When a Penalty Is Not a Penalty

The Affordable Care Act requires most Americans to buy qualifying health insurance coverage. Fail to comply with this mandate, and there’s a financial penalty waiting for you come tax time. But when is a penalty not a penalty? When is a mandate not a mandate? Hey, kids, let’s do some math.

The penalty for going uninsured in 2016 is \$695 per adult and \$347.50 per child, up to a maximum of \$2,085 or 2.5% of household income, whichever is greater.

To determine the cost of coverage, we’ll use the second-lowest Silver plan available in a state. That’s the benchmark used to calculate ACA subsidies, and in 2015 Silver plans were roughly 68% of policies sold through an exchange. Even more important, I found a table showing the cost of the second-lowest cost Silver plan for 40-year-olds by state, but I couldn’t find a similar table for other levels.

The least our 40-year-old could spend on the second-lowest Silver plan this year is \$2,196, in New Mexico; the highest premium is \$8,628, in Alaska. The median is \$3,336. Divide the penalty by the premium, and you get 32% of the cheapest premium and 21% of the median premium. Put another way, paying the penalty saves our 40-year-old  consumer \$1,500 in New Mexico and more than \$2,600 in the mythical state of median.

I did find a table showing the national average premium a 21-year-old would pay for a Bronze plan: \$2,411.  In this situation, the \$695 penalty amounts to just 29% of the policy’s cost, a savings of more than \$1,700.

The purpose of this post is not to encourage people to go uninsured. I think that’s financially stupid given the cost of needing health insurance coverage and not having it. And, personally, I support the individual mandate. I also understand the political obstacles to establishing a real penalty for remaining uninsured.

However, I also believe the individual market in this country is in trouble. (More on this is a later post). Adverse selection is a contributing cause to this danger. The individual mandate is supposed to mitigate against adverse selection. The enforcement mechanism for that mandate, however, is a penalty that, for many people, is no penalty at all.

That’s not just my opinion. That’s the math.

A version of this article was originally posted on LinkedIn.