Better approach than the individual mandate


Now that Obamacare’s survival seems assured, the debate has finally shifted toward how to improve the law, including by revising the excise tax on high-cost employer-sponsored health plans. With the third round of open enrollment starting Sunday, there’s another Obamacare tax that’s due for a rethink: the penalty for not carrying insurance.

That penalty — the stick behind the individual mandate — makes sense in theory. The point of the law is to provide affordable health insurance for as many Americans as possible. It uses generous federal subsidies to entice those without job- based insurance to buy plans on the exchanges. And to provide a sharper nudge, the law also levies significant fines on those who don’t get coverage.

The tax penalty also helps fund the law’s other provisions. The Internal Revenue Service says it’s brought in $1.5 billion so far, and the amount will increase as the penalty grows.

The problem is, the tax doesn’t appear to be doing enough to change behavior. As many as three out of four uninsured Americans who qualify to buy coverage on Obamacare’s state health exchanges will nonetheless choose not to next year, according to government projections. Not surprisingly, the people who decline to buy even heavily subsidized insurance tend to be young and healthy — just the ones whose participation insurers most need to keep premiums low. They’re expected to stand their ground in 2016 despite fines of at least $695, more than twice those imposed this year — and depending on their income, possibly much more.

If these projections are correct, then the tax is becoming more akin to a penalty on people who don’t understand the law or don’t like the options it provides. It’s failing at its main purpose, and that means Congress and the administration need to find a better way to prod more Americans to buy insurance.

One thing is for sure: The tax cannot be scrapped before a strong alternative is in place. Doing so would cut the number of Americans with health insurance by 14 million by 2025. It would also push premiums for individual health plans about 20 percent higher.

What options should be considered? One strategy would be to make the carrots more appealing. Raise the subsidies for premiums and cost-sharing. Perhaps more health services should be made available before beneficiaries have to pay their deductibles, as Hillary Clinton has proposed. Tighter caps on out-of-pocket payments would also help. Another approach would be to increase premiums the longer people are eligible for coverage but don’t sign up.

Such added incentives, however, would work only for people who have been making a calculated decision not to buy insurance. Many others still don’t know how the law works, or don’t realize that they qualify for subsidies. The simplest way to reach this group would be to automatically enroll them. Those who really don’t want coverage could still opt out. But this would raise hard questions about whether it’s appropriate for the government to make purchasing decisions for citizens (even if those purchases are publicly funded).

A less problematic strategy would be for the IRS, which already asks tax filers whether they have health insurance, to ask those who say no a follow-up: Would you like us to sign you up for your local benchmark Obamacare plan?

With any alternative, the details would be difficult to work out. But Obamacare needs incentives and tools that really work to get more Americans insured.

Bloomberg View editors

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