Mandate to Buy Health Insurance: The 6.5 Percent Exemption

In a comment to my earlier post on Speaker Fabian Nunez’s and Senate President Pro Temp Don Perata’s new health care reform plan, an agent asked “[What do] you think of the allowable exemption for families that would use 6.5% or more on premiums [to not meet the requirement to purchase minimum health insurance]? Doesn’t this seem counter productive to you? Wouldn’t that simply mean that people will still be uninsured? Specifically low-income earners, or those people with large families whose premiums would be higher because of the number insured?”

These are critical questions. The mandate to buy coverage is what makes the mandate to sell coverage work. Without this balance, premiums for individual coverage will skyrocket and carriers will flee that market segment (just look at what’s happened in New Jersey and New York). If there’s going to be an exemption determining the appropriate criteria is critical. Too tight an exemption and the public will not perceive the requirement to obtain coverage as fair, fearing it won’t be affordable. Too loose an exemption undermines the viability of requiring carriers to accept all applicants. And it means that a signficant population will continue to incur substantial, uncompensated care, perpetuating the hidden tax of cost shifting.

At this time, we don’t know how tight the proposed exemption is. Neither Governor Arnold Schwarzenegger’s health care reform proposal nor the Legislative Leader’s plan defines what minimum benefit package they would require individuals to purchase. Both leave this determination for a later date. Without knowing this plan design we can’t begin to estimate the cost of coverage. Without knowing the cost we have no numerator to determine the income level below which the exemption would apply.

Adding to the uncertainty is whether all medical expenses an individual might incur is to be included in the calculation or just the cost of the insurance itself. The Speaker’s public statements could be interpreted either way — we won’t know for sure until the legislative language is released, which could be today. (Most of the comments I’m reading assume it will be premiums plus out-of-pocket expenses). What’s included in the calculation will determine if the exemption does more harm than good.

Premiums Only
Let’s assume, however, only premiums are used in calculating whether a household is exempt from the mandate to obtain coverage. Let’s also assume high deductible plans eligible qualifying under Health Savings Account regulations meet whatever defintion of a minimum benefit package eventually emerges (it would make sense they would). In Los Angeles, today, a couple in their 50s with two children would pay $5,148 for Health Net’s Simple Choice 4000 HSA-eligible plan. If this family’s household income was less than $79,200 they would be exempt from the requirement to purchase coverage.

Significantly, however, both the Speaker and the Governor propose premium subsidies to help middle-class consumers afford coverage. The Governor’s plan caps the availability of these tax credits to those with annual earning of up to 350 percent of the Federal Poverty Level ($72,274 in 2007). Speaker Nunez extends tax credits to those earning $92,925 (450 percent of FPL). The $79,200 annual income figure which would qualify for the exemption is 385 percent of the FPL. So if the Speaker and the Governor compromise by making tax credits available to those earning 400 percent of the Federal Poverty Level, all individuals eligible for the exemption would also be eligible for premium subsidies. This means few consumers would likely qualify for or take the exemption from the requirement to buy coverage.

Premium Plus Out-of-Pocket
Now let’s assume all of a household’s spending on medical care is included in calculating eligibility for the exemption. This would mean combining the cost of the coverage (the premium) with the family’s out-of-pocket exposure. For our hypothetical family, this works out to $13,148 ($5,180 in premium and $8,000 in out-of-pocket exposure). This means folks like our hypothetical family with incomes of less than $202,000 would now be able to opt out of obtaining coverage under the 6.5 percent rule. The same holds true for individuals in their twenties earning less than $70,000. Welcome to New Jersey.

What goes in to the calculation then is one big devil. There are other issues related to the exemption to consider. For example, enforcing the mandate to buy coverage would be more difficult. Regulators would need to determine if an individual was without insurance because of the exemption or in violation of the law. But the affordability issue is the big problem and the big problem with affordability is defining it.

As lawmakers consider this issue I hope they remember a simple reality. $8,000 is a lot of money for a family. But it’s a lot less than the unlimited exposure uninsured families face today. If limiting the exemption calculation to premium costs means we can make health insurance coverage — even what some consider only catostrophic coverage — a reality for all Californians. That would be a good thing.

Note: This post was revised on November 10, 2007.