Avalere Health
Individual Mandate Penalty May Be Too Low to Attract Middle-Income Individuals to Enroll in Exchanges
Caroline F. Pearson
Senior Vice President
Apr 24, 2015
A new analysis from Avalere finds that the penalties associated with the
individual mandate, which grow in 2015, might be too low to attract enrollment,
particularly among middle-income, healthy individuals.
Earlier this week, the Department of Health and Human Services (HHS)
announced that 68,000 people enrolled in exchange coverage through
HealthCare.gov as part of a special enrollment period for individuals paying the
individual mandate penalty on their 2014 tax filings. That lackluster uptake of
the special enrollment period is driven, in part, because for most people
individual mandate penalties are much lower than actual costs of coverage.
Monthly health insurance premium costs are significantly greater than the
individual mandate penalty for many potential exchange consumers in both 2014
and 2015, even after accounting for tax credit subsidies. However, individuals
with incomes at or around the federal poverty level (FPL), $11,670 in 2015, will
save money by purchasing insurance as opposed to paying the fine. Some
individuals earning up to 200 percent of poverty will also save if they buy
insurance, depending on their age and where they live.
gInsurance through exchanges is a good deal for individuals who are heavily
subsidized, especially as the individual mandate penalty increases,h said
Caroline Pearson, senior vice president at Avalere. gWhile the incremental cost
of insurance becomes less significant as the mandate penalty grows, individuals
earning more than double the poverty level may continue to forego coverage since
paying the fine is still much more affordable than purchasing
insurance.h
Specifically, the analysis found that on average a 27-year-old making
approximately $23,000, or 200 percent of the FPL, in 2014 would spend $849 on
health insurance, after accounting for tax credit subsidies. If he did not buy
insurance, he would pay $230 in penalties – $619 less than if he had purchased
coverage. However, with mandate penalties rising in 2015, if the same individual
chose to stay uninsured in 2015, he would spend only $391 more on insurance than
if he had paid the penalty.
For individuals below 400 percent of the FPL, the cost of insurance compared
to the mandate penalty increases as income grows and tax credit subsidies
decline. For example, if that same 27-year-old had an income of approximately
$46,000, or 400 percent of the FPL, the incremental cost of insurance would be
$1,639 in 2014 and $1,223 in 2015. This calculation varies by not only income,
but also age, because tax credits are income-based and premiums are age-rated.
Data by age and income is available in the appendix.
Data released previously by Avalere found exchanges using HealthCare.gov had
enrolled 76 percent of eligible individuals in 2015 with incomes between 100 and
150 percent of FPL or $11,770 to $17,655. However, participation rates declined
dramatically as incomes increase and subsidies decrease. For instance, only 16
percent of those earning 301 to 400 percent FPL picked coverage through an
exchange, even though they may be eligible for premium subsidies.
Consumers remaining uninsured may face significant costs, beyond the
individual mandate penalty, if they need medical care. This analysis does not
account for these potential out-of-pocket costs associated with obtaining
healthcare services without insurance.
Methodology
Premium data based on Avalere analysis of the 2014 HHS Individual Market
Landscape file, updated as of August 2014, and the 2015 HHS Individual Market
Landscape file, updated as of November 14, 2014. Analysis includes average
premiums for 34 federally-facilitated marketplace states. Analysis excludes
state-based exchanges, including those states that use healthcare.gov for their
exchange portal (NM, ID, OR, NV). All premiums are based on a 27-yr and 50-yr
old non-smoker.
The individual mandate penalty is the greater of $95 for 2014 and $325 for
2015 times the number of uninsured individuals per household, or 1 percent of
income for 2014 and 2 percent of income for 2015. The penalty is capped at the
lowest cost premium bronze plan available to an individual.
Medicaid expansion data per Avalere State Reform Insights, as of April 15,
2015.