Proposed surcharge for dropping health coverage is no real stick, CBO says

The Washington Post

The House Republicans' mechanism for persuading healthy Americans to stay insured would be largely ineffective, according to the new Congressional Budget Office analysis released Monday, and it would ultimately lead to about 2 million fewer Americans buying insurance each year.

GOP lawmakers are determined to repeal the individual mandate Democrats crafted under the Affordable Care Act, which aimed to compel consumers to have coverage by imposing a penalty if they could not provide proof of insurance when they filed their taxes each year. But by jettisoning what has grown over time to a hefty penalty, several experts said, lawmakers have crafted a financial incentive that many consumers are unlikely to find compelling.

Under the House GOP proposal, any consumer who opts out of getting insurance would have to pay a 30 percent surcharge on one year's premium upon re-enrolling. That compares with the current tax penalty under the 2010 law, which is calculated as the higher of either 2.5 percent of household income or a flat-dollar amount per adult and child in a family, for a total that cannot exceed $2,085.

Although the Internal Revenue Service has not prosecuted Americans for failing to provide proof of insurance, roughly 7.5 million taxpayers paid a fine the first year the penalty was in force. And the total annual risk of staying uninsured has risen over time, to make for a greater impetus.

James Capretta, a resident scholar at the American Enterprise Institute who specializes in health care and budgetary issues, said in an interview that he and several other analysts have similarly concluded that the threat of the surcharge "is too weak."

"A big fundamental problem with it is if you're youngish and healthy and you drop out of the insurance market for multiple years, when you sign up again you only pay the surcharge for a single year," Capretta said. "I think that's probably an imbalance."

Topher Spiro, vice president for health policy at the liberal think tank Center for American Progress, noted via email that "younger, healthier individuals may not be sufficiently motivated to sign up for coverage to avoid an abstract penalty if they happen to get sick sometime in the unforeseeable future."

Yet Republicans contend the ACA stick is not working.

"The individual mandate has been a failure, with more Americans claiming an exemption or opting to pay the tax than actually purchasing Obamacare plans," a House Energy and Commerce Committee spokesman said in an email. "Continuous coverage incentives have worked in Medicare and the employer market, and it is our belief based off of conversations with health economists that it will work in the individual market."

Initially under the Republican approach, the CBO projects, "roughly 1 million people would be induced to purchase insurance in 2018 to avoid possibly having to pay the surcharge in the future." But after that year, it adds, about 2 million people would opt out annually of getting covered.

That shift could affect the overall mix of who is buying insurance on the individual market.

"The people deterred from purchasing coverage would tend to be healthier than those who would not be deterred and would be willing to pay the surcharge," the CBO analysis states.

Robert Laszewski, president of Health Policy and Strategy Associates, agreed. "This penalty's like an IQ test," he said. "If you're healthy, you should pass on the insurance and pay the 30 percent penalty."

To some extent, that flexibility is by design. House Ways and Means Committee Chairman Kevin Brady, R-Texas, said Monday that the new budget score shows the legislation will "deliver much-needed relief from Obamacare's crushing taxes and mandates." House Republican Conference Chair Cathy McMorris Rodgers, Wash., touted that it "increases choices for consumers, creating a vibrant market where people will have more freedom and flexibility to get the plan they want."

Many insurers have complained in the past that the ACA made it too easy for consumers to stop paying their premiums and then re-enroll. But they are now raising concerns that the surcharge simply isn't enough of a stick to coax enough young, healthy Americans to remain insured.

In a March 7 letter, the BlueCross BlueShield Association suggested as much. "Give states flexibility to adopt a 6-month Medicare-like waiting period or other incentive for continuous coverage that work best in their state," the insurer wrote.

But such a waiting period, Laszewski said, does not produce the kind of revenue that Republicans are seeking in the budget bill making its way through the House.

And to make the surcharge sufficiently high, he added, the penalty would have to be "greater than what the treatment for a preexisting condition would be" once someone sought out health insurance again. Since those kinds of treatments can run as high as $100,000 or more, Laszewski said, no politician would be willing to attach that kind of price tag.

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