Inc. Magazine | December 7, 2016

Some Americans are Choosing to Take a Tax Penalty Instead of Buying Health Coverage

It’s possible that the Affordable Care Act (ACA) – also known as “Obamacare” – may be an endangered species. And those who have called for a repeal have one specific element that draws their ire: the individual mandate. But it turns out, the government’s requirement that Americans buy healthcare plans may not exactly be working as expected anyway. ...

I recently spoke with Christine Speidel, a tax lawyer at Vermont Legal Aid. She explained to me that the tax penalty was largely created to spur citizens who have been known to forego health coverage, most notably young and healthy ones, to enter the “risk pool,” which would help cover the more popular components of the law, like coverage for those with pre-existing conditions.

“In order to make this work as a private insurance market, you have to have a viable risk pool,” Speidel explained. “Which means you have healthy individuals in the risk pool as well as sick ones.” ...

So if the ACA needs everyone to buy in for it to work, why not just simply raise the penalty to a level that Americans would actually feel? Speidel says it’s not that simple.

“That might work for people who have higher incomes. But for people who are already feeling like they can’t afford insurance, increasing the penalty may just lead to resentment and huge tax bills,” she said. “If the penalties were equal to the premiums, there would be no incentive for those who can afford it not to purchase insurance. But for those who truly can’t afford it, that would be terribly unfair and punitive. Raising the subsidy levels would also help with compliance and improve the risk pool. ...

“I think it’s too soon to say what effect a Trump presidency will have on the ACA, but it’s interesting that both Mitt Romney, when he enacted a similar plan to the ACA when he was governor of Massachusetts, and President Obama, when he started to draw up the ACA, were against some sort of mandate. But when the economists and the actuaries ran the budgets, it became hard to have a bar against pre-existing condition exclusions without having some sort of mandate.”