ObamaCare: Penalties vs. Subsidies

Part of the drive for many to enroll in insurance under the Affordable Care Act was to avoid getting hit with a penalty for failing to comply with the law. But a new report out from the Congressional Budget Office and the Joint Committee on Taxation finds that nearly 90% of the 30 million Americans without insurance will be exempt from the tax.

The ACA mandates every individual in the country have insurance or face a fine of $95 a year or 1% of their annual income for failing to comply. This amount will hit $695 per adult in 2016, or 2% of family income, capped at $2,085.

The report finds that 4 million people are expected to pay this fine in 2016, down from previous projections of 6 million. In the law’s first year of open enrollment, 8.02 million people enrolled in coverage on state and federal exchanges. There are more than 316 million people living in the U.S. according to recent Census estimates.

The law originally provided exemptions for certain groups of people, including illegal immigrants. But exemptions have since broadened to include hardships such as domestic violence, property damage and having a health plan cancelled when the law kicked in on Oct. 1, 2013. The ACA mandates that every plan include 10 essential health benefits, including ambulatory services and prescription drug costs.

While the numbers are lower than projected for those paying fines, Manhattan Institute scholar Yevgeniy Feyman says the IRS will likely be lax in enforcing these penalties in year one.

“A lot of people don’t know they have to pay them because a lot of people aren’t informed about the ACA,” Feyman says. “People may even go and pay if they don’t need to. I think the IRS will use broad discretion because it will be harder scrutinizing people.”

The penalties go partly toward funding the ACA’s subsidy program, which provides premium tax credits for people making up to 400% of the federal poverty level. In 2014, that was $45,000 for an individual and $94,000 for a family of four. In year one of the ACA, 9 in 10 people who enrolled on the federal exchange, Healthcare.gov, received subsidies to lower their premium payments.

“Subsidy funding comes much more from cuts to Medicare advantage, and also penalties from businesses under the employer mandate, and the Cadillac tax which begins in 2018,” he says. “There are more sources of funding aside from penalizing the uninsured.”

And while Feyman says the individual mandate tax will be an impetus for people to enroll in coverage, it isn’t the only sticking point for the uninsured.

“I think the bigger force pushing people to enroll is the limited [time frame] for open enrollment,” Feyman says. “Also relative to what it was pre-ACA; it’s now less costly to remain uninsured. You don’t get rated based on your risk or health status [as the law makes this illegal]. If you want to get insurance after you are sick, you won’t pay more.”