The individual mandate’s penalty costs more than you think

On Twitter today, the Washington Examiner's Justin Green asked why it was such a big deal to delay the individual mandate. After all, he noted, the penalty is just $95. How much could that possibly matter?

All of the dollars. (bigstockphoto)

All of the dollars. (bigstockphoto)

This is a common bit of confusion. The individual mandate's penalty is not $95 in year one. It's $95 or 1 percent of your taxable income, whichever is greater. So if you make $80,000 in taxable income, the penalty is $800.

And it grows each year. In year two, it's $325 or 2 percent of your taxable income. In year three, it's $695 or 2.5 percent of taxable income. After that, it effectively holds steady.

In all cases, the key is that people pay whichever penalty is larger. That means that it's the percentage penalty that will really matter for most people. Someone paying the $95 penalty is making $9,500 or less in 2014. That's a very low income. That $95 floor is there to encourage people to sign up for Medicaid (in states where Medicaid isn't being expanded, people making that little money will be exempted from the mandate on affordability grounds).

So that's the first point: The mandate's penalty is larger than many people think in 2014, and it gets even larger in 2015 and 2016. If you've got $76,000 in taxable income in 2016, you're paying a $1,900 penalty.

There's also the issue of norms. The mandate doesn't work because it costs more than health insurance. It works because people tend to follow the rules and they don't like paying money and getting nothing for it. That's the experience from Massachusetts, where violating the mandate costs much less than purchasing insurance, but almost nobody takes that route. Removing the mandate removes the rule -- and so it removes the sense that going without insurance is breaking the rule.

Finally, it's simply too late to delay the mandate. Doing so would mean that every insurer participating in the Obamacare marketplaces would have to pull their product and increase their premiums to account for the fact that there would be more sick people and fewer healthy people signing up. Higher premiums would, of course, make the situation worse, as even more healthy people backed off.

That's why delaying the mandate will be a nonstarter: It's a heftier penalty than its critics realize and much harder to remove than they admit.

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