot afford a database administrator to map the fields! I’d hate to think what happens in a clinic where they hired a stupid db administrator. Or what happens in a clinic where the data is stored in handwritten records?
I suppose the “easy” way to build this national db is to store scanned images of those handwritten records. That’s a lot of scanning, a lot of movement of paper records…and–guaranteed!–an enormous number of mistakes. And security: How do thousands upon thousands of clinics, hospitals, doctors’ offices move all that personal data with no security glitches? Not likely to go smoothly.
Coming up with ideas that sound smart is the easy part. Making it happen is the hard part. Using common sense seems to be the hardest part of all.
I’m not worried about the national database yet but I am not ignoring the bad stuff that could happen if even the tiniest piece of that idea is implemented.
This is how they will control the cost of labor. We will soon all be working for very low wages in all sectors and at all but the elite levels. The government will provide our health services at their discretion. Lifestyle mandates will be implemented. Our mortgages will all directly or indirectly be owned by the government so technically, most of us will be dependent on them for our housing as well. This scenario reminds me of the antique songs and stories of miners, etc. who owed their lives to the company store. Sad.
@Mike from IN – I agree. It isn’t the government’s place to tell us how to spend our money – it is their job to keep us in a safe stable environment so we can do things for ourselves. I for one don’t think that a stratified system where de-facto government monopolies assisted by regulatory capture effectively split us into a country of morlocks and eloi, where some of us can afford health care becuase we were born in the right place to the right people, and other, just a capable and hard working, cannot get ahead. That is why government needs to enforce a certain minimum on everyone. And if you need someone to fill in the blanks in the arguement, spend some time studying sociology, economics, mainstream political theory, and history, and then get back to me.
Sorry if that spoils your libertarian fantasies. I had them once as well, then grew up.
@David Manheim – So here I am again. Believe it or not I have studied all of those issues. I have the transcripts to prove it. Don’t let my age mislead you, I’ve been following politics for 12 years now. And just to clarify, yes that means I started while I was only 14. While it may be true that being capable and hard-working sometimes isn’t enough to get ahead in this country, I would argue that those traits are still worth more here than they are anywhere else in the world. Hand delivering health care to the multitudes isn’t a solution that will level the playing field. Simple economics states that the more something costs the less of it you use, and conversely the less something costs the more of it you use. Using this basic principle, I have two questions. Given the higher cost of labor (at least for companies with payrolls higher than $250K), how many new employee positions are not going to be created, and how many current jobs are going to be downsized? I doubt anyone wants insurance more than they do their current job. Secondly, If more people are being treated and the overall cost is supposed to go down, won’t that lead to either lower quality care, longer waits for care, or both? I’m sure I wouldn’t be the first to recommend looking at the European or Canadian health care systems to see where our current course is taking us. By the way, if you’re hoping to spoil anybody’s “libertarian fantasies” you’d do well to at least check your comment before posting, and props on “The Time Machine” reference that’s quite a bit of colorful imagery there.
Thanks, Keith, for wading through the language and providing some information. We once again are having a bill rushed so fast through the process that almost no one has time to understand it.
Do you really think that the guy that owns the corner convenient store is going to make less money in the future because of these taxes? He’s going to raise the price of milk and bread and the single guy makine 50K is going to pay for his insurance along with the poverty level people that get insurance for free.
Keep in mind one of the people who makes more than 250K might just be the owner of your company or the owner of a company you or your place of employment does business with. Do you think they are going to absorb this cost or pass it on.
It is absolutely impossible to transcend the laws of nature. What can change in historically different circumstances is only the form in which these laws expose themselves.
(Karl Marx)
@JF –
When people are injured in car accidents, auto insurance covers the medical bills. That is part of legally required auto insurance.
So the straw man you just created has been blown away.
People are seldom bankrupted because of injuries from car accidents although it does sometimes happen with catastrophic injuries if the medical bills exceed the insurance limits.