A Perverse Incentive to Dump Your Health Insurance

Thursday July 12th, 2012   •   Posted by Craig Eyermann at 8:17am PDT   •  

Is it better to keep or dump your personal health insurance under ObamaCare?

It seems really strange to be asking that question, seeing as the main argument made in favor of the Patient Protection and Affordable Care Act was that it would ensure that all Americans would have health insurance coverage. Better, with all Americans covered, the cost of health insurance would be lower than it is today.

But it turns out that ObamaCare has a really perverse incentive built into it that would seem to encourage healthy Americans to dump their current coverage in favor of paying the mandate tax instead.

Political Calculations describes how that twisted incentive works:

Under the law, individuals who have health insurance coverage either through their employer or on their own are excused from having to pay a tax that is based upon their household income. Those who do not have health insurance however will not be able to avoid having to pay this tax, which will be enforced by the IRS.

We should note that those who have health insurance aren’t exactly coming out ahead. Even for Single coverage, the cost of health insurance is several times greater than the amount of the tax they would otherwise have to pay, which is what sets up a really perverse incentive for individuals to consider.

Because the law also requires health insurers to provide immediate coverage to individuals even if they have a pre-existing condition, an individual could reasonably choose to drop their insurance coverage, pay the much less expensive tax instead, and pocket the difference as savings until they actually might need coverage, with insurance companies compelled by law to provide insurance to these individuals on demand.

The Political Calculations article also features a calculator that can be used to confirm the financial advantage that healthy Americans of various ages would have for dumping their health insurance coverage in favor of paying ObamaCare’s less expensive-in-comparison mandate tax. �The bottom line:

Playing with the numbers in our tool, what we find is that the less likely an individual will need medical care, the more it is to their advantage to drop their current health care coverage and become uninsured, buying it only if it becomes necessary, then to drop it again once its not needed.

We also find that it takes a very high level of income to justify continuing one’s health insurance coverage. In both cases, the worst off an individual would be is if they must pay both the tax penalty and the annual health insurance premium year they require it. But then, if enough people drop their coverage to pocket the savings, look for health insurance premiums to rise at rates even faster than they do today!

Worse, if that scenario plays out, instead of lowering health insurance costs and reducing government spending as it was promised to do, the perverse incentive set up by ObamaCare’s mandate tax and its guaranteed coverage requirements for insurers will inflame those costs instead, ensuring future budget crises as the portion of the federal budget consumed by health care becomes just as inflamed.

That’s not a sustainable situation.

Featured Image:
Source: CDC

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July 2012