Preliminary data from the 2017 tax season are in, and they're shocking. Not only does it look like the working class bore the brunt of ObamaCare individual mandate penalties this year, but people with relatively modest incomes apparently paid a lot more than the Congressional Budget Office anticipated.
The data underscore a reality that Democrats would prefer not to talk about: While ObamaCare has been a big help to the near-poor and those with major medical needs, it gives a bad deal to nearly everyone else. Even among working-class households earning 150% to 250% of the poverty level, supposedly among the law's biggest beneficiaries, just
1 in 3 people who lack insurance from other sources are getting silver coverage that will protect them from financial disaster. Most of the other two-thirds are uninsured, either because they or a spouse work full time and don't qualify for exchange subsidies, or else they've spurned subsidized bronze plans that carry $6,000-$7,000 deductibles — despite the threat of an individual-mandate penalty.
The much-despised individual mandate was the central target of Republicans' chaotic, desperate effort this week to kill or wound the ACA in any way possible. Yet simply getting rid of the individual mandate, without addressing the ACA's underlying problems, would be a destructive act that would only increase premiums, which is the opposite of what Republicans say they want.
Sabotage
While the GOP came up one vote short of repealing the individual mandate early Friday morning, the IRS Taxpayer Advocate Service thinks that the new data from the 2017 tax season suggest that President Trump's effort to undermine the mandate might be working. The total number of forms with payments dropped 27% from a year ago. While other factors may have played a role, exchange enrollment was essentially flat, and the taxpayer advocate highlighted the drop in its discussion of Trump's executive order that led the tax-collection agency to accept tax filings even when filers failed to attest whether or not they had health insurance coverage.
Some insurers filing their 2018 rate plans cited lax enforcement of the individual mandate as among their reasons for out-sized premium hikes. On Wednesday,
Anthem (
ANTM) said it would have to seek an
increase in premiums of 20% — on top of the 20% hike already requested — if the government doesn't commit to funding ACA cost-sharing subsidies that limit out-of-pocket spending for low-income enrollees.
The dispute over the individual mandate has been at the heart of the toxic, deleterious environment that has made it politically impossible to fix the ACA's serious problems, and that dispute threatens to further destabilize insurance markets in the months ahead, despite the collapse of repeal efforts.
An Avoidable Fight
Yet here's another unpopular truth that could help avert the misery which might be wrought by Trump's stated plan to "
let ObamaCare implode": The individual insurance market can work much better than it does now without an individual mandate and without sacrificing the protections built into the ACA.
Few policy wonks on either side of the political spectrum have questioned the conventional wisdom that an individual mandate is essential to a functional individual market if rules prevent insurers from charging higher premiums to those with greater health needs. Those on the left warn of a possible death spiral if the mandate is killed, offering up the collapse of Washington state's insurance market as a cautionary tale and the relative success of the RomneyCare mandate in Massachusetts as proof of concept.
While the ObamaCare mandate does help to some extent in countering adverse selection — young and healthy people opting out while the less healthy get covered — it is much weaker and more poorly targeted than the RomneyCare mandate. An alternative set of policies can provide far better results, and there is a little-known bipartisan plan called the
Health Care Security and Freedom Act that shows precisely how to transform and improve upon the ACA, while increasing the ranks of the insured and without relying on the individual mandate.
$708 ObamaCare Fine
The 2017 tax data offer new evidence that there's much to be gained by moving away from the individual mandate and much to lose by sticking with it. Tax returns that had been processed as of April 27 included
4 million that paid ObamaCare fines (officially known as individual shared responsibility payments), with an average payment of $708.
What is striking about the data is that the average payment is barely higher than the minimum payment of $695. Since people were required to pay the greater of $695 or 2.5% of taxable income above the filing threshold ($10,350 in 2017), one takeaway is that most of the $2.8 billion in fines paid through April appear to have come from people with modest to moderate incomes. As a frame of reference,
CBO's 2014 analysis implied that the average mandate payment for this tax season would be roughly $1,075 and that the total amount paid by people earning up to three times the poverty level would barely exceed $1 billion.
IBD'S TAKE: IBD's Medical-Managed Care industry group has been a stock-market laggard over the past week as the debate over ObamaCare mandates has proceeded. Visit IBD Stock Checkup to see which leading ObamaCare insurer is rated No. 1 based on earnings, sales, margins and stock performance.
