Health Care Affordability and the Individual MandateApril 5, 2010 - by Donny Shaw
One of the most important and most controversial parts of the new health care law, the Patient Protection and Affordable Care Act as amendment by the reconciliation bill, is that it requires all U.S. residents to have insurance or pay a tax penalty. This is known as the “individual mandate,” and although it is a Republican idea that has a long history of bipartisanship, both conservatives and progressives have recently focused their criticisms of the law on it — progressives because it will be a boon for private insurers and conservatives because it is a strong use of federal government authority.
In reality, it’s quite nuanced. The idea of the law is that it will control costs and provide enough government assistance that insurance will be affordable for everyone and that the individual mandate penalty will not have to be used. It will give out billions in “affordability credits” and it includes an economic hardship exemption so that people who can’t reasonably afford insurance under the new law won’t have to pay the tax.
Here’s a detailed rundown of how the affordability and individual mandate provisions would work, including, to the extent possible, how much money people will be expected to pay for insurance under the new law.
Under the new health care law, affordability credit levels will be tied to the cost of the “second lowest cost silver plan” on a state exchange. What is a “silver plan?” Basically, the exchanges under the new law will mirror the one that currently exists in Massachusetts, which divides health care plans into three levels of benefits — bronze, silver and gold — each of which has its own range of costs and services — i.e. silver low, silver medium and silver high.
The new health care law would limit premium contributions for the second lowest cost silver plan to the following percentages of income once fully implemented (in 2019):
- 133% up to 150% of Federal Poverty Level — 2%
- 150% up to 200% of Federal Poverty Level — 4%
- 200% up to 250% of Federal Poverty Level — 6.3%
- 250% up to 300% of Federal Poverty Level — 8.05%
- 300% up to 400% of Federal Poverty Level — 9.5%
So, any costs beyond those percentages for the second cheapest silver plan on a state’s exchange would be subsidized by the federal government. To be clear, people will not be required to purchase the second lowest cost silver plan. They could use their subsidies to buy any plan on the exchange. The second lowest cost silver plan is only used as a sort of median for figuring appropriate subsidy levels.
According to the CBO, the average tax credit for an individual or family under the bill would be $6,000 per year. Beyond that, it is impossible to put accurate tax credit numbers to the different income ranges because the prices of the second lowest cost silver plans in each exchange haven’t been set yet.
But, if the cost of health care in a state is similar to what it is in Massachusetts right now, the subsidies levels would look like this:
- An individual earning $15,000 would receive $4,188 from the government, which more than covers the full cost of all bronze plans an the cheapest silver plan.
- An individual earning $23,000 would receive $3,039 from the government, which would cover cover all but $110 of the annual cost of the cheapest bronze plan, meaning that they could have monthly premiums as low as $10.
- An individual earning $33,000 would receive $1,353 from the government, which means they would be required to pay $1,803 for the cheapest bronze coverage, or a monthly premium of $150.25.
Again, the above numbers are based on health care costs being what they are currently in Massachusetts, which may or may not be the case. There’s just no way to know.
Now that we have an understanding on how the affordability credits work, we can look at the economic hardship exemption in the law, which would allow people that still can’t afford coverage to avoid paying the individual mandate tax penalty. First, here’s how it reads in the actual bill text:
‘(1) INDIVIDUALS WHO CANNOT AFFORD COVERAGE-
‘(A) IN GENERAL- Any applicable individual for any month if the applicable individual’s required contribution (determined on an annual basis) for coverage for the month exceeds 8 percent of such individual’s household income for the taxable year described in section 1412(b)(1)(B) of the Patient Protection and Affordable Care Act. For purposes of applying this subparagraph, the taxpayer’s household income shall be increased by any exclusion from gross income for any portion of the required contribution made through a salary reduction arrangement.
In other words, if the amount you would have to pay for the cheapest health care plan for the year is more than 8% of your annual income, you would be exempt from the tax penalty for not having coverage.
Since the tax credits are tied to premiums, this is really designed to keep people who earn above 400% of FPL and are ineligible for government assistance from having to pay any steep rate increases that may occur under the new law. If rates were the same as they are currently in Massachusetts, nobody would be exempt from the tax penalty from not having insurance. Rates would have to go up beyond that level for the hardship exemption to kick in for anyone. Here are a couple of scenarios:
- An individual earning $44,000 annually, which is just slightly above 400% of FPL, would not be required to have insurance or pay a tax penalty if the cheapest plan on the exchange cost more than $3,520 for the year, or $293 per month. If rates were similar to what they are in Massachusetts currently, this individual would be considered able to afford all levels of bronze plans and would not be exempt from the tax penalty if they didn’t comply with the mandate to have insurance..
- A couple earning $60,000 annually, which is just slightly above 400% of FPL, would not be required to have insurance or pay a tax penalty if the cheapest plan on the exchange cost more than $4,800 for the year, or $400 per month. If rates were similar to what they are in Massachusetts currently, this couple would be considered able to afford all levels of bronze plans and would not be exempt from the tax penalty if they didn’t comply with the mandate to have insurance.