Healthcare Reform - Penalties and Mandates

I have been working on a presentation for the Small Business Development Center regarding the Patient Protection and Affordable Care Act (hereafter PPACA, to help prevent Carpal Tunnel Syndrome). Basically, the presentation will provide an overview of what the requirements are from an HR perspective and when these requirements take place. I am also trying to address a few strategical considerations, for instance, at what point does it behoove a company to discontinue offering health insurance? Once we get the class scheduled, I will post. I encourage you to attend.

With the changing of the guard in Congress, there may be some alterations to the PPACA, but for the most part, we need to proceed as though the PPACA will be the same as it was before the elections. The purpose of this post is not to get into the details of what the requirements are in total (you can find a good summary here: ).

What I want to discuss on this post is the mandate for individual health care and the penalties for not having health care.

I was debating this issue with friends of mine (all of whom will certainly benefit by having access to healthcare, as their current jobs do not provide any). Despite many of these individuals being relatively liberal in their politics, almost all felt the individual mandate was wrong and seemed to be most swayed on the topic of the PPACA by this fact.

Insurance is a strange beast of a product. The idea is that everyone puts in money, and then that pool of money is used to pay for expenses. In order for it to be sustainable, it has to take in more money than it spends (including the money spent on administration/operations/etc.). So for insurance to be successful, people have to pay more money than they are getting in benefits. In the employer sponsored group health model, the profit on premiums for healthy employees offsets the loss on premiums for employees who are ill or injured.

Universal Coverage would mean that everyone is covered under insurance, which is likely provided by the Government. Universal Access means that everyone can get coverage - presuming they can pay for it. When drafting the PPACA, Congress preferred the idea of Universal Access but recognized that creating Universal Access means that there is a reduced incentive for people to enroll in health insurance before they get sick. The logic is, if I am guaranteed to be able to purchase insurance when I need it, then why pay premiums for all those months that I don't need it?

One of the main benefits of having insurance is to reduce the possibility of an individual going bankrupt due to a medical condition for which they could not get insurance coverage. The American Journal of Medicine published a study in 2007 that indicated that 62% of bankruptcies were due to medical reasons with 92% of that group going into bankruptcy due to medical bills.

Having seen the impact of catastrophic illness (my sister is a cancer survivor who fortunately had insurance), I am very much in favor of Universal Access. Individuals who work hard and struggle to make ends meet cannot afford to deal with a catastrophic illness or injury. It can mean lost income in addition to high medical bills. Universal Access means that they will be able to get insurance and at least mitigate the costs of such a tragedy.

Ok, here is my argument for why it is a good thing to have individual mandates and penalties for not having insurance. With Universal Access I can purchase insurance when I find out I am sick. If everyone did this, then insurance companies would go bankrupt, and we would have an entirely new issue to resolve. If there is a mandate and subsequent penalty (only $95 in 2014 or 1% of income, and $695 in 2016 or 2.5% of income) then those who enroll while healthy will be contributing to the sustainability of the insurance companies, and those who don't will be contributing to the costs of the uninsured via the penalty.

A study by Families USA indicated that about 37% of the cost of healthcare ($42.7 Billion in 2008) for uninsured individuals is paid for by the insured through higher premiums. The penalty and mandate are designed to help reduce this burden and stave off rising medical costs. It is a good thing, not only for the insured and insurance companies.

Back to my conversation with friends. My point to them (and the point of this post) is that the penalty and mandate are beneficial to you, even if you remained uninsured. To explain, let's take an example:

Numbers: According to a study by the University of Colorado, the average cost of cancer treatment is around $59,000. America's Health Insurance Plans (AHIP) did a survey of their member groups and determined the 2009 average annual premium for an individual was less than $3,000. For the purposes of our example, let's presume that the cost of insurance for an ill person purchasing insurance for the first time is 3x the 2009 average annual premium.

Example: With Universal Access, a person who was diagnosed with cancer would face nearly $60,000 in medical bills, or he or she could purchase insurance at a high premium for $9,000 a year. Even with a large deductible of $10,000, the individual will save nearly $40,000.

To continue with the example, if the average insurance premium is $3,000 a year for a healthy individual, and the penalty for not having insurance is $695, then this individual saves $2,305 a year by paying the penalty as opposed to paying for insurance. My suggestion is that the penalty can also be viewed as the cost of the privilege of purchasing insurance after becoming sick.

As I see it, Universal Access with a mandate and penalty is beneficial for the system and for the individual. I do not recommend ANYONE going without insurance. We have no idea what the world has in store for us, and shopping for insurance when you are sick or injured is less than ideal. At least with the passage of the PPACA, you will be assured you CAN purchase insurance when you are sick or injured...and that is a good thing.