Precise conclusions can't be made based on the available data, but two of the unknowns would have somewhat offsetting effects: Some tax forms included mandated payments for more than one individual (i.e. a spouse or child), meaning the minimum payment would be much higher than $695, while some people paying a fine may have had coverage for part of the year.
Based on mandate collections that streamed in after April in prior years, the full-year total is likely to rise to roughly 5 million tax forms with mandated payments totaling closer to $4 billion.
ObamaCare Vs. RomneyCare
It's a fairly easy job to explain why policy mavens have placed far too much faith in the ObamaCare mandate. In fact, ObamaCare's mandate is weakest for the group that policymakers most want to sign up: young and healthy adults with moderate incomes, somewhere around 250% of the poverty level. Young adults with much lower incomes are much easier to attract because their subsidies are so much more generous. Those with much higher incomes are more likely to get insurance because a hospital bill would drain their bank account, rather than push them into bankruptcy.
Take 30-year-olds earning $32,500 a year, about 275% of the poverty level. Their choice is paying a $695 penalty or paying about $2,150 for a bronze plan (nearly double what a 60-year-old at the same income level would pay for the same plan), according to the Kaiser Family Foundation health subsidy calculator. Essentially, such young adults can tuck away nearly $1,500 a year by paying a fine — unless they ring up medical bills of more than $6,000.
In this case, bronze-plan premiums cost more than three times the mandate penalty. By comparison, RomneyCare plans cost only twice as much as the mandate penalty for young adults, greatly limiting the potential reward for going uncovered. On top of that, RomneyCare plans for this income group carried $0 deductibles, so people were much more likely to derive some benefit from the plans, further limiting the incentive for rolling the dice.
For many people with somewhat more modest incomes, ObamaCare's mandate costs nearly as much as a bronze plan, so it does provide a powerful push to get coverage. Yet that coverage still isn't cheap and it may not provide help paying medical bills until long after their finances are in distress. It's worth remembering that President Obama never sold the individual mandate as a requirement to buy plans with deductibles of $6,000 or more.
In 2016,
12.7 million tax filers claimed one of numerous exemptions from the individual mandate that further limit its forcefulness. In addition, payment is limited to the size of one's tax refund. Just over 3 out of 4 taxpayers last year still claimed a refund after paying a penalty, meaning nearly 1 in 4 didn't. (It's not clear the extent to which this limits the average payment.) Amid all of the doubts about the political staying power of the mandate, a further weakness is that people who make their mind up in December over whether to buy insurance for the coming year won't actually have to pay a fine until 16 months later.
Powerful Incentive$
The logic of coming up with an alternative is compelling, given the structural problems with ObamaCare's mandate, the further problem of lax enforcement and the destructive political battle that's raging over it. The alternative offered by the
Health Care Security and Freedom Act is based, in part, on a very simple and powerful idea: If you give people enough flexibility to buy a plan that works for their finances with some cash left over (to put in a Health Savings Account), then you don't need a mandate to get people to sign up. When free cash is available, word will get around.
This approach isn't just the key to ending the fight over the individual mandate, it also could unlock a beautiful compromise over the cost-sharing reductions that the White House has threatened to withhold.
The compromise would, in effect, turn the cost-sharing subsidies into working-class tax cuts, giving people the choice of applying them to very comprehensive coverage or using them to pay premiums, with leftover funds going into HSAs. While the concept may at first be concerning to ACA supporters who want everyone to have comprehensive coverage, the Health Care Security and Freedom Act is extremely carefully crafted to minimize such concerns.
The reality is that neither ObamaCare nor GOP plans are designed to deliver a robust nongroup market for insurance that serves everyone well, whether they are young or old, healthy or sick, working class or middle class. Yet the dynamism of our economy will be better served if entrepreneurs and idealists who are willing to step out on a limb don't have to fear that their health insurance support will come crashing down. Demographic changes make it increasingly important for people to have the flexibility to step back from full-time work to help care for an aging parent or a sick child. Amid minimum-wage pressures and health care mandates, ultra-competitive markets and the advance of technology threaten to widen the cracks in our employer-centric insurance system that millions of workers, many with modest wages, are already falling into. And don't forget that we're entering the ninth year of an economic expansion. When the next recession hits, all of these pressures will multiply and millions more people will depend on insurance outside the employer system.
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