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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We’re losing site of a basic question: does the government have the right to force someone to purchase something against their will? It seems that if one can find – despite their being no language overtly stating it – a right to an abortion lurking in the Bill of Rights that applies to all states and one can find, as Sotomayor did, that there is no right to bear arms – despite their being overt and explicit language asserting that right – that applies to all the states, then surely the right to privacy must include the right to make private financial decisions. As a matter of fact, isn’t health insurance a private medical decision? Why not?
50K, you’re single, you can afford a bare bones policy. How can you not. It’s the same thing with car insurance, make it the law people find a way to afford it. This isn’t an argument. Is the 15 year old working. I did and went to a top 20 school, and then because may parents were poor and my classmates were rich i sold drugs to them to make my ends meet. it was one of the best learning experiences i ever had. in fact the son of a fortune 100 ceo was one of my best customers. cry me a river here
It is alarming how rapidly the Congress and Administration are once again forcing this legislation through. As with the Cap and Trade, I am sure that there will be glaring gaps to be filled in later and last minute surprises. We still have no idea of the pork in the House’ version of Cap and Trade, can you imagine what would be hidden in the margins of national healthcare? But what is more alarming than the cost are the ethical concerns that are the underlying pattern of this administration.
Who will set the priorities? In his speeches, President Obama mentioned his grandmother’s hip replacement. He speaks of it as a burden. It almost seems as if he see such a boon as something to be denied a person should they be viewed as too old? Do you really think a nationalize, computerized paradigm will allow for individual differences? Has it ever done that with Medicare? And does it do well with veterans at the VA? These are the existing examples of government care. Instead of the friendly corner clinic, there will be triage units worthy of any urban public hospital. After all, that’s how they do it in Canada.
In addition, tax funds will be directed to those programs that are seen as politically beneficial. So “reproductive services” will be covered, but knee replacements for seniors may not. Likewise, I am sure we will see approval for the costly efforts of transgendered individualsm but in order to make ends meet, may also see euthanasia promoted for a variety of individuals. These are morally offensive to many of us and forces us to accept practices which we find personally unacceptable. And since politics will be driving this bill, I am sure that there will be government penalties if you smoke, if you drink, if you weigh too much, or if you eat “bad” foods.
Does this not smack of Big Brother? Is anyone else alarmed at what could be government access to our medical records? Right now, there are insured individuals that seek out practitioners for many conditions outside of their employers insurance for fear their records could harm their careers. That is why HIPAA laws were put in place. But what happens when your records are just part of the national database? Isn’t it possible that anyone could get them? And before you answer, remember, Social Security is still paying rent for dead people and some dead people are living a second life thanks to identity theft and poor border control.
Speaking of that, the number of uninsured is a pretty loose figure. One quarter of those listed are here illegally. They get much from our economic system, but pay precious little into it, especially when they are paid in cash, under the table. Public hospitals along the border are going broke due to this massive overuse. Citizens and resident have to be literally dying to get help because of the use of these facilities for health services even though other better options exist. I also know people who could get insurance but instead they choose to travel or otherwise indulge themselves. So those of us chumps that pay for insurance will not get to subsidize their lack as well as getting taxed.
BTW, if you take a minute and look, you can find a basic policy anywhere unless you have problems already. My daughter, with preexisting back issue, pays $96 a month. And that’s with drug prices at the same rate I am getting from Blue Cross. Unfortunately, this program has been sold as being “free”. There aint no such things as a free lunch. Not only will the “rich” be paying for this, but everyone will pay. They will pay for taxes, they will pay in time wasted in waiting rooms and we as a nation will pay in decreased productivity as a result. But since businesses are closing anyway, I guess that won’t matter.
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.
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?
JSirko
What on God’s green earth makes you think you are entitled to better health than another simply because you can afford it? If your house, your boat, or whatever, of greater value than another human life? Think of your greed, of your selfishness, your lack of charity, and hang your head in shame.
The government option has unlimited resources to undercut the private firms, thus putting them out of business. Over time, the public option will become a de facto monopoly.
If you go to the ER without insurance, that should be your problem. You didn’t buy insurance? Sucks to be you. Of course, if lawyers and juries weren’t driving malpractice through the roof, government weren’t mandating prices, and new thus costlier technologies being developed, you might not pay so much.
I believe I’ve read of doctors offering “malpractice waivers.” You promise not to sue so they don’t have to buy the insurance and–presto!–your bills go down.
I don’t live in the US, so I don’t know how far h$50K and $90K go in specific locales. However, under 0bama’s College4All noodling, maybe you just register for a class or two at the local tertiary/vocational institution and get the cheap group insurance I passed on when I was a poor student: $20/mo or eat out and a case of cheap beer? Easy decision at 20.
“What on God’s green earth makes you think you are entitled to better health than another simply because you can afford it? ”
You cannot “purchase” health. It’s a craps roll–you get whatever genes you were born with. You cannot buy “never have an accident”, you cannot buy “never get cancer.” Rich and poor people breathe the same air and drink the same public water. As far as prevention, it takes no money to avoid promiscuity and drug abuse.
