So that’s why Obamacare has a penalty.
This month starts Obamacare’s third sign up period. One of the most controversial parts of the Patient Protection Affordable Care Act, aka Obamacare, was the individual mandate. The mandate required nearly all Americans to buy health insurance: those who did not, and were not exempt, faced penalties that rose every year (almost $695 per adult, or $2,085 per family next year). In one of the first major challenges to the law, the Supreme Court ruled the mandate could not infringe on the rights of individuals because it was not a mandate at all, but a tax that Congress could legally levy. But, why include such a provision, other than to draw the ire of millions of Americans?
First, we have to look at what one of the main issues Obamacare intended to solve: insurance companies denying individuals because of preexisting conditions. People who were diagnosed with diabetes, cancer, and asthma, for example, were denied health insurance when they tried to buy insurance on the open market or tried to enroll in a company’s health insurance plans after switching jobs. For an health insurance company, there would be no profit motivated reason to sell insurance to individual with diseases that are expensive to treat. The costs are too high, the risks are too high, and the payoff too low. However, as many remember, denying health insurance to those who need it the most sounds very cruel. So, Obamacare told insurance companies essentially “you can’t do that, anymore!”.
Great, right? Not exactly, because now the health insurance market is a “Market for lemons.” Since individuals know that they can’t be refused health insurance, then what exactly stops an individual from forgoing health insurance until they absolutely need it? However, if only sick people bought health insurance, then the program would enter a death spiral because of its unsustainable equilibrium; health insurers will price everyone as all “lemons,” but people wouldn’t be able to afford the skyrocketing premiums if that occurred. The penalty attempts to solve this game-theory issue by making it costly for individuals to forgo health insurance. While the current penalty is small compared to the yearly premiums of several thousand dollars, it has risen significantly from 2014, the first year of Obamacare, from $95 per person or $285 for a family.