Obamacare’s Individual Mandate

Health Insurance

December 5, 2017

One of the first parts of the Affordable Care Act (ACA) that got attention when the law went into effect was a feature called the individual mandate. When President Obama introduced the ACA, his goal was to provide health insurance for every American. The problem is that the federal government had no intention on paying for the insurance entirely, so an incentive had to be created to get people to pay the majority of their own insurance costs. That is what lead to the creation of the individual mandate.

The individual mandate is a financial penalty assessed to people who do not have qualifying health insurance for nine or more months throughout the year. It is assessed as a tax penalty that is applied to the person’s federal return each year. Donald Trump campaigned in 2016 under the promise to abolish the individual mandate, but the penalty still exists as we get closer to 2018.

How Much Will the Penalty Be in 2018?

As of December 2017, the exact amount that the individual mandate will penalize taxpayers has not yet been disclosed. But by doing some research, we can get a good idea as to what it will be. The annual increase in the individual mandate is tied directly to the rate of inflation. Since the cost of health care rises faster annually than inflation, using the rate of inflation gives taxpayers a bit of a break.

Each year, the government calculates your individual mandate penalty based on either a percentage of your income or a flat rate. The government will choose the larger amount as your actual penalty. In 2017, the percentage used as 2.5 percent of your entire household income. The flat rates were $695.00 per adult or $347.50 for every child under the age of 18.

As a way of comparison, the first year the individual mandate was used was for the 2014 tax year. At that time, the penalty was either one percent of total household income, or $95.00 per adult and $47.50 per child. The maximum penalty that could be applied at that time was $285.00 per household.

In just three years, the penalty has risen considerably. The 2016 penalty was very similar to the 2017 penalty, so many are expecting the 2018 penalty to rise only slightly. Since President Trump has been unable to get the individual mandate removed, taxpayers who did not have insurance for three months or more in 2017 can expect to pay the penalty on their federal tax return.

Recently, Congress decided to add a repeal of the Individual Mandate into their latest tax reform bill. If this passes both sides of Congress, the tax penalty will go away and people can enroll in any type of insurance – Obamacare or short term medical insurance – or they can go uninsured without penalty.

How the Individual Mandate Adds Up

The ACA included the individual mandate to try and protect the federal government while the ACA was getting started. In the health insurance industry, rates are based on how many subscribers a plan has. The more healthy people who buy into a health insurance plan, the easier it is for the provider to cover the expenses of the sick.

The ACA made it illegal for any insurance company to deny coverage because of pre-existing conditions, but the government also offered financial assistance to insurance companies to convince those companies to offer ACA-based coverage. The individual mandate was designed to help fund that financial help for the insurance companies and give the ACA a chance to get the number of subscribers it needed to be successful.

In 2016, it is estimated that 8 million taxpayers were fined up to a total of $8 billion in individual mandate penalties. That number is way up from the fines that were levied in 2015. The IRS says that the average penalty per taxpayer was $442.00 per return in 2016 versus only $190.00 per return in 2015.

Taking the Penalty Versus Paying for Coverage

Millions of people chose to pay a penalty of around $442.00 in 2016 rather than pay for health insurance. The point of the individual mandate is to encourage enrollment in the ACA, but a look at the numbers shows that $442 as a one-time payment might not be nearly enough to inspire healthy Americans to get health insurance.

During the 2016 open enrollment for the ACA, individuals paid an average of $393.00 a month for a qualified plan. At the same time, the average deductible for an ACA plan in 2016 was $4,328.00. This meant that not only did a health individual have to spend $4,716.00 per year in premiums, they had to spend an additional $4,328.00 to satisfy their deductible before their insurance started to work.

When compared side-by-side, millions of people preferred to pay the average penalty of $442 in 2016 versus paying $9,044.00 into a health insurance plan that might not offer any coverage at all. Some people preferred to get short-term health insurance in 2016 for $110.00 per individual or $276.00 per family per month rather than pay for ACA insurance. The government has since shortened the term for short-term insurance to only three months per year, but many people still see three months of coverage at the discounted rate better than paying full rate for ACA insurance.

The individual mandate was created to encourage people to sign up for ACA health insurance. But as premiums and deductibles continue to rise for ACA plans, more people are opting to take their chances with no insurance and paying the individual mandate every year.