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Health Reform 101

with Lisa Zamosky

WebMD helps readers understand their health insurance and the new health care reform law. The Affordable Care Act is bringing sweeping changes to American health care. Lisa Zamosky is here to help you navigate the health care maze and understand how these changes affect you.

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Thursday, January 24, 2013

Will You Buy Insurance or Pay the Penalty?

By Lisa Zamosky

Health Reform

If you don’t have health insurance right now, will having to pay a tax penalty for failing to buy coverage starting next year be enough to encourage you to do so?

That’s been a big question around the requirement written into the Affordable Care Act that says each individual must have health insurance or pay a penalty.

The cost for skipping coverage starts fairly low. In year one, which is2014,an individual will be charged the larger of either a $95 fine or 1% of their income for failing to carry health insurance coverage; families of three or more will pay $285.

That amount rises over time; by 2016, anyone without a health plan will face a fine of $695 or 2.5% ($2,085 for a family) of their household income – whichever is greater.

Will the Penalty Do Its Job?

The question many economists ask is whether these penalties are steep enough to encourage people to buy coverage. When you compare the thousands of dollars it costs each year to buy a health insurance plan to just a $95 penalty, it’s easy to understand why some folks might choose to pay the penalty. Unfortunately, if they do, that would leave mainly older and sicker people buying coverage, which could cause the cost of insurance to skyrocket.

A new analysis finds that at least over time, people may be more inclined to buy insurance than not, given the penalty.

The analysis was conducted by a health care economist at Boston University, Austin B. Frakt, Ph.D.  He looked at how effective the penalty has been in Massachusetts, where they passed a health reform law in 2006 after which the Affordable Care Act was modeled.

Here’s what the analysis concluded:

  • The penalty of $95 for individuals during 2014 may not be pricey enough to deter people from skipping insurance coverage
  • In year three, however, when the cost of the penalty rises significantly, more people are likely to buy insurance.
  • The individual mandate applied in Massachusetts motivated 3 healthy people to enroll for every person with a chronic illness, which is an encouraging sign that more people will choose to buy coverage than to forego it.

The report points out, however, that the rest of the country isn’t like Massachusetts, so although penalties for not having health insurance have been successful in getting people to buy coverage in Massachusetts, it doesn’t mean they will be everywhere.  But as a healthcare analyst I once spoke with about this told me, people do prefer to pay for something rather than pay for nothing. If it’s going to cost you anyway, wouldn’t you rather have the health insurance to show for it?

Share your thoughts on the matter: Will a penalty get you to buy health insurance even if you otherwise weren’t inclined to do so?

Posted by: Lisa Zamosky at 8:00 am

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