My mother counsels diabetes patients–the ones getting free care from the state exercise less and eat better than the ones paying for their own care. WALKING IS FREE. Drinking water instead of Pepsi is FREE. But hey–the state will buy their injections and their pills and their amputations, so why bother to do anything for yourself?
@Tcobb – “This is true, IF AND ONLY IF society as a whole is obligated to pay for the people who have no insurance. Get real. Much of the “health care crisis” is due to the fact that hospitals can’t refuse treatment to anybody who turns up at an “emergency room,” even if the emergency consists of a rash on their backside. If enforcing responsibility is really what you’re about, then lets repeal that federal law–if they don’t have the money or they don’t have the insurance let the hospital, at their discretion, refuse to admit them–no matter what. Tax payers shouldn’t be the only people who have to exercise “responsibility.”
That is, in a word, awesome (said with all the sarcasm I can muster). Pure Ron Paul libertarianism wing nuttery…I hope and pray that more Republicans advocate that those w/o the means to pay must be sentenced to death…at least you get points for speaking the bare truth of most Republican plans…give everyone a $5K tax break (what if you make so little or nothing that you don’t pay $5K in taxes) and tell them to find thier own individual plan for $5K or less (and most will tell you that $5K gets you a pretty bad plan in most states), and let insurance companies sell to consumers from any state (so all the insurerers flock to the state w/ the most relaxed laws / regulations and start selling sleazy plans that can make them the most profit…not that I blame them…it is a for profit industry)…
@David Manheim – The point is that it’s not the government’s place to be telling us how to spend our money. I speak for myself when I say that having health insurance provides me with a piece of mind, but if I had to foot the bill entirely on my own, I wouldn’t bother.
@Mike from IN – “but if I had to foot the bill entirely on my own, I wouldn’t bother.”
And then you get into a serious car accident that requires significant hospital time with multiple specialists, nurses, medical equipment, etc…Since you don’t have health insurance and can’t afford the $50K+ bill that arrives at your doorstep, the hospital takes what it can until you are bankrupt and then raises the rates on everyone else who comes in for care to compensate for you being a financial deadbeat…
…and the ongoing physcial therapy you will need to fully recover from this accident will never happen because you can’t afford it and it’s not a situation that requires emergency room care…
…and I could care less about bankrupting you and you living a horrible remaining life due to a lack health insurance…after all it is individual choice and all…
…but I do care about paying 20 – 30% more for some diagnostic test at the same hospital because they have to make up for your choice of not having health insurance…
@JF –
…and to alleviate my concern about paying 20 – 30% additional, we could follow Tcobb’s suggestion about repealing whatever laws require a hospital to see an emergency care patient regardless of ability to pay for services…but c’mon people…do you really want an ambulance pulling up to an accident scene and first assessing a person’s ability to pay for servcies before administering care?
“I’m sorry ma’am, there’s nothing we could do to save him…well actually, he probably could have been saved, but the estimated cost of saving him would have cost $75K overall and based on his income, available credit, FICO score, etc….we determined he couldn’t financially afford to be saved. We are so very sorry for your loss.”
@JF – I’m so glad your desire to see me insured comes from a heartfelt interest in my well being. I know the risks I would be taking by being uninsured (I am currently insured by my employer, by the way), and I would readily accept them. I have not used a dime of the health insurance benefit I (or my parents) receive in the past 10 years, I’m 26. To pay into a pot that I will never draw from seems like a waste of money to me. When I get sick, I deal with it until I get better. When I get hurt, I deal with it until it heals. Even if, God forbid, that doomsday scenario you just laid out should occur, I would try to get by on as little care as possible, and make payments on the remainder until they were paid in full. Given the unlikelihood of such events coming to pass, I think overall it’d be an intelligent decision.
Sorry,
But the tax only applies if you are a Jew or a Christian.
If you are a Muslim, you will not have to purchase this insurance.
So, the solution to the problem is simple.
Submit.
@Mike from IN – Ahh…to be 26, presumably single, and living a healthy life…Someday you will be hopefully be married and have kids and hopefully your wife will not have any medical issues to deal with and I am sure you are saving now…not just for the engagement ring, but for the hospital expenses involved in birthing a child and hopefully that child will be born as healthy as you were and not have any issues that require extended hospital care after birth…I was there once to my friend…I also remember when I got my first real paycheck at 15 from working Dunkin Donuts…And calculating my hours worked by the minimum wage salary and thinking how much money I would have…and then to see all that money taken out by the Fed, State, and Local…heartbreaking…but as I grew up, I understood that things like police, fire, roads, national defense, etc…it all costs money…and we are all asked to pay our fair share…and I am willing to do that…
Your bare bones examples also don’t take into account what plans will be eligible after the health care exchanges are instituted. What if that bare bones policy is no longer considered a qualified plan? That likely means that even more people would be forced to pay the tax since they cannot afford the new “bare bones” plans.