Skip insurance and pay the penalty? You might regret it.

Some would rather pay the ACA penalty than get insurance. But at what cost?

Going without insurance and paying the Obamacare penalty
Thinking about skipping insurance and paying the ACA penalty instead? You might regret it. ERproductions Ltd/Blend Images/Getty Images

For people who don't have health insurance in 2016 and aren't eligible for an exemption, the penalty under the Affordable Care Act will be much higher than it was in 2014 and 2015. A Kaiser Family Foundation analysis estimated that the average tax filer subject to the penalty for 2016 will pay almost $1,000 - about five times the average penalty for 2014. The exact amounts vary by circumstances, but there are calculators you can use to see what your penalty will be if you do opt to go without health insurance in 2016.


Is the penalty the less expensive option?

Although the ACA's individual mandate - and its associated penalty - is one of the more controversial aspects of the law, some critics contend that the penalty should be steeper in order to make going without health insurance a less attractive option.

A recent Kaiser Family Foundation analysis found that out of 11 million people who are uninsured and eligible to purchase coverage in the exchanges, 7.1 million would pay more in premiums for the cheapest insurance plan available to them than they would pay in penalties if they opted to remain uninsured.

At ACAsignups, Charles Gaba crunched the numbers for 26 to 35 year-olds in ten major cities across the US. He found that for a single person with an income up to $25,000/year, health insurance premiums are almost universally less than the penalty in 2016. But for young people with incomes of $30,000 or more, the cheapest Bronze plan premium is at least twice as much as the penalty for remaining uninsured in most of the cities he considered.

A recent New York Times article profiled several people around the country who have shopped for health insurance and determined that the premiums will be significantly more than the cost of the penalty. So they've opted to remain uninsured in 2016 and pay the penalty. 

The pitfalls of remaining uninsured

The problem with that approach is that it doesn't take into consideration the catastrophic consequences that could face a person who doesn't have health insurance.

If you're simply comparing the cost of the penalty with the cost of health insurance premiums, you're missing a lot of variables in the equation. Paying the penalty gets you absolutely nothing in return - your money is just being used to help pay for subsidies that help other people buy health insurance. Whereas premiums buy you the assurance that your out-of-pocket medical bills won't exceed $6,850 in 2016 (assuming you go to in-network providers)

It's common for people to say that they'll simply save the money they would have spent in premiums (minus whatever they have to pay for the penalty) and use that to pay cash for their healthcare throughout the year. That works if you only have minor healthcare costs. But a broken leg can cost upwards of $60,000 - for a one-time problem that's resolved within a few weeks. For people who are used to having only minor healthcare costs, health insurance can seem ridiculously expensive. But when you consider six and seven-figure medical bills, health insurance premiums pale in comparison. 

Yes, that sort of claim is relatively rare for an otherwise healthy person. But it's possible. And that's the whole point of health insurance. We all pay into the pool, and then when we incur medical bills that we would otherwise have no means of paying, the health insurance plan takes over.

But can't I just enroll later if I get sick?

One of the major changes that the ACA brought about is guaranteed issue health insurance in the individual market in every state. Prior to 2014, medical underwriting was used in nearly every state, and pre-existing conditions could make it impossible to get health insurance.

That's not the case any longer. Medical history is not a factor in premiums or eligibility for coverage. But the catch is that you can only enroll during open enrollment or during a special enrollment period triggered by a qualifying event (Nevada is an exception - you can enroll in plans outside the exchange in Nevada year-round, but the carrier can impose a three-month waiting period before coverage begins).

Open enrollment for 2016 started on November 1, 2015, and continues until January 31, 2016. Once January ends, the next open enrollment period won't come around again until the fall of 2016, for coverage effective in January 2017

Special enrollment periods can happen anytime throughout the year, but you have to have a qualifying event in order to get a special enrollment period. Some qualifying events may be easier to manipulate than others... for example, you could opt to move to a new area if you find yourself in need of medical care. But your coverage would not be effective immediately. Most special enrollment periods follow the same enrollment deadlines as general open enrollment (ie, in most states, if you enroll by the 15th of the month, you'll have coverage in place by the 1st of the following month). Newly-weds can enroll at any point in the month and have coverage effective the first of the following month, but most people would probably consider marriage to be an extreme alternative for obtaining health insurance.

But even in a best-case scenario where you're able to arrange a qualifying event (moving to a new area is often touted as the easiest solution, but it's certainly easier said than done), it's going to take a while before your coverage goes into effect. And the new plan won't cover any medical bills you incurred prior to the policy start date.

So if you break your femur on July 3 and are able to somehow arrange a qualifying event before July 15 and get coverage effective August 1... you're still going to be in serious financial peril, since the new plan won't cover any medical bills that happened in July (if your qualifying event is a bit delayed and you can't enroll until July 16, your coverage wouldn't be effective until September 1 in most states).

Sitting around for four - or more - weeks with an untreated broken leg probably wouldn't appeal to many people. Although critics are often flippant about how "easy" it is to get coverage via a special enrollment period, the reality is that if you skip open enrollment and find yourself in need of medical care later in the year, it might be much harder than you think it will be to enroll in a plan at that point and have coverage for your costs. If you can't arrange a qualifying event, it will be impossible to get coverage until the following year.  

Premium savings... but at what cost?

In short, if a catastrophic scenario were to unfold later in the year, people who balked at the idea of paying for health insurance might find themselves wishing they had made a different choice. Health insurance can be expensive if you don't qualify for subsidies, and it might not seem like much of a benefit when you hardly ever use it. But if you ever find yourself in a predicament where you need hundreds of thousands of dollars worth of medical care in order to stay alive, you'll be glad you've got it.

If you're considering going without health insurance simply because the penalty is less than the premiums you'd have to pay, you're missing the point of health insurance. 

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