An early read on the population incurring the landmark penalty rather than purchasing health insurance
When the most controversial component of President Obama's health reform law kicks in a few years from now, 6 million of the 30 million Americans who remain uninsured at that point will be subject to a tax penalty. That's up from the 4 million the Congressional Budget Office (CBO) originally said would be liable.
The penalty is meant to do two things: encourage Americans to buy health insurance and raise revenue for the government. But it won't affect everyone in the same way. Here's everything we know about who'll be affected so far.
There are two ways to look at the individual mandate penalty. The first is to talk about the positive definitions in the law; the second is to talk about who's exempt.
Let's start with the former. There are three pillars to the tax. In order to incur it, you have to be a federal taxpayer. You have to be able to afford health insurance. And you also have to make the decision not to buy it. Here's how those people break down in terms of income, according to the CBO, relative to the federal poverty level:
Who doesn't pay?
On their own, those three pillars exempt a large share of Americans from the tax. They cut out all the undocumented Americans who don't pay taxes. They exclude those who don't have enough income to need to file a tax return. They ignore people who can't get health insurance at a reasonable cost -- defined as 8 percent of household income.
Then there are the explicit exemptions contained in the law, loopholes designed for specific constituencies. Tim Jost, a law professor at Washington and Lee University, has a whole checklist.
"It doesn't cover people who have religious objections," Jost told me in a phone interview. "It doesn't cover people in healthcare sharing ministries; people who are incarcerated; people who have been uninsured for fewer than 3 months; people who are expatriates; people who are Native American. There are a lot of people it doesn't cover."
Even after you exclude all of these exempted groups, though, you're still not down to the core 6 million the CBO says will ultimately wind up stuck with the tax. To get there, we need to consider one last group who'll be granted a free pass.
The Medicaid exemption exception
We already know that if you don't have health insurance, you're subject to the tax. If you're on Medicaid, you're safe from the penalty, as Medicaid is a form of insurance. But there's another catch on top of that. Some states have vowed not to expand Medicaid coverage as the original health reform law intended -- a challenge to Washington that was upheld by the Supreme Court this summer. In those states, people who might have qualified for this expanded coverage now won't receive it, leaving them at risk of being uninsured. Specifically, this includes anyone who lives below 138 percent of the poverty line. Rather than fine them for a decision that wasn't in their control, the Department of Health and Human Services will rely on what's called the "hardship" exemption to waive the penalty. It's an expansive clause, so the government will be free to exempt even more people under this part of the law if it sees fit.
So who's left?
We can divide the remaining uninsured, penalty-liable Americans into two groups: those who live anywhere between 138 percent of the poverty line all the way up to 400 percent of it, and those who live at 400 percent of the poverty line and above. The distinction isn't arbitrary; people in the first category have access to a special tax credit aimed at subsidizing medical premiums in order to make buying insurance more attractive. People above 400 percent of the poverty line, meanwhile, have to pay for the entire cost of insurance themselves or face the fine. Whether they choose to do so will be mostly a matter of preference.
Those in the first category don't have that luxury, according to Larry Levitt, the Kaiser Family Foundation's executive director for health insurance studies. Imagine you're the 40-year-old head of a family of four with a combined income of $50,000 (or 213 percent of the federal poverty line). The cost of an insurance policy for your family would be about $12,000. Since you qualify for the medical premium tax credit, you'd pay part of the cost, and the government would subsidize the rest. The size of the subsidy generally correlates with your income level, but in this hypothetical, you'd front about $3,000 yourself, leaving the other $9,000 to be paid by the tax credit. Now that you know how much you'd have to pay for insurance if you got it, you'll need to compare that amount with what you'd owe the IRS if you were to forego buying health insurance.
According to the health law, the penalty assessed will be either $695 for every person in a household or up to 2.5 percent of a household's income, whichever is greater. For our purposes, that would mean a penalty of $2,780. Paying the penalty would be cheaper in this case, but for a few hundred dollars more, you'd get some health insurance.
Is it worth it? That's a very personal question, and a dilemma the individual mandate penalty doesn't solve.
Of course, what this comparison ignores is that there's very little the IRS can do to you if you choose both not to get insurance and not to pay the penalty. They can't seize your property, and you can't be jailed or taken to court. The only thing they can do is to deduct whatever you might owe from any tax refund the government owes you.
But when push comes to shove, most experts believe the financial incentives -- and the simple desire to stay on the good side of the law -- will lead most people either to buy insurance or pay the fee.
"People may oppose the individual mandate as a policy measure on ideological grounds," said Levitt in a phone interview. "But when it comes to making a personal decision, most people will look at the dollars and cents."