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ObamaCare Mandate Is Near-Poor Penalty

It's now clear that the actual impact of ObamaCare's individual mandate tax penalty will be far worse than the benign intent that the Obama administration claimed.

"What we're talking about is a penalty for the few people who will refuse to buy health insurance — even though they can afford it — and who expect the rest of us to pick up the tab for their care," a September 2009 White House defense of the individual mandate states.

Six years later, the harsh reality is coming into focus: The mandate's primary impact will be to compel low-income households to buy bronze coverage with deductibles of up to $6,850 per adult that are well beyond their capacity to afford. Because any semiserious health issue will torpedo their finances long before ObamaCare begins to pay the bills, this situation raises a question of whether it is ethical to threaten them with a mandate penalty.

In addition, after two years of ObamaCare enrollment, it now appears likely that this contradiction — the Affordable Care Act mandating unaffordable care — will be the rule, not the exception, for modest-income households between 150% and 250% of the poverty level.

Near-Poor Avoid Pricier Plans

The best available data show that only one in three eligible individuals with income from 150% to 200% of the poverty level selected plans in 2015 that might keep them from being swamped by medical debt if they land in the hospital. Among those in the next income tier, from 200% to 250% of the poverty level — who receive less generous premium subsidies — just 1 in 5 eligible individuals signed up for coverage that might keep them out of financial distress if they incur large medical bills.

These findings piece together two sets of data. The Avalere Health consultancy's analysis of 2015 signup data showed surprisingly weak ObamaCare enrollment at modest income levels. At between 150% and 200% of the poverty level, just 41% of those eligible signed up for coverage. The number falls to 30% among those between 200% and 250% of the poverty level.

On top of that, analysis of HealthCare.gov and state exchange enrollment data shows that among the minority who did sign up, about 20% of those between 150% and 200% of poverty selected high-deductible bronze coverage, rising close to 40% among those between 200% and 250% of poverty.

Enrollment Below Forecast

The ObamaCare exchanges had just 10.2 million paying customers in March, after 1.5 million of the 11.7 million people who selected plans dropped out. At least another 3 million registered with the exchanges but apparently didn't find a good enough deal to take the next step of selecting a plan, Department of Health and Human Services data show. The lack of participation has left enrollment far below the prior Congressional Budget Office estimate of 13 million and even the 12 million estimate made in January.

IRS data show that 7.5 million people paid a penalty this year for failing to comply with the ObamaCare mandate in 2014.

By spurning exchange coverage in the first two years, a wide majority of modest-income individuals have signaled that they find the coverage options unaffordable. Yet as the mandate penalty ramps up to the greater of $695 or 2.5% of taxable income starting in 2016, many of these low-income individuals will be pushed to select a bronze plan that costs roughly the same as, if not less than, the mandate penalty.

Despite White House efforts to present every enrollment as a success story, the evidence clearly shows that the law has failed to work the way it was supposed to for most modest-income households.

ObamaCare made a priority of limiting out-of-pocket medical spending for those with incomes of up to 250% of the poverty level so that they wouldn't face a pile-up of medical debt or avoid getting necessary care at the risk of worse health outcomes. That's why the law provides both premium subsidies and an extra slice of cost-sharing subsidies for households in this income range.

But because Democrats were so focused on limiting unmanageable out-of-pocket costs, the law's crafters linked the extra cost-sharing subsidies exclusively to silver plans as an extra incentive for modest-income individuals to buy comprehensive coverage. Those who buy cheaper bronze plans lose out on the extra subsidies.

The New Bronze Age

Take the example of a 35-year-old couple in Miami earning $35,000, with one child covered by Medicaid. They could have bought the second-lowest-cost silver plan this year for a premium of $1,848, which would have cut the deductible to $500 and capped extra out-of-pocket costs at $4,500.

Alternatively, such a couple with little cash to spare could pay a more manageable $684 annual premium for the cheapest bronze plan but face a $13,000 deductible, after which their ObamaCare plan would pay all covered costs.

The CBO initially expected few low-income individuals to opt for the bronze plan and give up valuable cost-sharing subsidies. But in January, the CBO cut its estimate of 10-year spending on cost-sharing subsidies by $39 billion, or 23%.

"Three million people who would have been eligible for cost-sharing subsidies if enrolled in a silver plan will forgo those subsidies by signing up for a bronze plan," the CBO projected.

When the CBO made that projection, it was still expecting enrollment of 12 million this year, so budget agency estimates of silver-plan enrollment by low-income households continue to be too high. The bottom line is that the individual mandate will act as a tax on a majority of the modest-income individuals who were supposed to benefit from the law.