Obamacare’s Individual Mandate Today

The Individual Mandate, officially called the Individual Shared Responsibility Payment, is the penalty imposed on Americans who don’t obtain Minimum Essential Coverage per Obamacare (PPACA) in any given year. Health insurance plans and programs that meet the Minimum Essential Coverage (not the same as Essential Health Benefits) for satisfying the Individual Mandate are given in the figure below.

Minimum Essential Coverage for Individual Mandate

As you can see in the above figure, Americans could get this insurance coverage from an employer (covering the employee, his spouse, and children up to age 26), a government program (like Medicare, Medicaid, Veteran’s health care program, CHAMPVA), or through individual plans on the Health Insurance Marketplace (called non-group insurance). According to the Henry J. Kaiser Family Foundation, 49% of all Americans had employer-sponsored health insurance, 20% Medicaid, 14% Medicare, 7% individual plans, 2% other government-sponsored plans, and 9% remained uninsured (in 2015).

The Individual Mandate is supposed to be Obamacare’s “incentive” for the uninsured to buy health insurance. It is a penalty that Americans must pay when they file their income taxes (IRS Tax Form 8962) if they failed to have health insurance coverage in the previous year. A partial penalty applies when coverage was not for a full year.

The penalty has been phased in over the past three years and the details are given in the figure below.

Individual Mandate by year

The Individual Mandate penalty is only collected if the uninsured files a tax return (i.e., has income that exceeds the threshold for filing) and gets a tax refund.  The IRS takes the penalty out of the refund.  The IRS does not try to collect otherwise! Penalty exemptions for certain hardships, some life events, health coverage or financial status, and membership in some groups are available. According to the IRS Taxpayer Advocate Service, as of April 30, 2016, 5.6 million tax returns (not individuals) included individual mandate payments averaging $442 per return.  Eleven million returns claimed coverage exemptions.

Details about the tax penalty can be found online at the IRS.

Why Did Obamacare (PPACA) Include the Individual Mandate?

There are two reasons for demanding that all Americans have health insurance coverage:

  1. Health insurance plans need healthy people to pay for the care of the sick
  2. Healthy, uninsured people can become sick people overnight and will still demand care that someone must pay for

Health insurance is a pooling together of funds from a large group of people where the healthy (low spenders) pay for the sickly (high spenders) in any given year. Health insurance premium prices reflect the size and composition (composition identifies the ratio of low spenders to high spenders) of any given plan AND how well the insurance companies can negotiate prices with healthcare providers. In places where doctors and hospitals are scarce (local monopolies), prices are higher and therefore health insurance premiums will also be higher. This is true for every private employer-sponsored plan as well as for every Health Insurance Marketplace plan.

The probability that a young and healthy American will need expensive health care is pretty low. In fact, in 2013, 50% of the U.S. population spent an average of only $253 for health care. What happens to health insurance premiums if the young and healthy are not required to purchase (or cannot afford) health insurance coverage? In this case, the ratio of high health spenders to low health spenders increases in any given health insurance plan and the health insurance premiums will go up as a result.   In other words, when young and healthy Americans cannot (or choose not to) “share the risk of getting sick” with other Americans, they are making health insurance premiums more expensive for those who do buy health insurance.

Health insurance plans NEED healthy people to keep health insurance premiums lower (more affordable) for ALL people in the plan. This shared responsibility is the same as having all Americans, even the childless, pay for the public school education of all American children.

Sickness and the need for expensive health care can happen to anyone, even young adults. When a healthy person remains uninsured, he/she is taking a calculated risk that expensive care will not be necessary. In the end, someone must pay the healthcare bills for the uninsured and that someone always seems to be taxpayers in one way or another.

Current Status of the Individual Mandate

While the recent attempt by House Republicans to repeal of Obamacare (PPACA) has failed, other actions by President Trump and his administration have for all intents and purposes effectively shelved the Individual Mandate. On January 20, 2017, President Trump signed an executive order giving “executive departments and agencies” (like the IRS) the authority and discretion to roll back certain aspects of the Affordable Care Act (ACA).

In addition, the original language of Obamacare (PPACA) leaves enforcement of the Individual Mandate in the hands of the IRS and the Secretary of Health and Human Services (HHS). Obamacare (PPACA) is very clear in stating that taxpayers who don’t pay their Obamacare (PPACA) penalty will not be subject to levies, liens, or criminal prosecution and the penalty “ shall be paid upon notice and demand by the Secretary”. For 2016 income tax returns, the IRS is allowing “electronic and paper returns to be accepted for processing in instances where a taxpayer doesn’t indicate their coverage status”.  In addition, no one expects Tom Price, the new Secretary of HHS, to demand anything that calls for the smooth operation of Obamacare (PPACA) reforms.

If I didn’t have health insurance in 2016 and didn’t declare it on my income tax return, I would not be losing any sleep worrying that our government might one day come and try to collect on my unpaid Individual Mandate penalty.

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