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Obamacare Fines

In a previous essay on Obamacare, I argued that the guaranteed issue requirement of Obamacare would result in the demise of many insurance firms since it would be rational to wait to buy a policy until you are sick. This explains why the law has an individual mandate requiring that people buy insurance. The caveat to this was that fines were to be imposed upon individuals who do not buy insurance. I pointed out in this earlier essay that the effectiveness of the fines would depend upon the size of the fines relative to the cost of the insurance. Having finally seen the details on the fines, it seems clear that the fines will not be effective in forcing people to buy insurance.

Obamacare imposes a fine of either $695 or 2.5 percent of income if an individual does not buy health insurance. A moment’s reflection reveals that the fines are not going to change behavior. Suppose that the fine is the larger of the two amounts. A person earning $60K will incur a fine of $1,500. It has been reported that a health insurance policy for a family in Massachusetts costs $12,000, far above the amount of the fine. It is much cheaper to pay the fine. The same will obviously be true for many, but not all, individuals with higher incomes. For a single individual, policies have been reported to cost $8,000, still well above the amount of the fine. It will only be true that for very high earners, say those earning a million dollars or more, that the fine might be large enough to induce them to buy health insurance but it is quite likely that such an individual would buy the insurance anyway. Thus there seems to be little chance that the fines will change people’s purchasing patterns. And of course we are assuming that the fines are completely enforceable which may not be the case.

The implication of this exercise is that guaranteed issue is likely to lead to financial losses for insurance firms due to adverse selection. If so, the only health insurer in the U.S. may ultimately be the federal government, thus giving us Medicare for all. The costs of such insurance will be staggering and it is impossible to think that such a system can be sustained without huge tax increases for most U.S. residents.

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Economics One

A blog by John B. Taylor

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One economist's views on economic policy.

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