The myth of the $95 penalty

I see a lot of speculation in the media about whether young, healthy people might simply choose to forego insurance and simply opt to pay the $95 penalty instead. For example, an article posted today  in The Daily Beast asserts, ” But it’s cheaper for young people to pay the one time legal fine of $95 ….”  In the Wall Street Journal, an article about health insurance for  “young entrepreneurs” reiterates, “For 2014, the dollar penalty is $95.”  In the Los Angeles Daily News, a writer quotes “expert” predictions that Obamacare will falter “If young adults instead chose to pay the $95 fine.

But the fine for not having insurance is more than $95 – a lot more in some cases. The $95 refers to a minimum,  per-person fine.  The actual tax penalty for not having insurance coverage in 2014 is the higher of $95 per person or 1% of  household income of household income over the filing threshhold, which is $10,000 for a single taxpayer in 2013. (See 26 USC 5000A)

So the only uninsured people who will be paying penalties as low as $95 will be those with incomes of under $19,500 — who by virtue of their income are eligible for substantial subsidies.  In other words, under ACA, that person with the $19,500 income would be able to buy a Silver policy in an exchange for about $975 a year, or a premium of $81 per month. If that person truly did not believe that health insurance was “needed,” he could opt for a lower cost Bronze policy. 

So lets look at the math for a single 30-year old living in Sacramento and earning $35,000 a year.  We’ll call him Luke. If Luke decides that he is so healthy that he can forego insurance, then his penalty will be $250. (1% of $35,000 less the $10,000 exemption and standard personal deduction).  At his income level, the maximum he would have to pay out of pocket for a policy would be $277 a month.  As the benchmark Silver premium in his region, for his age, is $292, he would qualify for a $22 monthly tax credit toward his premium.

But since Luke has already decided that he is willing to shoulder the risk of going without insurance, paying out of pocket for a possible emergency room visit if, for example, he breaks his leg — he could opt instead for the lowest cost Bronze policy, for a cost of $201 a month after applying the $22 premium assistance.

Now admittedly, a $250 fine is less than the $2,412 in monthly insurance premiums — but to merely count dollars is to ignore that his health insurance does, indeed, buy something of benefit to him.  He is buying protection against the risk of an unexpected injury or accident, which can easily cost tens of thousands to treat. That he is young and healthy is no guarantee that he won’t be injured.

We can look at it another way — what is the value of the premium assistance as opposed to the fine — and in that scenario we see that Luke is choosing between going without insurance and paying the government $250, or buying insurance for himself and having the government pay him $264.  If I frame the question that way — would you rather owe $250 at tax time, or get a refund of $264 — most people would want the refund.

We could also look at examples of taxpayers at much higher income levels who do not qualify for subsidies, but whose first-year penalty could be much higher — for example, a single person who earns $70,000 would have a $600 tax penalty.

These amounts are still quite low and will be easy for any taxpayer to handle, whatever their income level, but there may be a psychological difference when it comes to decision-making.  So I wish the news reports would describe the penalty amount more accurately.

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